Pacific Rubiales, Back in Distress, Still Has Time on Its Side

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There’s no denying how tough things look right now for Pacific Rubiales Energy Corp.

The Colombian driller battered by crude’s plunge and the loss of its biggest oil field saw its future become bleaker last week when its widely heralded savior scrapped plans to buy the company. Bondholders have wasted no time registering their pessimism, pushing the company’s notes down the most in emerging markets and leaving them in distressed territory again.

Still, the gloom enveloping Pacific Rubiales may be overstated, according to Jefferies Group LLC and Credit Agricole. That’s because the company has bought itself some time in recent months by pushing back maturities and cutting costs, giving it the ability to pay debt at least over the next few years, they say. Pacific Rubiales had about $860 million of cash on hand to cover just $18 million in short-term debt and no bonds maturing until 2019.

“They’re very fortunate because they have a lot of time for things to get better,” said Luis Maizel, who manages $5.5 billion of fixed-income assets, including Pacific Rubiales bonds, at LM Capital Group in San Diego. “There is a decent chance for them to make it, but there are a lot of moving pieces.”

Pacific Rubiales says it will continue to reduce debt and operating costs as it sells non-core assets. It will also seek opportunities in Mexico with Alfa SAB as a partner. Unless there’s an increase in the price of oil, the focus will be on paying debt, Pacific Rubiales said in an e-mail.

Bonds Sink

Mexico’s Alfa and partner Harbour Energy Ltd. pulled their $1.7 billion takeover offer for Pacific Rubiales last week after the driller’s largest shareholder said the bid was too low.

Speculation the deal would fall through deepened last month as O’Hara Administration Co., the Venezuelan-led group that controls almost 20 percent of Pacific Rubiales, said the offer had to be sweetened from C$6.50 per share before it would consider the bid. The shares gained 6.2 percent Tuesday to C$3.28 as of 11:24 a.m. in Toronto.

Pacific Rubiales’s $1.3 billion of bonds due 2019 have plummeted 13 percent since Wednesday to 71.22 cents on the dollar. At 16.45 percent, the notes now yield 14.7 percentage points more than similar-maturity Treasuries. That’s well above the 10 percentage point threshold for securities considered distressed.

The company, which has lost 85 percent of its market value in the past year, also saw its ratings slashed by Fitch Ratings on Friday, citing the termination of the acquisition. And more downgrades can’t be ruled out after the outlook on the grade was also revised to negative.

Oil Field

Pacific Rubiales, whose net debt has quadrupled in the past two years to $4.5 billion, said in March that Colombia’s state-controlled oil producer didn’t extend the contract to operate the country’s largest oil field beyond mid-2016. The field accounts for 35 percent of Pacific Rubiales’s output.

Investors will now focus on oil price moves and the company’s ability to replace the production that will be lost with the Rubiales field, Rafael Elias, a Latin America debt strategist at Credit Agricole, said in an e-mailed response to questions. “They are pricing, I think, an uphill battle in a difficult stage in the oil cycle, but not a default.”

Pacific Rubiales’s 2019 bonds sank to as low 60 cents on the dollar in January before soaring to as high as 93.8 cents in the wake of Alfa’s offer to buy the embattled company in May.

Despite the latest plunge in the notes, there’s little probability of a default anytime soon, according to Alexis Panton, a strategist at Jefferies.

“They’ve successfully cut costs” and “have a truck-load of cash,” Panton said in a note to clients July 9. While a debt restructuring is a real possibility, “that seems a long way off from here, years in fact.”

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