- Moody's survey shows 30 percent of companies expect reduction
- Smaller firms that borrowed heavily likely to be hardest hit
Canada’s oil producers are starting to feel the pinch as their banks reassess how much they’re willing to lend amid the rout in crude prices.
Parallel Energy Trust had its credit line pulled by its bankers and has been working on alternative financing, the Calgary oil and gas driller said this month. Lightstream Resources Ltd. could be in for a second cut to its credit line this year as banks prepare to reduce the value of Canadian companies’ oil reserves by at least 15 percent, analysts at Moody’s Investors Service and Canaccord Genuity Group Inc. said.
Almost a third of Canadian exploration and production companies surveyed for a Moody’s report said they were expecting their credit lines to be reduced. Canadian companies aren’t alone. Banks are conducting their semiannual review of loans backed by oil and gas assets and several U.S. producers have had their credit lines cut in recent weeks. Almost 80 percent of oil and natural gas producers will see a reduction in their credit lines, according to a survey last month by law firm Haynes and Boone LLP.
The cuts are happening at the same time that investors who plowed $3.2 billion into bonds issued by Canadian energy companies last year lose their appetite for the debt. Issuance for Canadian oil and gas explorers and producers has dropped to $1.2 billion in 2015 -- the lowest since 2010, according to data compiled by Bloomberg.
A reduction in credit lines “shortens that runway that you have to survive in a low-commodity-price environment,” said Geof Marshall, a money manager at CI Investments in Toronto who oversees more than C$11 billion ($8.5 billion) in high-yield bonds.
Parallel failed to get its $165 million credit line renewed Sept. 30, the company said in an Oct. 1 statement. While the company’s working with its lenders, “there can be no assurances that alternative arrangements will be agreed to”, it said. Parallel spokesman Curtis Pelletier declined to comment for this story.
Argent Energy Trust had its credit line rewewed at $80 million in June , according to a company statement. The line had been $110 million at the end of the first quarter. Argent had $68.5 million outstanding on the facility, according to its second-quarter results. Argent did not respond to requests for comment.
Lightstream, which had its credit line cut in the second quarter, will probably see another reduction because it hasn’t been able to keep its producing reserves from declining, Moody’s analyst Paresh Chari said. A Lightstream representative declined to comment.
The company had drawn C$626 million on a C$750 million borrowing-base revolver on June 30, although it used proceeds from a July bond sale to repay a portion of the loan, filings show. Lightstream, rated Caa2 by Moody’s, had C$42.5 million in free cash flow in the last 12 months.
Other small-cap producers may also see their credit lines reduced, Canaccord analysts wrote in a Sept. 14 research note. "The domestic credit quality outlook is possibly the most pressing concern of Canadian bank investors, though one that has not materialized in a major way (yet)," the analysts led by Gabriel Dechaine wrote.
Bellatrix Exploration Ltd. and Perpetual Energy Inc. may also have their credit lines cut because they haven’t significantly boosted oil reserves to offset lower prices, Moody’s Chari said. “We expect somewhere between 15 and 25 percent reduction” in the banks’ valuation of oil reserves, he said.
Bellatrix, which is rated by B1 by Moody’s, had C$387.1 million drawn on its C$600 million borrowing base on June 30, according to company filings. The company burned through C$367.7 million over the past 12 months and has C$694.5 million of long-term debt, according to data compiled by Bloomberg.
If Bellatrix has its credit line cut, it probably won’t be significant because of the company’s slight increase in production and “fairly adequate” cash flow and leverage numbers, Chari said. Bellatrix spokesman Troy Winsor declined to comment.
Perpetual Energy, rated Caa1 by Moody’s, owed C$66 million on its C$96.5 borrowing base, according to a September presentation. Moody’s last year downgraded Perpetual’s liquidity rating to the lowest rung. The company can sell an equity stake of more than C$200 million in Tourmaline Oil Corp. to raise cash if needed, Chari said.
Perpetual Chief Financial Officer Cam Sebastian in an interview for this story said the company was finalizing its reserves before a meeting with lenders at the end of October. He said he expects “significant reserve additions” but that it’s too early to tell what lenders might do.
“Perpetual is an 85 percent natural gas producer so the crude price doesn’t affect us nearly as much as the natural prices do,” Sebastian said. Natural gas prices have declined 14 percent this year to $2.499 per million British thermal units.
Paul Tepsich, who manages C$203 million at High Rock Capital Management in Toronto, warns that bondholders may be at risk even when companies manage to hold onto their credit lines. That’s because when cash-strapped explorers and producers draw down on those lines of credit, that adds higher-priority debt on top of their notes.
“Every quarter they draw down the credit facility. And they draw down, and they draw down, and sooner as opposed to later, bondholders are going to look up and go ‘Oh my God,”’ Tepsich said.