Canada’s Most Indebted Energy Plays May Miss That Oil Recovery

  • Penn West says survival in doubt, Connacher seeks protection
  • ‘Writing on the wall’ as crude rout pushes toward second year

The highest oil price in six months is offering hope to the beleaguered energy industry, but it may be coming too late for some of Canada’s most indebted companies.

On Monday, Penn West Petroleum Ltd. warned it may not survive if it can’t negotiate new borrowing limits by the end of the second quarter, and Connacher Oil and Gas Ltd. said it was seeking creditor protection under the Companies’ Creditors Arrangement Act. That followed Lightstream Resources Ltd.’s May 2 announcement that it had 90 days to shore up a credit facility shortfall to avoid default. Parallel Energy Trust and Argent Energy Trust have also filed for creditor protection.

The latest troubles in Canada’s oil patch come as the crude rout approaches two years. And while oil closed up 3.3 percent at $47.72 a barrel in New York on Monday, the highest since November, it remains 55 percent below where it was in June 2014. The prolonged period of depressed prices has inflicted serious damage on many companies, and for the most indebted ones like Penn West, time may be running out.

‘Covenant Issues’

"It’s coming to a head and their lenders see the writing on the wall,” Nima Billou, an analyst with Veritas Investment Research, said by phone from Toronto. "You don’t get a return to prices north of $60, you’re going to have to address these covenant issues quickly.”

The oil rout may be on the verge of claiming one of its biggest victims in Penn West, which at its peak in 2008 had a market cap of C$13 billion. The company’s shares closed Monday at 82 Canadian cents, for a market value of C$527 million. It loaded up on debt between 2007 and 2011 -- when oil rose as high as $145 in 2008 -- leaving it with C$1.86 billion ($1.44 billion) in long-term borrowings at the end of the first quarter, according to company filings. 

Unless it gets relief on its targets including senior debt to earnings before interest, tax, depreciation and amortization, Penn West will breach its financial covenants at the end of the second quarter, posing a "going concern" risk, the Calgary-based oil producer said in a statement Monday. It said it was working with lenders on options to avoid default.

Asset Dispositions

The company announced approximately C$230 million in the first quarter in asset dispositions, Chief Executive Officer David Roberts said on a conference call.

"We will continue to strive for additional asset dispositions to further reduce our debt," Roberts said. "Our top priority for 2016 remains the improvement to the health of our balance sheet, which I believe can be accomplished as we continue to seek improvements in our cost structure and our debt levels so that we are well positioned to move forward once commodity prices recover."

Penn West has C$686 million available on its C$1.2 billion credit facility, Chief Financial Officer David Dyck said on the call. Requests to Penn West seeking further comment weren’t returned.

This isn’t the first time Penn West has asked for more time. The company said in its fourth-quarter results that it was working with its lenders on options to avoid default, and it negotiated amendments to its financial covenants almost a year ago.

Lenders Pushing

"It’s one of the rare instances in our coverage universe where the lenders are really pushing the company into liquidating the assets to get their money back," Billou said. "In a lot of other instances, they’ve provided covenant relief to many companies that are leveraged. That’s because they have confidence in the asset base." 

Asset sales are the best option for the company, according to Kristopher Zack at Desjardins Securities Inc., but it’s negotiating from a "position of weakness" that could necessitate discounted transactions.

"The other risk is that as the company continues to unwind assets, its ability to continue servicing debt decreases, which we suspect might be a key point of contention for bondholders in particular," the Calgary-based analyst wrote in a note. He rates the company a sell with a target price of C$0.25 per share.

And while Penn West exceeded analyst expectations on its first-quarter results, with production ahead of consensus, "it may be a little too late," Jeremy McCrea, an analyst at Raymond James Ltd., said by phone from Calgary.

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