Athabasca’s Bankers Tighten Noose as Oil Plummets: Canada Credit

Athabasca Oil Corp. faces an unusual requirement from lenders in two months that will be harder for the energy explorer to meet as crude prices languish below $60 a barrel and the value of its oil reserves may be reassessed.

The terms of its $225 million loans due 2019 are different from the standard ones developing energy companies operate under because Athabasca must match its liabilities with liquid assets or count on proved reserve tests to offset a shortfall. Based on its third-quarter earnings, the producer would have found itself about C$57 million ($45 million) short of the cash and liquid asset threshold. That puts more importance on the crude reserves at a time when prices are close to six-year lows.

“I expect they’re working with their lenders to figure out how to get through this chasm,” Desjardins Capital Markets analyst Justin Bouchard said by phone from Calgary. “The banks are working closely with the companies to manage through this period of volatility. They don’t want to own energy assets.”

Lenders to struggling oil companies are facing choices between being strict and potentially pushing a borrower into default or overlooking covenants and knocking back their own protections through waivers. Either one can leave them with a bankrupt company on their hands without enough assets to cover what it was lent.

“Athabasca is in a very strong financial position with positive net cash on the balance sheet,” Matthew Taylor, a spokesman for the Calgary-based company, said by e-mail Tuesday. The company has complied and is currently compliant with all its covenants, he said. Year-end results are slated for release March 12.

Cash Position

By the end of this year, Athabasca aims to almost double production to 10,000 to 14,000 barrels a day as it taps total estimated reserves of about 9 billion.

In the event Athabasca’s liquid assets don’t match its liabilities, it would have to show that proved reserves exceed net first-lien debt by at least 1.5 times, beginning March 31, according to a Nov. 7 regulatory filing.

The company had C$723 million of cash, cash equivalents and short-term investments on Sept. 30, according to the filing. It didn’t disclose how much of the cash was restricted. That compared with about C$780 million in long-term debt, the filing shows. Shareholder equity, a reflection of net worth, was C$3.3 billion as of Sept. 30, according to the filing.

March Evaluations

Lenders require it to maintain a minimum tangible net worth of at least C$2.75 billion.

“There are a lot of companies walking on thin ice from a financial covenant standpoint,” Bouchard said. “The unfortunate reality is oil is at $50.”

West Texas Intermediate, the U.S. crude benchmark, has slumped 54 percent from last year’s peak in June as producers from North America to the Middle East create a supply glut. It traded at $49.93 a barrel as of 12:26 p.m. in New York.

Athabasca is one of at least eight Canadian energy companies funding operations using bank loans guaranteed by reserves, according to Moody’s Investors Service. The company is rated CCC+ by Standard & Poor’s, seven steps below investment grade.

Banks typically determine a producer’s oil reserves based on market values in March and adjust credit lines the following month. They can force a borrower to sell assets in order to comply with smaller lines of credit.

Bond Performance

“I expect you’ll see in the first quarter that many of those covenants are going to be tight,” said Jie Liu, head of credit and fund manager at Sentry Investments Inc. in Toronto, which runs C$1.5 billion of credit investments. “Liquidity will be tight. They know banks will be after them, but banks don’t want to put them in default either. The only way you can meet bank requirements is to sell assets.”

Athabasca’s bonds are trading at about 85 cents on the dollar compared with an average 89 cents for energy firms in Bank of America’s Canada High Yield Canadian Issuers Index. The securities have lost 13 percent in the past six months, compared with 4 percent on average for index peers.

Hangingstone, an oil-sands project under construction in Alberta, has the potential to produce 80,000 barrels a day, according to the company’s most recent investor presentation. Spending on Hangingstone will amount to C$63 million this year.

“There’s a lot riding on Hangingstone,” Bouchard said.

In August, Athabasca closed a C$1.18 billion agreement with PetroChina Co. to sell its holdings in Alberta’s Dover region, raising C$600 million in cash and C$584 million in promissory notes due through August 2016. The original agreement was for PetroChina to pay in cash.

“There’s huge uncertainty for bondholders,” said Liu, who passed on the bond sale in November 2012. “A lot of your investment success builds on the hope the reserves will work out.”

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