Warburg Among Private Equity Sideswiped by Canada Gas Routby
Mosaic, Endurance insolvent as debt obligations weigh in rout
Heating fuel companies join oil producers for sale in downturn
The first natural gas producers to go broke are being put up for sale in Canada during the worst start for prices in two decades.
Mosaic Energy Ltd., which is backed by Irving, Texas-based NGP Energy Capital Management LLC, is set to be shopped around by Royal Bank of Canada through a receivership that began in late April, while Endurance Energy Ltd., majority owned by New York-based Warburg Pincus LLC, is being marketed by Bank of Montreal through a restructuring that started at the end of May, court documents show.
The two gas-focused producers join oil companies also grappling with insolvency two years into a crude market rout, including Connacher Oil and Gas Ltd. and Anterra Energy Inc. They may be the first of a series of Canadian gas companies being forced to sell as they navigate what will probably be a summer of tough prices, according to FirstEnergy Capital Corp.
“It’s another lesson that even when you’re an all-private firm with private-backed money, that’s no guarantee of success,” said Martin King, an analyst at FirstEnergy in Calgary. “There are still probably too many small, independent natural gas producers out there who are just simply not going to make it through this cycle, or are going to come through it deeply wounded.”
Spot gas prices in Canada are being hit with a confluence of short- and long-term challenges. A warmer winter reduced demand, pushing record volumes into storage for the season, just as the industry is up against stiffer competition from U.S. producers. Demand lost from oil-sands projects shut down by a wildfire in May has been another blow. The storage supplies are widening the discount for Canadian gas relative to the U.S. benchmark, which typically reflects transportation costs.
Gas at Canada’s AECO hub has averaged $1.1529 per million British thermal units in 2016, the worst start since 1996, according to data compiled by Bloomberg. Gas at 53 cents on May 9 was the lowest daily price since October 1997. While the fuel has almost tripled since then, it’s trading at about little more than half the price at the Henry Hub in Louisiana. U.S. natural gas futures prices have averaged $2.078 per million British thermal units this year.
Mosaic, a Calgary-based company focused on producing gas and gas liquids in Alberta, had daily production of about 8,190 equivalent barrels of oil a day in February, 74 percent of which was gas, according to court documents. The company, negatively affected by the drop in gas prices and its fuel transportation and processing commitments, defaulted on terms of its agreement with lenders in March and didn’t repay debts, triggering the receivership filing, the documents show.
A representative for Ernst & Young, the receiver for Mosaic, didn’t return phone and e-mail requests for comment. NGP declined to comment.
In a unique twist for an insolvent producer, Mosaic could be acquired by one of its service providers. Pembina Pipeline Corp. has a contract to process Mosaic’s gas at its Resthaven plant for minimum charges of C$2 million ($1.6 million) a month for a 15-year term that began in October 2015, the documents show. If the contract isn’t assumed by a purchaser of Mosaic’s assets, Pembina would become a large unsecured creditor. To satisfy a contract currently worth an estimated C$200 million, Pembina may end up bidding for Mosaic, according to people familiar with the sales process who asked not to be identified discussing non-public information.
Pembina said the impact of Mosaic’s receivership is “financially immaterial” to the company, declining to comment on details regarding its contract and whether it could acquire Mosaic.
Endurance, also based in Calgary, produces about 85 million cubic feet of gas a day from its main Sierra Field asset in northeast British Columbia. The decline in gas prices and a reduction of credit available from lenders resulted in a “liquidity crisis” for Endurance, whereby it could no longer pay its debts, according to court filings.
Warburg Pincus, which bought its initial holdings in Endurance 2012 and now owns 84 percent of the shares, may end up taking the company out of the restructuring. By providing interim financing, the investor has the right to make a so-called credit bid, like other lenders, according to the documents. Warburg had sought a right of first refusal on bids and the court denied this, after objections from the bank-lending syndicate.
Protection from creditors was sought so the company could undergo an orderly restructuring, Endurance Chief Executive Officer Steve VanSickle said in an e-mail. Warburg Pincus declined to comment.
“There’s got to be a few more guys on the ropes,” said FirstEnergy’s King. Canadian gas producers will probably have to wait for the winter heating season to draw down supplies enough to significantly boost prices, he said. “For the balance of the summer, it’s going to be something of a struggle for Canadian gas.”
(A previous version of this story was corrected to show Warburg Pincus has only the right to make a credit bid for Endurance).