Baytex and Lightstream are mentioned in this article. Many upstream companies will be technical violation of their loan covenants after they take impairment charges due to low oil prices. However, the banks will work with them as long as they keep making interest payments. Banks do not win by calling loans and forcing E&P companies into bankruptcy and they know it. Both companies have enough cash flow from operations (even at today's oil price) to service their debt. - Dan
By Cecile Gutscher and Rebecca Penty
(Bloomberg) -- A specter of rising defaults marred the view
of pristine peaks as Canadian energy executives gathered at the
Whistler ski resort.
Penn West Petroleum Ltd. and Baytex Energy Corp. told
attendees at the annual gathering last week hosted by Canadian
Imperial Bank of Commerce that they may need to appeal to
creditors to forgo debt terms. Two smaller explorers, Laricina
Energy Ltd. and Southern Pacific Resource Corp., announced
earlier this month they were in default. The oil slump that’s
knocked more than 50 percent off the price of crude is raising
doubts that producers can meet payments on as much as $14
billion of junk-rated debt.
“Banks are being inundated with requests from companies to
modify bank facilities,” Mark Pibl, head of high-yield strategy
at Canaccord Genuity Inc., said by phone from New York Tuesday.
“Their exposure to the energy sector is being scrutinized so
they can’t be as accommodative as in the past.”
Bank of Montreal has stress-tested its energy loans to $35
a barrel for North American crude for this year, and at $50 a
barrel for next year. Goldman Sachs Group Inc. said this month
that U.S. crude prices will drop to $39 a barrel, holding there
for the first half of the year.
Restructuring Talks
Penn West, which is focused on the Cardium formation in
Alberta, is seeking relief from lenders to meet conditions of
about C$2 billion ($1.6 billion) in private bonds and C$1.7
billion bank credit this year, Dave Roberts, chief executive
officer, told investors Jan. 22 at the conference. Earlier that
day at the event at Whistler, North America’s largest ski
resort, Baytex’s CEO told attendees that he’d be renegotiating terms
on a C$1.2 billion credit should the oil rout persist.
As requests to renegotiate trickle in, oil producers are
losing access to the bond market. The average price of U.S.
dollar-denominated junk bonds from energy companies, 7 percent
of which are Canadian, has fallen to 86 cents on the dollar,
compared with 106 cents in June, Bank of America Merrill Lynch
data show. Borrowing costs have climbed to 9.6 percent from 5
percent since then
Laricina, a startup oil-sands developer, said this month it
violated a bond covenant based on its production levels.
Southern Pacific missed a C$5 million interest payment on its
convertible debt Dec. 31. It was granted protection from
creditors this month under Canada’s Companies’ Creditors
Arrangement Action to pursue options that include restructuring
debt and selling assets.
Credit Outlook
Paresh Chari, a Toronto-based analyst at Moody’s Canada
Inc., expects at least C$3 billion of loans to speculative-grade
energy companies in Alberta to need relief in coming months.
That includes Lightstream Resources Ltd., Korea National Oil
Corp.-owned Harvest Operations Corp. and Baytex. Moody’s said
Jan. 26 it expects Baytex’s talks with lenders on relief “will
be successful” and reduced its outlook on Baytex’s debt to
stable from positive.
It could take two more quarters for the companies to fail
quarterly covenant tests because they are based on a 12-month
rolling average where the price swoon is offset by higher prices
in the past, said James Jung, an analyst at DBRS Ltd. in Toronto
who assigns ratings to oil firms.
Throughout Year
“We need to be talking to folks about relief throughout
the year,” Penn West’s Roberts said, noting that the company’s
bonds and bank line require that its debt can’t exceed three
times the value of its earnings before interest, taxes,
depreciation and amortization over the prior 12 months. “I
expect them to want to work with us.”
Lightstream is half drawn on its credit facility and
expects lenders will work with the company to renegotiate terms,
Peter Scott, Lightstream’s chief financial officer, said Tuesday
in a phone interview.
“If you look at past cycles and if you look at what’s
happened with the natural-gas market in the recent downturn
there, by and large the banking industry is looking to work with
the E&P companies through those cycles,” Scott said, referring
to exploration and production companies.
Representatives for Penn West and Baytex declined to
comment further, while a request for comment from Harvest wasn’t
immediately returned.
Lenders will probably work with companies to renegotiate
debt terms, because the price crash is beyond their control,
said Gordon Tait, an analyst at BMO Capital Markets in Calgary.
‘External Event’
“Given it’s an external event, a sharp decline in
commodity prices, it’s different from a company that had really
mismanaged their operations or drilled hundreds of dry holes,”
Tait said. “I don’t think it’s the objective of these banks to
own or operate oil and gas properties.”
If negotiations don’t lead to new terms, creditors may
tighten the purse strings, make debt more expensive, or force
producers to sell assets to come into line.
Penn West may try to sell oil-producing assets if that’s
required by bondholders, Roberts said at the conference. If the
company gets the relief it’s seeking, it will continue to
advance drilling programs as planned, he said. The company’s
bank line is undrawn, he said.
Baytex is counting on lenders to give it a break. The
Calgary-based oil and natural-gas producer has already drawn
C$700 million of its C$1.2 billion credit line, chief executive
officer James Bowzer said.
“With the kind of history we’ve got with the banks, with
the kind of programs we have going forward, what I believe is a
relatively small window of oil price recovery to stability, I
would hope they would work with us,” Bowzer said.
For Related News and Information:
Penn West Talking to Bondholders as Oil Price Rout Curbs Cash
Oil-Sands Startups Asking for Whom the Bell Tolls: Canada Credit
Crude Collapse Has Investors Braced for ’80s-Like Oil Casualties
Can Canadian Oil Sands Survive Falling Prices?
To contact the reporters on this story:
Rebecca Penty in Calgary at +1-587-702-3025 or
rpenty@bloomberg.net;
Cecile Gutscher in Toronto at +1-416-203-5717 or
cgutscher@bloomberg.net
To contact the editors responsible for this story:
Dave Liedtka at +1-212-617-8988 or
dliedtka@bloomberg.net
Greg Storey