Some junior oil and natural gas companies with large debts are starting to have their financial problems go public. See these examples:
1. On February 17, Canadian Superior (SNG-TSX) just had their $47 million loan called by the Western Canadian Bank. Canadian Superior along with partners including British Gas has made some very large offshore natural gas discoveries in the Caribbean Sea. But with the gas glut in North America, it is almost worthless for several years. Their stock has plummeted from $5 to 35 cents a share.
2. On February 16, Bow Valley Petroleum (BVX-TSX) announced they are being bought by a UK oil firm, Dana Petroleum PLC, for 50 cents a share plus debt of $197 million. Bow Valley is a small oil producer whose big debts, taken on to develop assets in the North Sea, sunk the ship. BVX is a complimentary fit to Dana, which also has assets in the North Sea.
3. Opti-Canada (OPC-TSX) has a promising oil sands project in Alberta just going into production, but on December 17 last year decided to sell a 15% working interest to partner Nexen (NXY-NYSE; NXY-TSX) for $735 million to reduce debt and increase working capital.
And with lower prices on the horizon for the next few months - especially for natural gas - these financial issues will get more press.
Peters & Co, an oil and gas securities firm out of Calgary, issued a brief research note showing that at US$30 oil/barrel and natural gas priced at CAD$4.63/mcf, intermediate-sized producers that they cover would have an average debt: cash flow ratio of 3.3:1. Junior producers would be an average 4.4:1. Lenders start to be aware of client companies when they have greater than 1:1 ratios. At more than 2:1 they are very aware. At US$40 oil and CAD$5.63 gas, intermediates are 2.5:1 and juniors are 2.7:1.
It's a big issue in the oil patch these days. These debt levels are weighing on stocks. And unfortunately, in this business cycle trough, the banks' balance sheets are not in great shape either.
Oil and gas prices fell so hard so fast last fall, and now, with almost no hedges in place, paying the debt back is a problem for both the producers and the lenders. It's likely that the positive cash flow from these producers will be slim to none over the summer months. This means stock valuations will be under even more pressure as 2009 drags on, and equity could be harder to raise. Asset valuations are also declining along with commodity prices. But the debt doesn't get any smaller.
So how do the bankers and producers go about working it all out?
I am going to talk about that in my next posting tomorrow.
Keith Schaefer has spent more than 15 years investing and raising money for mining and oil and gas companies in Canada, and working with retail investors and stockbrokers, newsletter writers, research analysts, hedge funds and senior public company management. His Oil & Gas Investments Bulletin covers oil and gas companies producing in the range of 1000 - 20,000 barrels per day. His research is intended to give investors an independent view on some of the top management teams and companies in the oil and gas industry.
