Record debts mature for Canadian oil field after five years of crisis

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Six years ago, the Canadian oil services company Calfrac Well Services had a market value of $ 2.1 billion and was ready for expansion in the United States.But last month, Calfrac’s market value collapsed to just $ 23 million, and it postponed an interest payment on the debt that does not mature for six years. Texas billionaire Wilks brothers, already its main shareholder, recovered more of the company’s debts in June, according to a regulatory file, preparing to recover what they can from the restructuring.

Canada’s industry has borrowed heavily to survive a series of disasters and will face $ 6 billion in refinancing over the next six months, the Bank of Canada announced in May.

The energy debts maturing this year are the most recorded for the fourth consecutive year and an increase of more than 40% compared to 2019, according to data from Refinitiv. They pose an existential threat to some companies during the worst industry crisis in decades, while others with higher credit scores can save time in exchange for higher rates that hamper results.

Businesses have two main options: unaffordable debts are maturing – swapping debts for stocks or convincing ticket holders to extend their term, said Kevin Fougere, partner at law firm Torys LLP.

The list of energy companies whose debts are due includes some oil giants, although the main producer Canadian Natural Resources Ltd. and pipeline operator Enbridge Inc. have already taken steps to cover them.

Small players face more drastic changes.

Bonavista Energy Corp. announced last month a recapitalization plan to reduce debt, reduce the value of existing shares and result in delisting.

At some point, the music will stop.-Alan Ross

The pace of restructuring and bankruptcy has been slow as banks are reluctant to own assets and the rebound in oil prices offers hope, said Alan Ross, regional managing partner of Borden Ladner Gervais law firm.

“There are many expanses, amendments and forgeries regarding the financial documentation,” he said. “But at some point, the music will stop. ”

When the price of oil plummeted in 2014, Canada struggled to recover as quickly as other countries due to problems building new pipelines. Businesses cut costs and borrow to survive.

This year, the coronavirus pandemic has hammered demand for oil, the biggest blow in decades.

Too many producers have gorged themselves on cheap debt to finance their operations as stock prices lagged and investors were relentless on new stock issues, said Jeremy McCrea, analyst at Raymond James.

“Even if they throw the can on the road, it will still be a major problem,” he said.

Bank of Canada says potential downgrades to high-quality bonds could more than triple the amount of high-yield energy bonds, which are already the largest of any Canadian sector in the yield category high.

“Grinding stop”

For Calfrac, which is 19.8% owned by the Wilks brothers, its history went from riches to rags so quickly that it could not even pay interest of $ 18 million.

Calfrac, which provides hydraulic fracturing, coiled tubing and well cementing services, went public in 2004 as prices began to climb to dizzying heights.

Prices plummeted in 2014 and two years later the company cut 500 jobs. Despite this, in 2017, Calfrac moved to the American Permian basin.

After years of profits, losses started in 2015 and continued, excluding exceptional items.

The collapse in prices this year led Canadian producers to cut production and abandon drilling plans, which hurt service companies like Calfrac.

“Everything was interrupted and they got caught before they could start cleaning up the leverage,” said Rafi Tahmazian, senior portfolio manager at Canoe Financial, Calfrac’s sixth shareholder.

Peer Trican Well Service, on the other hand, has taken a cautious approach, said Tahmazian.

Calfrac reduced operating expenses by 23% compared to 2014-2019, while revenues fell by 35%. Trican cut expenses by 69%, as revenues fell 74%, including the sale of certain businesses, according to Refinitiv data.

In June, after Calfrac missed interest payments, he said he would work with advisers to explore his options. Dan Wilks acquired about a quarter of Calfrac’s second-tier debt for $ 18.4 million, the case showed, giving his investment group Wilks Brothers greater influence over the company’s future.

Efforts to reach the Wilks brothers failed. Dan Wilks has also acquired stakes in hard-hit US service companies.

Since deferring its interest payment on a debt of $ 432 million, Calfrac has 30 days, unless extended, to pay or find another solution before a default that could lead to restructuring by bankruptcy, said analyst Ian Gillies of Stifel FirstEnergy.

Calfrac President Lindsay Link declined to comment on the options during his delayed quarterly conference call on June 25.

“We do not expect a return to normal activity levels in the short term,” he said. In a statement, the company said it had the ability and the ability to pay interest.

He declined to comment.

Small producers with little capacity to sell assets or raise new debt or new capital face a “refinancing wall,” said Victor Vallance, senior vice president, energy, with credit scout DBRS Morningstar.

“You are going to see more consolidation,” he predicted.

Government loans have done little to help.

In the meantime, lenders assess their confidence in management teams and assess operating costs to decide on their flexibility, said Fougère of Torys.

“The banks will determine who the winners and losers are. “

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