Oilpatch showing signs of life after string of deals

Recession isn’t over in the energy sector, but the mood is changing

Renewed interest from investors is spurring optimism in the oilpatch and helping at least one Calgary oil company pull itself from the brink of bankruptcy.

A few weeks ago, Penn West warned it may default on its debt.

‘We got multiple bids for all the assets.’ – Drew Ross, Scotia Waterous

The Calgary-based oil company was struggling to turn a profit. Its production was dropping, its shares were falling, and its long-term debt was nearly four times higher than its worth on the Toronto Stock Exchange.

No wonder some people were starting to write off the company.

A sale of oil-producing assets in Saskatchewan last week for nearly $1 billion has seemingly turned Penn West around.

“With this transaction they skate through a lot of that,” said Drew Ross with Scotia Waterous. “They are able to sell a meaningful part of their company for a very substantial value so they can effectively pay off a lot of their debt with this.”

The sale is a lifeline for Penn West. The stock price is up, analysts are excited and, most importantly, the company’s debt is dramatically reduced.

Optimism returns

More broadly, it’s the latest example of renewed optimism by investors about Canada’s oil and gas outlook. The mood has improved since the beginning of the year, coinciding with the increased price of oil.

“When [oil] was at $25 in January, things were looking very bleak. Now at close to $50, with a 76-cent Canadian dollar, people know they can survive. So people running these companies are feeling a lot better about the environment and are more confident to transact,” said Ross.

Suncor just raised $2.5 billion last week through a share issue. Ross said his firm also had good results selling properties for Husky Energy.

“There was strong interest for the company’s Saskatchewan assets,” he said. “We got multiple bids for all the assets.”

Nicole Leonard in Calgary for Platts conference

Nicole Leonard, with Platts Analytics Consulting, says Canada is an attractive market for oil investors. (Kyle Bakx/CBC)

Consulting firm Platts said Canada is an attractive market, especially with the heavy oil production from the oilsands.

“Globally, heavy crude production is declining. In Canada, it’s growing,” said Nicole Leonard, with Platts Analytics Consulting. “Canada has the opportunity to displace some of the lost volumes from Venezuela, Colombia and Ecuador.”

What it means

Renewed investor confidence will improve the fortunes of many companies, but not all.

There are essentially three tiers of oil and gas companies, beginning with those players with good balance sheets. They are usually the larger companies and have the financial flexibility to raise money, like Suncor’s share issue, to improve their finances or use the cash to fund acquisitions.

The bottom group of companies are those too leveraged and at risk of entering bankruptcy protection, if they are not there already. At this point, an oil price rally alone may not save them.

In the middle are the players who are struggling during the oil downturn. They have some leverage and balance sheet problems and are trying to become more efficient. In the case of Penn West, optimistic investors have improved the company’s fortunes.

Canada Oilsands Production

Continued growth of bitumen production is expected in the oilsands.

Teine Energy bought the Penn West assets, with backing from the Canadian Pension Plan Investment Board.

“Natural resources is a sector we’ve been investing in for a number of years,” said a pension board spokesperson. “We look at investments through a long-term lens, and do not make investment decisions based on short-term market events alone.”

Limited rally

While optimism has returned to the oilpatch, there is caution about whether the situation will improve much further. Oil prices are stuck around $50 US a barrel and, according to the International Energy Agency, they are unlikely to rise much further because supply and past inventories remain high.

Further asset sales, mergers and other transactions are expected in the oilpatch, as companies continue to navigate the downturn.

“People are feeling better,” said Ross. “That being said, the banks are tightening their credit, which is really impacting the smaller junior producers. That is not going to change.”


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