More pain in store for Canada’s oilpatch as insolvencies rise and banks tighten credit

Geoffrey Morgan, Financial Post

The lights are off, the doors are locked and unopened mail is piling up on a neglected desk on the ninth floor offices once occupied by the now-insolvent Calgary-based junior gas producer Terra Energy Corp.

Last month, Terra announced it was shutting in all of its production, its officers and directors were resigning and about 30 staff had been let go after Edmonton-based Canadian Western Bank demanded the junior producer make a full repayment of its $15.9-million in loans. Court documents show the company, which was founded in 2004, owes an additional $10.4 million to a list of unsecured creditors.

As oil prices hover stubbornly close to US$40 per barrel – less than half its price from 18 months ago – banks are reluctantly running out of patience, calling in an increasing number of loans to oil and gas producers and oilfield service providers.

The sector is already reeling from tens of thousands of job losses and both bankers and energy executives are concerned that demands for repayment could lead to additional layoffs, pushing Canada further into recession.

Banks are going to be forcing companies to sell their crown jewels

“All of the financial institutions are working with as much patience as they can,” said Dave Mowat, president and CEO of ATB Financial. The Canada Crown corporation’s gross impaired loans climbed to $425.8 million at the end of 2015, thanks in large part to the oil price collapse and resultant downturn.

Mowat said ATB is trying to work with its borrowers in the oil and gas industry and acknowledged “we can create problems by acting too precipitously.”

Explorers and Producers Association of Canada president Gary Leach said he expects more companies will find their bankers tightening their access to credit. “It wouldn’t surprise me,” Leach said.

TD Securities analyst Mario Medonca said in a late March research note he expects “the next shoe to drop” this spring, saying there is growing “potential for covenant breaches” in energy lending.

In recent weeks, insolvency practices at large accounting firms have become significantly busier as a rising number of lenders are demanding repayment, in full plus interest, of loans made when oil benchmarks were in triple digits, which is pushing an increasing number of companies into either bankruptcy or insolvency.

“There definitely has been an increase in (receivership) filings in the public domain,” Deloitte partner and senior vice-president of restructuring Jeff Keeble said.

Keeble said the downturn has now persisted so long that, in some cases, “banks are going to be forcing companies to sell their crown jewels.”

“The general sentiment is there will be some pain to go through still,” he said.

At the beginning of April, large Calgary-based oilfield services companies Sanjel Corp. announced it was applying for court-ordered protection from its creditors, which include ATB, while also selling off its Canadian and U.S. fracking businesses for undisclosed sums. The company owes more than $1 billion, according to court documents.

STEP Energy Services Ltd., which acquired Sanjel’s Canadian division, has said it doesn’t yet know how many of Sanjel’s 2,200 employees would join STEP. “They still have an overhead structure that is larger than what STEP needs,” president and CEO Regan Davis said at the time.

In March, the head of Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, asked the country’s biggest banks to review their accounting practices as a result of the oil price collapse and potential strain from failing energy loans.

Following Scotiabank’s annual general meeting in Calgary on Tuesday, CEO Brian Porter said the bank was preparing to tighten access to credit for energy companies as a result of the collapse in oil prices.

“In terms of the borrowing base re-determination, we’re going through that with our clients now – I don’t think there’s any surprise to them,” Porter said.

Neil Narfason, Calgary-based partner and transaction advisory services leader with EY, said as banks conduct their reviews many heavily indebted energy sector companies are coming up short.

“The banks have been extremely flexible. The banks are looking for ways to avoid a sale in this downturn,” he said, but added that lenders are nervous about companies that have reduced their costs but still report negative cash flow.

Narfason said his restructuring team is busier this year than it was last year, as the group oversees more formal processes as additional companies have applied for protection from their creditors.

He attributes the additional number of insolvencies, however, to the fact that the oil price rout has now dragged on for about 20 months.

“What has happened is, because we’re in such a long-term decline, companies have run out of these levers to pull (to cut costs and reduce their debts),” Narfason said.

Now, he said, many oil and gas companies are looking at selling off lucrative mid-stream assets to survive the prolonged downturn and appease their lenders.

Banks with the largest exposure to energy include Canadian Western Bank, with five per cent of its outstanding loans in the sector, and Scotiabank, with 3.6 per cent of its total loan book in the sector.

Asked whether he anticipates calling in more loans from energy companies, Porter said, “no.”

“Our book is performing very well under these types of stress conditions,” he said. Still, in the first quarter the bank downgraded 10 per cent of its energy portfolio and added nine companies to its watchlist.

Files from Barbara Schecter

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