A worker walks near a well pad at Christina Lake, a situ oil production facility half owned by Cenovus Energy Inc. and ConocoPhillips, in Conklin, Alberta, Canada, on Thursday, Aug. 15, 2013.Brent Lewin/Bloomberg
Canada's embattled energy producers' efforts to cut debt to weather a price crash are helping them claw back second-quarter losses in the bond market.
Cenovus Energy Inc. and Encana Corp. were among the top five gainers last week in a global index of more than 700 U.S. dollar investment-grade securities compiled by Bloomberg. Cenovus's $350-million (U.S.) global bonds due September, 2043, gained 2.9 per cent since June 26, outperforming the debt of peers from Brazil to the United States. Encana bonds were among just five in the index that returned more than 2 per cent in the past week, offsetting their 3.6-per-cent decline in the second quarter.
Canadian energy producers have been issuing stock and selling properties to help fund drilling and pay down debt to cope with a 46 per cent plunge in crude prices in the past year.
"If you don't keep your production volumes up, that main generating asset that's supporting the debt could decline and that actually increases your level of debt," said Sam La Bell, an analyst at Veritas Investment Research in Toronto. "They want to keep the volumes intact and not run up any more debt."
Cenovus added about $3-billion (Canadian) of cash to its books selling assets to Ontario Teachers' Pension Plan last week, a move that will help reduce 2016 net debt to $640-million from $3.9-billion, according to Kyle Preston, an analyst at National Bank Financial in Calgary.
"It may provide them the comfort level they need to phase in expansion they shelved earlier this year," Preston said by phone Thursday.
Economy contracts
That means Cenovus can expand without having to resort to borrowing in an economy that contracted for a fourth straight month in April. Bloomberg Intelligence analyst Spencer Cutter estimates Cenovus's liquidity, or available cash, may now exceed $9-billion (U.S.), "sufficient to cover spending and interest expense through 2018."
Cenovus, which drills for bitumen in Alberta's oil sands, was hard-hit when crude prices started falling last year. The Calgary-based producer cut 800 positions in the first quarter and cut spending, the first time in its history the company has eliminated jobs.
"Cenovus has come a long way to address its balance sheet concerns," said Garey Aitken, chief investment officer at Franklin Bissett Investment Management in Calgary, whose firm manages $23-billion (Canadian). "It positions Cenovus very well from this point."
The same Cenovus 2043 bonds that outperformed global peers last week slumped 4.5 per cent in the second quarter, more than the average decline of 2.6 per cent for global energy bonds in the Bloomberg index during the period.
RBC underweights
In a note today, Royal Bank of Canada analysts said most investment-grade rated energy producers "are well positioned to manage through a period of sustained low oil prices," citing "strong liquidity positions bolstered by a combination of share issuances and asset sales." Even so, they advised holding fewer of the bonds than benchmarks recommend because they anticipate a "prolonged slump in oil prices" will weigh on performance.
Encana, seeking to fend off threats to its credit rating, is also cutting debt. It used a $1.25-billion share sale to repay bonds in March that would have otherwise come due in 2017 and 2018. Moody's Investors Service lowered the outlook on its Baa2 rating to negative from stable in June. Moody's cited concern about Encana's continued reliance on the sale of a depleting pool of assets to fund negative free cash flow.
"One of their key focuses this year has been to maintain their credit rating," Preston said. "Deleveraging has become a much bigger issue for them."