OPTI's future looking bleak

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Any hope investors had for OPTI Canada Inc. is quickly eroding now that analysts and rating agency Moody's Investors Service Inc. have weighed in on the oil company's bleak future.

Moody's cut ratings on some of OPTI's debt, while one analyst opined that "it's time to throw in the towel." Shares tumbled 61 per cent over two days as investors fled the company.

OPTI's dismal liquidity is driving the discontent. With $2.8-billion in existing debt, the company does not have enough cash on hand to meet 2011 interest payments, let alone new capital expenditures.

Although a temporary fix could be struck, "it would be irresponsible for the company to seek additional debt financing, as we do not believe the time afforded by such borrowings would change the likely eventual outcome of bankruptcy or restructuring," RBC analyst Mark Friesen said.

Mr. Friesen's new price target for the shares is "zero," implying he believes OPTI will go under. It's "time to throw in the towel," he wrote in a research note to clients on Wednesday.

And, noted Bank of Montreal analyst Randy Ollenberger, "If Long Lake production rates fail to improve from current levels, there may not be enough asset value in the oil sands leases and upgrader to support any equity value."

Shares have plummeted to 27 cents, from a high of $25.05 in June, 2008. To staunch the flow OPTI hired investment bank Lazard on Tuesday to look at restructuring options, but some observers think even the brightest minds can't save the company.

Although overall oil prices are skyrocketing, OPTI has been hampered by the extremely slow development of its Long Lake project in northern Alberta's Athabasca oil sands. Operations there "will not improve quickly enough to afford OPTI positive cash flow before the company exhausts its liquidity," Mr. Friesen wrote.

Progress has been slow because OPTI's OrCrude process, which reduces the amount of natural gas required to extract bitumen, hasn't yielded the considerable benefits the company touted. OPTI has estimated 2011 output around 40,000 barrels per day, but Mr. Friesen fears it will remain at the 28,500 barrels produced each day of the fourth quarter.

If things don't change, Mr. Friesen predicts that OPTI's $200-million in cash on hand will be exhausted by mid-2011. Interest expenses for the year, plus expected Long Lake capital expenditures, total around $350-million. OPTI has credit lines available, but Mr. Friesen thinks tacking on more debt won't help.

Rating agency Moody's feels the same way; it cut ratings on some of OPTI's debt to C-double-A-3 from C-double-A-2, citing "declining liquidity and our view that the company will be unable to meet all of its cash requirements in 2011."

Moody's wasn't as negative as Mr. Friesen, however. The rating agency simply noted that "OPTI's capital structure is unsustainable and will likely need to be restructured."

OPTI's credit facility is up for renewal in December and $525-million (U.S.) of debt matures in December, 2012. At best, the company's cash flow breaks even after operating expenditures, leaving little money to repay any debt.

Investors have long been negative on the stock. OPTI's average share price was about $2 from 2009 to mid-2010, even though the company sold a portion of its Long Lake project to Nexen Inc. to raise funds.

The stock price hit a breaking point late last year and has fallen further since. The drop comes at a time when the Toronto Stock Exchange is soaring, largely due to oil and gas producers.