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Rows of steam generating plants at Cenovus Energy's Christina Lake oil sands operation in Christina Lake, Alberta. Some energy companies are starting to get serious about its debt. Cenovus sold $1.5-billion worth of new shares in January and then sold its royalty lands for $3.3-billion a few months later.RICHARD PERRY/The New York Times

Let this be the definitive lesson for resource companies: Dabble with too much debt and you eventually drown in it.

In a world with mind-blowingly low interest rates, commodity producers – and even worse, developers – have piled on debt, assuming the projects or share buybacks the leverage helped fund would be worth the burden. Looking at you, Glencore PLC and Barrick Gold Corp., and at you, Cenovus Energy Ltd. and Canadian Oil Sands Ltd. – although the list goes on.

In a mordant way, it is almost comical that investors let this play out, considering commodity markets are notoriously cyclical. Coming out of the financial crisis of 2008, shareholders persuaded themselves the next mining and energy downturns were years, if not decades, away. What an embarrassing mistake.

Because so many were so naive, 2015 has been a rude awakening. The hopes any overleveraged companies had that commodity prices would rebound have finally fizzled out, forcing them to get serious about their debt.

Some companies turned radical early in the year: Cenovus sold $1.5-billion worth of new shares in January and then sold its royalty lands for $3.3-billion a few months later. Others are just getting serious now: Hoping to pay back $10-billion (U.S.) of its $30-billion net debt load, Glencore recently sold $2.5-billion worth of new shares and is now said to be considering selling large chunks of its agriculture assets.

At this point in the cycle, no one is safe. MEG Energy was once one of the oil sands' precious darlings, because its cost structure is incredibly low. But the energy market turned before MEG could get to full production, and now its sizable debt is all investors seem to care about.

In August, the company announced it had started a strategic review, looking to sell its interest in the Access pipeline to pay back debt, but even that was not enough to stem investors' hysteria. Before energy stocks popped on Monday on the back of Suncor Energy Ltd.'s hostile bid for Canadian Oil Sands, MEG's shares had plummeted 58 per cent this year.

A recent downgrade from rating agency Moody's Investors Service helps explain why. "While we assume the company will be successful in selling its interest in the Access pipeline and reduce debt substantially, leverage would still be high."

Debt is rarely a problem until, suddenly, it is. And when it becomes a five-alarm fire, it often forces companies to sell assets – or themselves – in a fire sale. Suncor knows this, and that is why it is pouncing. The price offered for Canadian Oil Sands is cheap (far below the cost Suncor would have to pay if it went out and developed the asset now from scratch), but the target's shareholders have long known their company has serious balance sheet problems, and this may be the most elegant exit from their struggles.

Another life lesson for chief executives: Being boring pays in the long run. Suncor is proof of that. During the latest energy boom, companies such as Crescent Point Energy and Whitecap Resources had the juice; today, they are struggling to tread water. Suncor, though, is praised for its diversified business model – it extracts oil from the ground and also refines it – and its safe balance sheet provides financial flexibility that rivals must be salivating over. (Let's not forget, though, that Suncor has had its own troubles – see 2009 and the Petro-Canada merger for evidence.)

Even though Suncor has $14-billion (Canadian) of debt outstanding, ratings agency Moody's Investors Service barely blinked when the oil sands giant announced its hostile bid on Monday. Although Suncor would absorb Canadian Oil Sands' debt, the buyer has $4.9-billion in cash on its balance sheet – which is why analysts have been predicting it would be a buyer should any sector consolidation start up. (Imperial Oil is the other expected acquirer, because it is backed by parent Exxon Mobil.)

Where the blame for all this carnage lies is debatable. As bad as all this looks for the executives who tacked on too much debt, remember that investors never seemed to mind. Until they did. In many ways, management teams have been encouraged to borrow because rates have been so low.

But you have to draw the line somewhere, which is ultimately why CEOs are paid the big bucks. The market has an insatiable appetite for growth, but it comes down to management teams to determine what is feasible. That is a truth that holds for management teams in any sector. And while we're at it, for governments, too.

If the most aggressive shareholders are always listened to, stalwarts like Suncor would probably get broken up to "extract value." Doing that would make them suffer in markets like this, which is when their balance street strength, and their diversity, really shine.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:00pm EDT.

SymbolName% changeLast
ABX-T
Barrick Gold Corp
+2.46%22.53
CPG-N
Crescent Pt Energy
+1.61%8.19
CPG-T
Crescent Point Energy Corp
+1.19%11.08
CVE-N
Cenovus Energy Inc
+0.76%19.99
CVE-T
Cenovus Energy Inc
+0.56%27.08
IMO-A
Imperial Oil Ltd
+0.7%69.13
IMO-T
Imperial Oil
+0.15%93.43
MEG-T
Meg Energy Corp
+0.81%31.1
SU-N
Suncor Energy Inc
+1.18%36.91
SU-T
Suncor Energy Inc
+0.99%49.99
WCP-T
Whitecap Resources Inc
+0.59%10.25
XOM-N
Exxon Mobil Corp
+1.1%116.24

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