Canadian oil and gas executives are looking to November with equal measures of anticipation and dread.
That’s when banks will take hard looks at their small and mid-size corporate clients in the oil patch as part of semi-annual redeterminations of credit, in which they stress-test the companies’ credit capacity based on financial health and oil price forecasts.
Usually rather staid affairs, the coming editions promise much more tension, with companies that are starved of capital and shedding thousands of jobs fearing the lenders will reduce their access to credit.
Just a few months ago, industry officials were speaking in terms of survival while pleading with Ottawa to help them and their employees deal with a double whammy of collapsing oil prices and out-and-out lack of demand for the stuff from refiners across the continent. In April, a brief period of below-zero crude prices added to the apocalyptic feel.
The government responded with programs such as the emergency wage subsidy and $1.7-billion for cleaning up inactive wells. Of critical importance to the industry also was help with credit obligations, as companies’ cash flow dwindled with energy demand, triggering breaches of covenants on existing debt and the potential for foreclosure.
Over the summer and into fall, the crisis eased somewhat as commodity prices clawed back. But it did not go away, as is reflected in oil companies' still-depressed stock prices. Yet, given the gravity of the situation, few government credit support deals have been announced. Business Development Bank of Canada (BDC) and Export Development Canada (EDC), both Crown corporations, have offered loans to producers and backstops for their lending syndicates.
It’s been an arduous process. Tristan Goodman, president of the Explorers and Producers Association of Canada, explains that it has taken since the spring for hard-hit producers and their lenders to work through the terms and implications of tapping into billions of dollars of support programs announced as the COVID-19 crisis delivered its worst to the industry.
Bonterra Energy Corp., target of a hostile takeover bid from Obsidian Energy Ltd., is one of a very few companies that have publicly said they are working to finalize one of the credit packages, a $45-million loan with BDC and a $38.4-million reserve-based lending commitment from EDC. They remain subject to final approval from Bonterra’s lenders.
That doesn’t mean others aren’t still in the works. Deals have been approved, although producers are waiting for the money to come through. Still, the whole process is complicated by the various corporate predicaments and, perhaps most importantly, existing credit deals with lending syndicates, Mr. Goodman said. Unless more deals are wrapped up in time for November, the industry’s debt worries could get worse.
“Hopefully, EDC and BDC are doing a really good job," Mr. Goodman said. “I appreciate their efforts in a very difficult situation, but we do need to get this done. If you can hear the tone in my voice, I am now actually getting a little more nervous. These are good Canadian companies that are on board with where Canada is trying to go, but they’ve got to make it through.”
In the summer, industry officials complained that the two federal programs, along with another targeted at large employers, were too complex and taking too long to inject liquidity into the sector. The Large Employer Emergency Financing Facility was partly aimed at the energy sector, but to date only Gateway Casinos & Entertainment Ltd. has tapped the program, which comes with requirements for stringent reporting on businesses' environmental effects. The industry called on the government to rejig the programs.
But now it’s not just the federal government’s agencies causing a logjam, said Ben Brunnen, vice-president of the Canadian Association of Petroleum Producers. The banks themselves have at times been resistant to federal programs that might extend their financial exposure to oil and gas companies when their long-term health is not assured.
In some cases, lending syndicates kept producers on short leashes, restricting capital spending and reassessing credit capacity month-by-month while pushing for companies to seek buyers.
“Definitely banks are a bit hawkish right now and they’re not particularly oriented towards automatically supporting more liquidity and taking more exposure to companies," Mr. Brunnen said. "That’s pretty much all what EDC has put on the table, and as a result of that, unless EDC is willing to take over on behalf of the banks, it’s not an easy proposition to advance.”
It all puts some executives in very tough spots, unable to plot long-term strategy as November approaches. This is all against a backdrop of worry that a second wave of coronavirus infections, if it worsens, could force petroleum-fuelled economies into lockdowns again. That would put survival back at the top of the priorities list for many companies.
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