In March and April, the oil patch found itself in a life-and-death struggle.
Recall just how bleak everything looked as companies, especially the smaller players, faced serious risks of defaulting on their debt as global demand for fuels plummeted with the COVID-19 lockdowns and oil prices crashed through the floor. A desperate industry called on the federal government for a series of financial lifelines to stay afloat until the crisis passed.
Now that Ottawa has announced those programs and oil has started to recover, it appears the banks are putting hard-hit borrowers in the energy sector on much shorter leashes.
Athabasca Oil Corp. is the latest company to see its credit capacity cut. The oil sands producer said this week that its line of credit had been slashed by 65 per cent to $42-million, and that it would seek to tap some of the government credit support.
Companies with credit agreements on the value of their oil and gas reserves, which are mostly the junior and mid-size producers, have been undergoing what could be the most intense semi-annual redeterminations of those instruments to date with their lending syndicates.
Some have announced that their credit access has shrunk, while others have said the introduction of government help has added new wrinkles to the discussions and that the process has been extended by a month.
What’s clear is that, besides reducing dollar amounts of credit available, these agreements are being rejigged to add several new restrictions on what companies can use the money for. There are also a number of new hoops to jump through to gain access to it.
In the meantime, a gap has opened up between companies that entered the crisis with low debt levels and minimal environmental cleanup obligations and those with plenty of both and are now barely hanging on.
From these borrower-lender tough talks have emerged a series of conditions to reduce the banks’ exposure to potential insolvencies. And the tougher they are, the harder it will be for some producers to take advantage as energy markets rebound, said analyst Cody Kwong at Stifel FirstEnergy, who catalogued major changes in relationships that are appearing.
Two of the conditions are similar to what Ottawa has included with some of its credit support – that is, restrictions on dividends and share buybacks. Lenders will be demanding a say in whether companies can institute either after many producers suspended these shareholder-friendly moves as the pandemic’s economic impact worsened over the past couple of months.
Also expected to be written into some contracts are strict limits against using the lines of credit to pay down more junior debt. Some of this, Mr. Kwong said in a report, is the banks “reasserting their position” in creditor priority after the Supreme Court’s 2019 Redwater decision, which mandated that any money left over in an insolvency must first go to environmental cleanup obligations.
As the crisis gathered steam in March, Bonavista Energy Corp.’s banking syndicate blocked the company’s request to withdraw $175-million from its $500-million line of credit to pay down other debt, even though Bonavista believed it was within its rights to do so.
Also front and centre are abandonment and reclamation obligations that are on corporate books, and act as a liability on top of financial debt. Mr. Kwong pointed out some companies are saddled with both in large proportions to their corporate cash flow, led by Journey Energy Inc. and Perpetual Energy Inc.
If a company wants to acquire any assets, then some lending syndicates will demand that it will not result in the addition of large environmental obligations, despite the prospects of any increases in cash flow and earnings. What’s not yet known is how many companies will be able to access the money Ottawa has earmarked for the cleanup of inactive wells and how this might affect the calculation.
Finally, after the crisis, borrowing’s going to get more expensive, possibly to the tune of one to two percentage points, with oil producers seeing bigger jumps in interest rates than those companies with production skewed to less-volatile natural gas.
The better-financed players will not have to sweat over the new conditions as much as those that are struggling, Mr. Kwong said. And the latter group will be tapping government credit support more than the former will.
In the end it all looks geared to keeping loan losses at the banks in check as much as keeping oil companies afloat.
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