Ottawa has thrown large oil and gas companies the financial lifeline they asked for, and given them lots of reasons not to take it.
The Large Employer Emergency Financing Facility (LEEFF) program is chock full of terms and conditions that complicate a company’s relationship with its current lenders and add a new and stringent layer of reporting on environmental performance.
With global oil markets improving after a two-month collapse, take-up of the program will be limited to energy producers that are out of other options before going bankrupt. This is a good thing. After all, it’s supposed to be lending of last resort.
Of course, LEEFF is not just for the oil patch; it’s for all non-financial companies with revenues above $300-million that have sizable work forces and whose businesses have been wrecked by COVID-19 and measures employed to limit the spread of the virus. Airlines and retailers have been front and centre with their struggles.
However, the energy industry was hit with a double whammy. Oil prices tumbled into the single digits per barrel last month as demand for fuels plummeted. Meanwhile, the drop in consumption caused storage to fill up, forcing companies to shut off large proportions of their output.
As cash flow dwindled, producers ran afoul of the covenants in their credit agreements, or risked doing so, making the notion of taking on more debt either prohibitively expensive or impossible as banking syndicates worried about their exposure.
LEEFF is not the first government-support package the energy industry can make use of. Ottawa had already come forward with its emergency wage subsidy as well as a credit program for small and mid-size oil and gas producers. Another $1.7-billion is targeted at cleaning up inactive and orphan wells as a way to put oil field hands back to work chipping away at that environmental and financial liability.
What the new program offers is last-ditch survival for companies that have exhausted their other credit sources. The loans, at a minimum of $60-million, carry an interest rate of 5 per cent in the first year, 8 per cent in the second and increase by 2 per cent each year after. As part of the deal, the government would get warrants that it can convert to common shares equal to 15 per cent of the loan value, or, in the case of private companies, the cash equivalent.
Also in the fine print, 20 per cent of the debt will be secured and the government corporation in charge of the program will have the right to appoint observers on boards of directors.
These details, spelled out on Wednesday, are in addition to stipulations laid out when the government announced the program earlier this month, including strict limits on executive pay, dividends and share buybacks as well as a requirement to adopt more intensive reporting on environmental performance.
So it’s anything but free money. Some companies have already said they would rather keep trying to work with their own banking syndicates than turn to the government. The largest have received support from the banks.
Some lenders are unlikely to welcome the government in with equal seniority and, in fact, existing loan agreements may have to be changed to allow it. The federal program requires waivers over such things from the existing lenders or bondholders.
In addition, shareholders may be unhappy with dilution of their stock should the government exercise warrants in the future, at a price to be determined. Although, one assumes the alternative would be having the equity wiped out in an insolvency, so you pick your poison.
Also at play is the economy, and oil markets. They are starting to creak back to life after the mass shutdowns in March and April. Recall it was just a month ago that West Texas Intermediate crude oil futures sank to below zero for the first time. Oil has since climbed to near US$34 a barrel – not a full-blown recovery yet, but a steady gain based on signs that the worst is over.
This could put stronger companies in a better position to consider snapping up the weak in a wave of consolidation that the Canadian oil and gas industry sorely needs after more than five years of downturn and poor market performance.
Alberta Premier Jason Kenney said he is concerned about the bureaucratic hoops companies may have to jump through to access Ottawa’s loans, as well as the potential for government to micromanage corporate decisions.
But the government can’t save every company, and the stipulations attached to the program will partly determine how badly some want to be saved.
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