OPTI heads back to the bond markets

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Troubled oil sands producer OPTI Canada is taking advantage of the strength in bond markets to grab hold of another lifeline.

But shareholders, who have long hoped for signs that the worst is over, were bitterly disappointed by the move, which they saw as a further sign of corporate weakness in a company that has produced a litany of bad news.

Markets drove down shares of OPTI more than 20 per cent Wednesday, bringing the company within a few cents of becoming a penny stock, after it took on another $400-million (U.S.) in debt. That prompted a credit rating downgrade and further worries about its ability to deliver on promised bitumen output.

"The company is not cash-flow positive. It also has reasonably high debt. And by raising more debt, it is being perceived that the company is putting their hands up and saying cash flow isn't going to come very soon," said Ian Mortimer, co-manager of the Guinness Atkinson Global Energy Fund, which owns OPTI shares.

"It's been a perennial underperformer, and this is another disappointment in a long line."

OPTI's woes have been primarily tied to its 35-per-cent interest in Long Lake, an oil sands project that has struggled to reach its promised 72,000 barrels a day of production.

The company added further fuel to shareholder worries Wednesday when it reported an average of 28,700 barrels a day of production in July, only a slight rise from the 25,000 barrels a day it produced in late April and a far cry from the 40,000 to 60,000 barrels its majority partner, Nexen Inc., has promised by year's end.

Though the new financing should give OPTI roughly 18 months of breathing room, according to BMO Nesbitt Burns Inc. analyst Randy Ollenberger, it's a sign that the company has not seen much success in its search for strategic alternatives, a process many hoped would bring in a corporate white knight.

"Clearly this is an admission that a deal's not imminent," Mr. Ollenberger said.

The financing is also "effectively a dilution of equity value," he said.

The new debt includes $100-million due in 2012 and a further $300-million due in 2013. The company did not disclose terms of the financing, which will bring its total debt load to $2.575-billion, far outweighing its $315-million (Canadian) market value.

The company now has roughly $500-million in working capital, plus a $190-million revolving credit facility.

OPTI said it will use the proceeds of its new financing to continue advancing Long Lake and to keep working on its "review of strategic alternatives."

Nexen and OPTI began the work of extracting bitumen at Long Lake in 2007, and publicly announced that it would achieve full production as early as late 2009. Last November, OPTI stopped predicting when that might happen.

Production has, however, substantially increased in the past 12 months, rising from 14,000 barrels a day in the fourth quarter of last year. On Wednesday, a Nexen spokesman confirmed that the company still expects Long Lake to become cash-flow positive this year, perhaps as early as the third quarter.