Canadian energy companies with surplus cash are buying back bonds on the cheap to help shore up balance sheets amid the worst oil downturn in decades.
Encana Corp. and Repsol SA's Canadian division are each pursuing debt purchases this month, as about 20 per cent of $108-billion of energy-company bonds in the country trade below 80 cents on the dollar, according to data compiled by Bloomberg. Precision Drilling Corp. and Athabasca Oil Corp. have also floated using spare cash for debt reduction, including potential bond deals.
"If they can go out and spend $100 in cash and buy their bonds at 60 cents on the dollar, it's a reduction in net leverage," said Nicholas Leach, a high-yield portfolio manager at CIBC Asset Management Inc. in Toronto. "For bondholders who want to continue to be stakeholders in a company, obviously it's going to be positive."
Energy producers are taking advantage of a window to repurchase securities trading below par and save on interest costs as U.S. crude hovers around $40 (U.S.) a barrel, more than 21 months into a downturn. The reduction in leverage is a way for producers to safeguard their balance sheets on the expectation that prices will remain low for longer, and also to attract investors favouring companies seen as safe bets for surviving the market correction.
Encana on March 16 offered to repurchase as much as $250-million of its four longer-dated senior notes, using cash on hand and available credit facilities.
The move will help the company reduce the duration of its long-term debt liabilities to better match the reserve life of its asset base, according to Kristopher Zack, a Calgary-based analyst at Desjardins Securities Inc. The company will save on interest costs and also put to work proceeds from recent asset sales, and could do more debt retirements if the tender offer is successful, Mr. Zack said in a March 17 note.
Repsol's Canadian unit, formerly known as Talisman Energy Inc., offered on March 23 to purchase any and all amounts outstanding of its seven longest-dated bonds.
Precision and Athabasca have indicated bond buybacks are an option. On a conference call last month, Robert McNally, then chief financial officer of Precision, said it may be worthwhile for the company to use some of its cash to buy bonds trading at a discount. The company said Mr. McNally resigned on March 10 to pursue another professional opportunity.
Athabasca chief financial officer Kim Anderson said on a March 11 call that taking out a portion of the company's bonds is one option for the cash the company will receive from a joint venture it is forming with Murphy Oil Corp.
Matt Taylor, a spokesman for Athabasca, didn't respond to phone and e-mail inquiries. Samantha Dykeman, executive assistant to Precision CEO Kevin Neveu, declined to comment.
To be sure, the bond-buyback strategy is reliant on the cost of oil. The rise in U.S. crude from a more than 12-year low of $26.21 on Feb. 11 has taken bond prices higher, making the buybacks less attractive than previously.
Long-time high-yield issuers also have less ability to pursue the moves than so-called fallen angels, the companies that have been downgraded from investment grade to junk, said Andrew Jessop, managing director and portfolio manager at Pacific Investment Management Co. A rise in equity issuance among energy companies means there are more funds available for buybacks, he said.