For companies in pain, oil’s fall hits harder

Share

Skidding oil prices have intensified the struggles of energy companies seeking to emerge from already painful restructurings.

Penn West Petroleum Ltd., Talisman Energy Inc. and Lightstream Resources Ltd. are among oil-patch players that have sought to refocus operations and reduce debt by selling assets. In the current energy sell-off, investors have punished such companies the most.

A 35-per-cent drop in West Texas intermediate oil since September has added to risks facing companies with weaker balance sheets as a declining outlook for cash flow makes it tougher to sell assets, pay down debt and maintain dividends.

Last week the Organization of the Petroleum Exporting Countries resisted calls for production cuts and stuck to its existing output quota, sending crude prices to four- and five-year lows. It forced even well-funded producers to signal some projects will likely be deferred.

Companies carrying heavy debts are a key concern. "If people are worried about oil prices staying where they are or going lower, then they've got some really serious issues to deal with because of the need to service debt," said Martin Pelletier, portfolio manager and founder of TriVest Wealth Counsel. "You've got to be very careful with debt in the energy patch because of the volatility in commodities. You've got to manage it prudently."

Penn West said on Monday it completed a sale of assets in south-central Alberta for $355-million, lifting its tally for divestitures to $1.05-billion in the past year. The company is looking to concentrate on three main operating areas.

Before last week, when oil slumped below $70 (U.S.) a barrel, Penn West had set a debt target of 2.7 times its annual cash flow for 2015. Now, it will have trouble meeting its financial targets while maintaining the current dividend payment, said Gordon Tait, an analyst at Bank of Montreal. He estimates the company's debt would be 3.9 times cash flow for 2015 at an average oil price of just over $70, assuming no further asset sales. Mr. Tait cut his rating on Penn West to "underperform" from "outperform."

There is a "high likelihood" it will have to lower its 2015 spending budget of $840-million or cut the dividend, Mr. Tait said. "All [exploration and production companies] have been affected by the commodity price downturn, but we believe Penn West is at a disadvantage relative to its peers due to its leverage and funding constraints," he wrote in a report.

Penn West said it has no comment beyond what it disclosed in its previous investor presentation last month.

Penn West shares have lost nearly two-thirds of their value since the end of June; the company also dealt with an accounting scandal through the period. Shares sank nearly 7 per cent on Monday. The S&P/TSX energy group is down 32 per cent since the end of June.

Talisman has lost more than half its value through that time. Its own restructuring, launched in September, 2012, is largely based on selling assets. The company's North Sea holdings have had operational problems that could take years to fix, it has conceded. That means it could be stuck with them regardless of market sentiment.

"Our issues really don't change with falling oil prices," spokesman Brent Anderson said. "Does it make it worse? I guess [it] depends how you define worse. My view is the issues are still the same issues. They are just probably amplified because of the falling prices."

Talisman is calculating its 2015 budget. "We are likely going to be spending less next year," Mr. Anderson said. Talisman is expected to spend $3.2-billion in 2014.

To complete its retooling, Talisman must keep selling properties. Now, potential buyers also have funding constraints due to the weaker oil market.

Lightstream Resources Ltd., whose high debt is hindering its ability to pump cash into operations, has yet to issue a 2015 budget, having waited until after OPEC's decision, a Lightstream official said.

Connacher Oil and Gas Ltd., a small, struggling oil sands company, on Monday said it hired financial advisers to help devise "a process to devise and implement a strategy to address Connacher's liquidity and capital structure." These types of announcements generally foreshadow sales, whether for the entire corporation or for some of its assets.

"Everybody's view of the future has been shifted because of the reality of what's been happening recently," Chris Bloomer, Connacher's chief executive, said in an interview about the industry as a whole. Executives, he said, must now comb over their balance sheets and revenue assumptions. "I think people are kind of in the mulling mode."