Energy companies are running out of slack as they scramble to meet debt payments, warning of possible defaults even as oil prices hold above $40 (U.S.) a barrel.
Lightstream Resources Ltd. on Monday said it has 90 days to avoid default after its borrowing limit was cut by more than half to $250-million (Canadian).
Twin Butte Energy Ltd. said it is in talks with lenders to extend the deadline on an $85-million debt payment due April 30, and that it may not survive without additional concessions.
Meanwhile, struggling oil sands producer Connacher Oil and Gas Ltd. said it struck a deal for more time to negotiate with debt holders after it exhausted a grace period that expired on April 30. In March, the company skipped an interest payment tied to $153.8-million (U.S.) in loans.
The warnings reflect mounting debt woes among cash-strapped producers that borrowed heavily to fund drilling when oil fetched closer to $100 a barrel.
With crude trading at less than half that level today, defaults in the industry are expected to spike as banks tighten lending restrictions and companies struggle to cover basic expenses.
"The banks have been pretty lenient throughout 2015 by relaxing covenants with a hope that pricing would eventually improve or companies could raise cash by selling assets," AltaCorp Capital Inc. analyst Thomas Matthews in an e-mail.
Instead, mergers and acquisitions have been sluggish amid disagreements over asset valuations, exacerbating financial strains. To make matters worse, debt levels are in many cases judged against earnings for the previous four quarters, dampening the impact of a recent bounce in U.S. crude from lows under $30 that were hit earlier this year. "I think the banks are at a tipping point" in terms of how much more leeway they're prepared to give, Mr. Matthews said.
First-quarter results for the industry began rolling out last week, with a handful of integrated oil sands producers posting hefty losses and sharp reductions in cash flow that reflect oil prices that sank 30 per cent from the same time last year.
Like their smaller peers, the sector's biggest companies have slashed spending and staffing levels to weather the slump. But they have also used deep pockets and debt to finance growth, shrugging off credit downgrades from ratings agencies in a bet that oil prices will recover over time.
By contrast, Lightstream, Twin Butte and others are trying to sell their core holdings, threatening to further drain already meagre cash flow when it is needed most.
Twin Butte in December hired investment dealer Peters & Co. Ltd. and National Bank Financial Inc. to study options, including a debt restructuring and alternative financing, as well as a complete or partial sale of the company.
It said Monday an extension on its non-revolving credit facility would enable those talks to proceed. TD Securities analyst Aaron Bilkoski said in March the "best case" the company could hope for is winning concessions from lenders, allowing it to defer filing for creditor protection until it can find a buyer or commodity prices recover.
On Monday, the company offered no assurances that a deal could be reached with lenders, or that it could sell itself or its assets.
"Within the context of the ongoing strategic alternatives process, the current low oil price environment and the aforementioned debt repayment milestone, there is uncertainty surrounding the company's ability to continue as a going concern," Twin Butte said in a statement.
Similarly, Connacher said it is studying possible financing and restructuring alternatives while it negotiates with some of its debtholders.
Lightstream, which operates in the Saskatchewan portion of the Bakken shale zone and in the Cardium region of Alberta, said it currently has $371-million (Canadian) outstanding under its credit facility including issued letters of credit – well above its reduced borrowing limit.
The company said it aims to study options for shoring up its finances between now and June 30. However, it warned it may not have enough cash to meet a June 15 interest payment.