A tailings pond at a mine facility as seen from a helicopter tour of the oil sands near Fort McMurray, Alta.JEFF McINTOSH/The Canadian Press
Southern Pacific Resource Corp. has put itself on the auction block as it struggles with falling production and cash flow while requiring additional capital to bring an oil sands project to capacity rates.
Southern Pacific, whose shares have tumbled 80 per cent in the past two months, said it hired RBC Dominion Securities Inc. to help it seek out strategic alternatives, which could include a sale of all or part of the company, or some other business combination to boost value.
The decision comes during a tough week for small-cap oil sands players. On Tuesday, Sunshine Oilsands Ltd., a Chinese-backed venture, said its chief executive and chief financial officer had left the company as a lengthy effort to raise hundreds of millions of dollars to develop its main project had so far failed to bear fruit.
Southern Pacific disclosed that one of its executives, Jeff Barefoot, vice-president of marketing and transportation, had left to "pursue other opportunities".
The stock was down by a third to 16 cents on the Toronto Stock Exchange on Wednesday. It was worth $1.25 a year ago.
Numerous small developers have had difficulty bringing oil sands projects to the stage where production reaches capacity volumes, and many have disappeared, often taken over by larger, well-funded companies, as their funding could not withstand unexpected and costly engineering problems.
Southern Pacific's production has fallen steadily. The company said on Wednesday output from its Senlac and McKay projects averaged just over 4,000 barrels a day, down from about 4,400 in October and 5,000 in September.
The company said it intentionally cut back production at the McKay steam-driven oil sands development so it can perform maintenance and testing on some if its wells.
Meanwhile, it said it has decided to drill more production and steam-injection wells to fill up the McKay plant to its 12,000 barrel a day capacity, an initiative that will cost $51-million and require an amendment to its regulatory approval.
Production delays and expectations for lower prices for bitumen in the coming year led FirstEnergy Capital Corp. analyst Robert Fitzmartyn to warn that the company could have trouble generating the necessary cash flow to service its debt, let alone fund further expansion.
In a research note published just before Southern Pacific disclosed its plan to explore strategic options, Mr. Fitzmartyn lowered his rating on the stock to "underperform" from "speculative buy".
"In light of the capital structure undertaken to execute its business strategy, our fear is growing that there will be an outcome of little to zero residual equity capital," he wrote. "There is simply too much risk to justify taking a gamble on this stock at this stage."
Jeffrey Jones