Energy giant KNOC dogged by Harvest acquisition

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When state-owned Korea National Oil Corp. bought Harvest Energy Trust for $1.8-billion in 2009, the Canadian company was reeling from a heavy debt burden that sent its shares tumbling. More than three years later, very little has changed.

Last week rating agency Moody's Investor Service downgraded the portion of Harvest's debt that isn't backstopped by the energy giant, largely because of the company's total borrowing. $500-million (U.S.) worth of senior unsecured notes that come due in 2017 were downgraded to B1 from Ba3.

"The downgrade reflects Harvest's high leverage on all metrics and very weak operating efficiency," Moody's wrote in a report.

The agency estimates Harvest will report negative free cash flow of roughly $100-million through the first quarter of 2015, forcing management to tap its $1-billion revolving line of credit , of which $300-million was still available at the end of March.

Initially Harvest looked like an attractive acquisition for a giant like KNOC that had the resources and the time to develop its oil sands assets. But in the years since the deal closed, Harvest has been hampered by too much debt as well as "considerable capital requirements to develop its oil sands reserves and the cash flow drain from its 115,000 barrels per day refinery in Newfoundland," Moody's noted.

"The drain on cash flow from the refining business has increased debt levels and decreased the capital spent on production, which will decline again in 2014," the agency added.

Because the refinery has sucked up so much cash, KNOC tried to sell it last year. So far, the company has struck out.

Harvest still has some hope, especially with its BlackGold oil sands project expected to start production in 2014. The company will also spend less on capital expenditures at its Newfoundland refinery this year, which should free up some cash.

But the acquisition certainly isn't looking as fruitful as it once did when KNOC pounced to buy Harvest on the cheap.