Sanjel now faces a reckoning after taking on debt to expand when times were good.
Sanjel Corp. scrambled to slash costs and scare up a buyer as the fall in oil prices turned its respected and fast-growing multinational energy services business into a money loser that couldn't make debt payments.
Bad timing played a sizable role in its downfall and impending corporate breakup. Privately held Sanjel, known for hydraulic fracturing and well cementing in Canada and the United States, issued $300-million (U.S.) of bonds just before the energy market began to weaken in mid-2014.
Last September, its cash draining as customers slashed capital spending, Calgary-based Sanjel hired financial advisers to help it seek new financing, a process that turned into a full-blown sales effort while bondholders, stiffed on an interest payment, sought a restructuring.
The family-owned company's snowballing crisis is spelled out in a detailed filing from its chief financial officer that is part of proceedings under protection from creditors, announced this week. The company has agreed to sell its Canadian division to STEP Energy Services and U.S. business to Liberty Oilfield Services under court supervision.
Neither has said how much it has agreed to pay.
The affidavit by CFO Paul Crilly provides the clearest picture yet of Sanjel's business and finances, and how quickly they deteriorated as oil and gas prices collapsed. Founded in 1982 by chairman Don MacDonald and run by chief executive officer Darin MacDonald, Sanjel had famously kept corporate details out of the public domain, even as the company grew to be the No. 3 Canadian-based "pressure pumper" with revenue of more than $1.5-billion (Canadian).
The crude-price rout has squelched demand for fracking, in which fluids and sand are pumped into the ground to crack rock layers to produce oil and gas. Margins for companies like Sanjel have collapsed, and many that accumulated debt to expand during the fat years now face a reckoning, said Andrew Bradford, analyst at Raymond James Ltd.
"That might have seemed sensible in a 2013-14 context, but is not manageable when your pricing drops 30 per cent year over year, and the utilization of your equipment drops," he said. "For that reason, I'm not overly surprised that something like Sanjel has happened."
The document shows Sanjel's cash flow turned negative as the downturn dragged on, prompting it to cut nearly half its work force of 4,300, implement wage and benefit reductions and close branches. It had $137-million in cash in December, and in three months it had dwindled to $58.2-million. Sanjel pegs the value of its assets at about $1.44-billion, but that's before impairments, which are a virtual certainty. Its liabilities top $1.1-billion. It owes more than $890-million to bondholders and a syndicate of lenders led by ATB Financial Corp., Alberta's provincially owned bank. The group also includes Bank of Montreal, Royal Bank of Canada and Bank of Nova Scotia.
Darin MacDonald told employees of the restructuring, sales – and his resignation – at town-hall meetings on Monday at Sanjel's downtown Calgary head office and at the firm's product development, training and call centre facility in an industrial park. There is no word yet on the fate of the staff in the transactions.
"It was heartbreaking, if you want to know. It was excruciating – one of the hardest days of many people's careers," said Shelley Kenny, group leader for corporate marketing at Sanjel Canada, who attended both meetings. "Everyone around here is very emotional. It was a family-run business, but we were all a part of the bigger family. That's why emotions are pretty raw."
The MacDonalds declined comment for this story.
The company certainly had ample financial advice. Last September, Sanjel hired Bank of America's Merrill Lynch unit to seek out private-equity firms to help shore up finances. Merrill Lynch called 28 companies, and 19 signed confidentiality agreements, but none got involved. However, the process helped identify potential bidders for the company and its assets, according to Mr. Crilly. Sanjel, meanwhile, hired Wells Fargo to look for buyers for two of its subsidiaries, Suretech and Terracor, an effort that is still going on. Also that month, the company engaged Credit Suisse in a bid to secure new debt financing or restructure its existing debt.
In December, it brought in PJT Partners, run by New York takeover specialist Paul Taubman, to ratchet up the effort to sell or recapitalize the company, a project it dubbed Project Saddledome in reference to the Calgary Flames' arena.
That month, negative net cash flow and "extremely constrained" working capital prompted Sanjel to forgo making a $11.3-million (U.S.) interest payment, which led to restructuring talks with bondholders. In default, the company has had to persuade lenders not to demand immediate repayment of $800-million (Canadian).
Sanjel opened a "virtual data room" for would-be buyers to pore over confidential data in January, and set a due date of March 9 for first bids. It agreed to the STEP and Liberty offers last Sunday, writing what appears to be the last chapter in a Calgary story that was part of a technical revolution – fracking – that took hold and eventually contributed to the glut in supply that has put heavy pressure on crude prices.
Timeline of downfall
2014 – present: Oil producers slash spending on energy services amid plunging oil prices, resulting in far fewer new oil and gas wells. Pricing pressure on drillers intensifies. Sanjel Corp. cuts staffing levels to 2,200 from 4,300, cuts salaries and benefits, and closes various locations.
Fall of 2015: Sanjel engages Bank of America Merrill Lynch to identify strategic partners and raise additional capital. Twenty-eight private-equity firms were contacted, but no transaction was made, given Sanjel's high leverage.
Late 2015: Sanjel breaches certain financial covenants under its bank credit agreement.
Dec. 19, 2015: Sanjel fails to make interest payment of $11.25-million (U.S.) under its bond agreement and seeks restructuring discussions with lenders.
March 31, 2016: Suffering negative cash flow and costly restructuring charges, Sanjel's cash balances dwindle to $58.2-million (Canadian) from $137-million on Dec. 31.
April 3: Sanjel enters into two asset-purchase agreements with STEP Energy Services Ltd. and Liberty Oilfield Services Holdings LLC.
Jeffrey Jones
Kelly Cryderman