Forced asset sales seen as banks squeeze Canada oil companies

CALGARY (Bloomberg) -- It’s crunch time on asset sales for Canada’s struggling oil producers.

Starting in earnest after Labor Day, oil and natural gas companies will begin the twice-yearly pilgrimage to their banks to discuss funding. It’s not going to be easy, with companies including Penn West Petroleum Ltd. under pressure to sell assets to keep the money flowing.

With no relief from the price of oil, which has tumbled under $50/bbl, companies are cutting more staff, reducing dividends and even selling hedging positions on commodities and currencies to boost cash flow. Banks will next likely force some producers to sell their best assets to avert bankruptcy, said Rafi Tahmazian, senior portfolio manager at Canoe Financial LP in Calgary.

“The banks are going to tell these guys to sell their coveted assets,” said Tahmazian, who helps manage about C$1 billion ($750 million) in energy funds. “That means the strong companies get to lick their chops.”

The oil slump has already made victims out of many of Canada’s fossil fuel producers which have cut thousands of jobs, most of them in Calgary. Banks approached struggling producers in the spring and told them to do what they could to strengthen their balance sheets and find ways to raise funds, Tahmazian said.

“This time, they won’t be so friendly,” he said.

Deals Slump

The Standard & Poor’s/TSX energy sub-index has lost about C$85 billion ($64 billion) in value this year, as the price of West Texas Intermediate crude touched its lowest point since 2009. Of the 63 members in the index, all but three have posted stock losses in the past 12 months, according to data compiled by Bloomberg.

Companies have so far been reluctant to sell. There were 14 pending and completed oil and gas deals worth $418 million in Canada’s oil patch in the third quarter, on pace for the the lowest quarterly value since at least 2003, according to data compiled by Bloomberg.

Canada Dry

Penn West, which earlier this week cut its workforce by 400 jobs, is still looking to sell properties after earning C$1.5 billion over the past two years selling assets producing about 30,000 bopd. The Calgary-based company is still in compliance with its financial covenants on its syndicated loan and notes.

“While the current commodity price environment poses challenges, we will continue to take a disciplined approach to our process and we remain confident in our ability to complete additional transactions to further advance our goal of debt reduction,” the company said Sept. 1.

A spokesman for Calgary-based Penn West couldn’t be reached for comment. Athabasca Oil Co., which has struggled to find a partner for its Duvernay assets, is in “good shape” with a strong financial position, Matthew Taylor, a spokesman for the Calgary-based company, said by phone.

Bonds Warn

Bond prices are already factoring in more challenges ahead for companies whose budgets are stretched. U.S. dollar debt of Canadian high-yield energy companies has lost 6.4% this year, a percentage point more than the broader index, which is on track for the worst year since 2008.

“The market is pricing in a higher default rate,” said Geof Marshall, who runs C$11 billion ($8.3 billion) in high-yield bonds for CI Investments Inc. in Toronto. “The market has actually done a remarkable job over the years of pricing that in.”

Defaults or bankruptcies mean assets will be on sale in the coming months as debt-laden producers are forced to sell some of their best properties to raise liquidity. “If you had a completely unlevered balance sheet right now you could buy whatever you wanted -- if you assumed the debt that came with that asset,” said Marshall.

Buyers Circle

There are buyers out there with enough cash to make purchases, said Canoe Financial’s Tahmazian, who declined to identify any possible purchasers. Suncor Energy Inc. CEO Steve Williams said in July that the company “looks at the opportunities,” adding that there’s “nothing particular to talk about.”

One group of investors that may take advantage of assets on the market in the coming months are from India, said Bob Schultz, a professor at the University of Calgary Haskayne School of Business.

“I expect the Indian companies to swoop in and buy,” he said, adding that they have been less active in the past than U.S. or Chinese buyers. That will change if the conditions are right, including more cash-strapped Canadian producers being squeezed by the oil price.

“These companies will have to restructure,” said Schultz. That means they’ll be looking for buyers.