The threaded end of one of hundreds of drill pipes is shown in front of the Baytex Energy Ltd.'s Pembina oil rig near Pigeon Lake, Alta., on Feb. 17.Norm Betts/Bloomberg
With the price of oil on the mend but still far below $60 per barrel, the viability of some Canadian energy producers is in doubt.
Southern Pacific Resource Corp., Ivanhoe Energy Inc., Shoreline Energy Corp., and Laricina Energy Ltd. have all defaulted on their obligations, making the possibility of going out of business very real.
The ratings agency Moody's, however, believes that among speculative-grade companies (those rated C to Baa1), similar troubles do not look to be on the horizon.
"Most of Canada's speculative-grade exploration and production companies are well positioned to sustain the current downturn in oil prices in 2015, thanks to strong balance sheets, adequate liquidity, and the ability to sustain production without significant negative free cash flow," said the team of analysts.
Moody's expects the cash flow from operations for the 11 speculative-grade companies analyzed (MEG Energy, Baytex Energy, Northern Blizzard Resources, Paramount Resources, Seven Generations Energy, Jupiter Resources, Teine Energy, Canbriam Energy, Osum Production, Harvest Operations, and Lightstream Resources) to drop by 36 per cent in 2015.
All are expected to generate positive cash flow from operations, though that will no doubt prove challenging in this environment.
"Access to capital markets will become more expensive and uncertain for low rated companies amid the lower commodity prices, and Canadian E&Ps must effectively manage their liquidity," said Moody's.
That optimism is informed by the prudent response of Canadian energy producers to the collapse in commodity prices, swiftly cutting dividends and reducing their capital budgets.
A poor set of fourth-quarter earnings results and what promises to be a woeful first three months of 2015 could bring about further reductions to payouts and capital spending plans, giving company balance sheets a little more breathing room in the short-term.
In addition, some speculative-grade companies have locked in hedging agreements for a portion of their production. As such, they will realize higher selling prices than the current spot price, making the hit to cash flow generation less severe.
The drop in the Canadian dollar also serves cushion the blow of lower oil prices for domestic producers, said Moody's.
The willingness of banks to continue providing cash to troubled companies will play a large part in determining their prospects for survival.
On the conference call following JP Morgan's earnings report on Tuesday, chief financial officer Marianne Lake indicated that the bank had set aside over $100-million in reserves relating to possible oil and gas losses after a review of its exposure to the space.
Canadian banks have more undrawn than drawn exposure to oil and gas companies, suggesting that many firms have the capacity to take increase their indebtedness to help weather the storm. But when the banks re-determine the amount energy companies are eligible to borrow in April and May, Moody's warns that some companies, notably Northern Blizzard Resources and Lightstream Resources, will likely see their borrowing bases shrink.
The ability to secure financing could also be affected by covenant breaches. Loans and credit facilities come with strings attached – called covenants – that often prevent the company from a certain amount of debt relative to their asset base. The lender can look to amend the agreement, keep the company from taking on more debt, or, in some cases, demand repayment of the borrowed funds.
Moody's says that Lightstream Resources, Baytex Energy, and Harvest Operations have all received covenant relief.
The amount of debt coming due for these companies in the near-term is minimal, at $815-million (U.S.) in 2017, $630-million in 2018, and $633-million in 2019. Through 2024, maturities peak in 2020 at close to $3-billion.
By that time, commodity prices may have recovered sufficiently to render concerns about the survival of these companies moot.
For smaller Canadian energy firms that lack a credit rating or that have seen their ratings withdrawn, however, the near-term outlook is likely considerably more dire.