A worker waits to connect a drill bit on Endeavor Energy Resources LP's Big Dog Drilling Rig 22 in the Permian basin outside of Midland, Texas, U.S., on Friday, Dec. 12, 2014.Brittany Sowacke/Bloomberg
As the price of oil lingers around $50 (U.S.) a barrel, some Canadian energy companies are facing a new worry: debt.
A survey of oil and gas producers by BMO Nesbitt Burns found capital expenditures are forecast to outstrip cash flow by about 10 per cent in 2015. That jumps to 25 per cent once dividend payments are included.
"As this is an unsustainable trend, we believe this suggests additional capital spending and dividend reductions may be coming," BMO analyst Jared Dziuba said in a report.
The situation presents another challenge for the energy sector, which has already slashed spending, cancelled projects and is cutting costs wherever possible in reaction to oil prices that have fallen by about 50 per cent since last summer.
Now, some companies in the oil patch are starting to use up their available financing as they struggle to earn enough cash flow. By the end of 2016, roughly half of existing credit facilities are likely to have been drawn.
Also, some firms with long-term debt coming due over the next two years may face difficulty securing funding in the future.
Others are in danger of breaching their covenant terms on loans, which could restrict their access to credit and should be viewed as a "red flag," according to Mr. Dziuba.
If oil fails to rebound, the elevated indebtedness of some Canadian oil and gas companies will likely prompt additional moves to shore up balance sheets, with some being forced to raise cash through share issues.
But whether investors have the appetite for many big new Canadian energy financings is an open question. Cenovus Energy Inc. recently raised $1.5-billion (Canadian) in a bought deal share issue, but the sale wasn't immediately absorbed by investors.
The price of West Texas intermediate (WTI) crude oil ranged from about $47.50 (U.S.) to $55 a barrel throughout the month of February after falling below $44 in late January. BMO assumes that WTI will average $51 a barrel in 2015 and $60 the following year.
During the selloff of energy shares, the market meted out less severe punishment to companies on a firmer financial footing. Mr. Dziuba noted that since January, 2014, Canadian oil and gas exploration and production firms with relatively strong balance sheets have declined by only 8 per cent. Meanwhile, companies with debt to earnings before interest, taxes, depreciation and amortization ratios above three times or debt-to-capitalization levels in excess of 50 per cent have declined by more than 40 per cent over the same period.
According to BMO, the companies best positioned in this low-oil-price environment are Raging River Exploration Inc., Cardinal Energy Ltd., Suncor Energy Inc., ARC Resources Ltd., Athabasca Oil Corp., Enerplus Corp., Tourmaline Oil Corp., Journey Energy Inc., and TORC Oil & Gas Ltd.
Firms that have a higher degree of funding risk, according to BMO, include Perpetual Energy Inc., Baytex Energy Corp., Paramount Resources Ltd, and Long Run Exploration Ltd., while Penn West Petroleum Ltd., Lightstream Resources Ltd., Zargon Oil & Gas Ltd. and Twin Butte Energy Ltd. have elevated overall leverage.
"We believe that a modest recovery in oil prices to the $60 [a barrel] level is not enough to restore the financial health of most highly leveraged companies and that the downside risk to crude oil prices could translate to further downside for these equities," Mr. Dziuba said.
Mr. Dziuba acknowledges that many elements of his analysis are subject to change. Companies could elect to trim their payouts or capital budgets, make greater use of dividend reinvestment plans, refinancing debt, or sell off assets in an attempt to improve their financial positions.
Divesting assets, however, has proven to be quite challenging for many Canadian oil and gas firms.
Penn West Petroleum Ltd., for example, has been trying to sell assets to buffer its balance sheet. Its Peace River oil sands project, a joint venture with China Investment Corp., is one of its assets on the auction block.