Record debt overdue for Canadian oil patch after five years of crisis

WINNIPEG, Manitoba / TORONTO (Reuters) – Six years ago, Canadian oil services firm Calfrac Well Services (CFW.TO) had a market value of C $ 2.1 billion ($ 1.55 billion) and was ready for expansion in the US.

But last month, Calfrac’s market value had plummeted to just C $ 23 million and deferred an interest payment on the debt that does not mature in six years. Billionaires brothers Wilks of Texas, who are already its main shareholders, collected more of the company’s debts in June, showed a regulatory filing, preparing to save what they can from the restructuring.

The Canadian industry has borrowed heavily to survive a series of catastrophes, and is facing a refinancing of Cdn $ 6 billion in the next six months, the Bank of Canada said in May.

This year’s energy maturity debts are the most registered for the fourth consecutive year and an increase of more than 40% compared to 2019, according to data from Refinitiv. They are an existential threat to some companies during the industry’s worst crisis in decades, while others with stronger credit ratings may buy time in exchange for higher rates that hinder results.

Companies have two main options as unavailable debts mature: swapping debt for shares or convincing noteholders to extend the maturity, said Kevin Fougere, a partner at the Torys LLP law firm.

The list of overdue energy companies includes some oil patch giants, although leading producer Canadian Natural Resources Ltd (CNQ.TO) and pipeline operator Enbridge Inc (ENB.TO) have already taken steps to cover them.

Smaller players face more drastic changes.

Bonavista Energy Corp (BNP.TO) last month announced a proposed recapitalization to reduce debt, reducing existing equity values ​​and resulting in a foreclosure.

The pace of restructuring and bankruptcies has been slow, as banks have little desire to own assets, and spikes in oil prices offer hope, said Alan Ross, regional managing partner at the Borden Ladner Gervais law firm.

“There is a lot of extension, modification and simulation regarding financial documentation,” he said. “But at some point the music will stop.”

When CLc1 oil prices collapsed in 2014, Canada’s oil patch struggled to recover as quickly as other countries due to problems building new pipelines. The companies cut costs and borrowed to survive. Then this year, the coronavirus pandemic hit oil demand, delivering the biggest blow in decades.

Too many producers gorged on cheap debt to finance operations as stock prices lagged and investors dwarfed new capital issues, Raymond James analyst Jeremy McCrea said.

“Even if they kick the can on the way, it will still be a general problem,” he said.

According to the Bank of Canada, possible downgrades in investment grade bonds could more than triple the number of high-yield energy-related bonds, which are already the bulk of any Canadian sector in the category of high performance.

‘GRINDING HALT’

For Calfrac, 19.8% of the Wilks brothers, their story went from wealth to poverty so fast that they couldn’t pay even an $ 18 million interest payment.

Calfrac, which offers fracking, spiral tubing and well cementing services, went public in 2004 when prices began to soar to vertigo-inducing heights.

Prices fell in 2014 and two years later, the company cut 500 jobs. Still, in 2017, Calfrac moved to the U.S. Permian Basin.

After years of gains, the losses began in 2015 and continued, excluding one-time items.

The collapse of prices this year has led Canadian producers to cut production and scrap drilling plans, hurting service companies like Calfrac.

“It all came to a complete stop, and they were caught before they could start cleaning up leverage,” said Rafi Tahmazian, senior portfolio manager at Canoe Financial, Calfrac’s sixth largest shareholder.

Peer Trican Well Service (TCW.TO), by contrast, has taken a cautious approach, Tahmazian said.

Calfrac reduced operating expenses by 23% from 2014-2019, while revenue fell 35%. Trican cut expenses by 69%, while revenue plunged by 74%, including the sale of some companies, according to Refinitiv data.

In June, after Calfrac lost the interest payment, he said he would work with advisers to examine his options. Dan Wilks acquired about a quarter of Calfrac’s second lien debt for $ 18.4 million, the filing showed, giving his investment group Wilks Brothers more control over the company’s future.

Efforts to reach Wilks Brothers were unsuccessful. Dan Wilks has also acquired stakes in heavily affected US service firms.

Since deferring his interest payment on $ 432 million in debt, Calfrac has had 30 days, except an extension, to pay or find another solution before a default that could result in a bankruptcy restructuring, said Stifel FirstEnergy analyst Ian Gillies.

Calfrac President Lindsay Link declined to comment on the options during her delayed quarterly conference call on June 25.

“We do not believe that there will be a return to normal levels of activity in the short term,” he said. In a statement, the company said it has the ability and the ability to make the interest payment.

He declined to comment further.

Smaller producers with little ability to sell assets or raise new debt or equity face a “refinance wall,” said Victor Vallance, senior vice president of energy at credit evaluator DBRS Morningstar.

“You are going to see more consolidation,” he predicted.

Government loans have been of little help.

Meanwhile, lenders weigh their trust in management teams and evaluate operating costs to decide how flexible they should be, said Fougere of Torys.

“Banks will determine who are the winners and the losers.”

(GRAPH: Digging through debt: here)