Huge Debt Payments at Worst Time for Canadian Oil Drillers

“There’s a lot of extend, amend, and pretend with respect to finance documentation. But at some point the music will stop.”

By Tsvetana Paraskova for Oilprice.com:

The collapse in oil prices has significantly deteriorated Canada’s oil companies’ finances and has made repaying their debt more challenging. Over the past decade, Canadian firms have borrowed money to survive the previous oil crisis of 2015-2016 and boost production post-crisis. But now the second price collapse in less than five years is leaving Canada’s oil patch, especially the smaller players, extremely vulnerable as debt maturities approach.

This year, the oil crash coincides with the highest-ever annual debt maturities in the Canadian energy sector, according to Refinitiv data cited by Reuters. In 2020, oil and gas firms have to repay US$3.7 billion (C$5 billion) in debt maturities, up by 40% compared to last year.

The debt pressure adds to the Canadian energy sector’s new predicament with low oil prices, low cash flows, and low overall demand for crude oil due to the coronavirus pandemic.

Some companies are set to default on debts, while others are looking at restructuring options and refinancing. Banks are not generally too keen to own energy assets. But the banks may be the ultimate judge of who can refinance, who can stay afloat, or who can go belly up in this crisis, legal and industry professionals told Reuters.

Some of Canada’s oil and gas firms had not overcome the previous crisis when this one hit. According to Bank of Canada’s recent Financial System Review—2020, the COVID-19 crisis led to widespread financial distress in all sectors, but “Canada is also grappling with the plunge in global oil prices, which hit while many businesses in the energy sector were still recovering from the 2014–16 oil price shock.”

The energy sector has the most refinancing needs over the next six months, at US$4.43 billion (C$6 billion), and faces the most potential downgrades, according to Bank of Canada.

As credit downgrades could raise funding costs, energy companies are likely to face further pressure in obtaining refinancing. Low oil prices could be a major hurdle to energy firms obtaining refinancing of their debt, the bank said, noting that energy-related bonds could dominate the high-yield debt in Canada.

Energy loans have surged as Canadian banks have increased their loans to the industry by 59% over the last five years.

After the pandemic struck, Canada’s federal government launched programs to support businesses, including in the oil and gas industry, with relief financing to help them overcome the oil price crash and COVID-19.

Canada’s oil firms, however, were still struggling last month to understand what it takes to qualify for a federal government program. Meanwhile, industry representatives said they were unaware of any firm that could access financing under those programs.

The large companies are refinancing short-term debt with new debt issues, but many of the small ones don’t have this option and are looking at alternative ways to recapitalize and restructure.

One of the largest firms, Canadian Natural Resources, issued a few weeks ago US$1.1 billion in five- and ten-year notes, planning to use the proceeds to refinance its outstanding short-term debt.

Among smaller firms, Bonavista Energy recapitalized last month swapping debt with equity and going private. In May, Delphi Energy Corp launched proceedings under the Companies’ Creditors Arrangement Act (CCAA) aimed at restructuring. Cequence Energy is also under the CCAA proceedings “to pursue potential strategic options and alternatives to maximize the value for its stakeholders.”

A growing number of smaller Canadian oil and gas firms are opting for the CCAA process to avoid bankruptcy, analysts told Kyle Bakx of CBC News last week.

Canada’s energy firms are pressured not only by the low oil prices and the turmoil in the global oil industry, but also by the approaching debt maturities. Some companies with weakened finances and potential credit downgrades may not be able to secure refinancing, analysts say.

“There’s a lot of extend, amend and pretend with respect to finance documentation,” Alan Ross, regional managing partner with law firm Borden Ladner Gervais, told Reuters. “But at some point the music will stop.” By Tsvetana Paraskova for Oilprice.com

Demand for gasoline collapsed in a stunning and historic manner, starting in mid-March. But there is no “V-shaped recovery back to normal.” Read… Update on the WTF Collapse of Demand for Gasoline, Jet Fuel, and Diesel

Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  30 comments for “Huge Debt Payments at Worst Time for Canadian Oil Drillers

  1. 2banana
    Jul 7, 2020 at 5:06 pm

    Canada.

    A country blessed with massive amounts of oil and natural gas.

    A cursed with a lack of will to build pipelines to get those resources to world markets.

    I guess they can always print even more to meet government spending levels.

    • char
      Jul 8, 2020 at 10:48 pm

      Dutch disease and all.

      Canada is cursed with oil, but has been blessed with politicians that can’t build pipelines.

  2. Trinacria
    Jul 7, 2020 at 5:12 pm

    I retired a couple of years ago and, wondering if we will see the day of atonement so to speak ? We print more money than is destroyed via shut downs and everything else. We live in the theater of the absurd. I hope that I am around to see the “come to Jesus” that is long overdue for the entire world, not just Canada and the US. Just look at how many decades Japan has been farting around. Beyond words.

    • MiTurn
      Jul 7, 2020 at 5:34 pm

      “day of reckoning” is kinder….just sayin’

    • MonkeyBusiness
      Jul 7, 2020 at 5:59 pm

      +1.

    • Petunia
      Jul 7, 2020 at 6:10 pm

      Pray you don’t live to see the day it all breaks down. Japan is managing the bad debts waiting for all the debtors to die, then nobody loses face when they write the debt off. I don’t think the west has this kind of discipline.

    • Raymond Rogers
      Jul 7, 2020 at 6:10 pm

      Be careful what you wish for. I’ve been in very chaotic places. Makes you appreciate having grocery stores that have selections of each products.

      Everyone should prep for the worst, but hope AND wish for the best.

      • Harvey Mushman
        Jul 7, 2020 at 7:39 pm

        Raymond Rogers wrote “Be careful what you wish for.”

        I agree! I seem to keep saying that to myself.

  3. BuySome
    Jul 7, 2020 at 5:26 pm

    How much of the capacity is devoted to domestic need and how much was for export? If they’re just in the business of getting rich from sucking the life out of a nation’s resource base, then why would anyone want to keep them going down that road? Once they cost more than they’re worth over the long run, let them die of their disease and allow the world to be free of the surplus population of corporate entities. Are there no poor houses?

  4. MiTurn
    Jul 7, 2020 at 5:35 pm

    We’re talking about tar sands, right?

    Shut it down. Tar sands are the poster child of ecological disaster. Let our Canadian friends import shale oil.

    • MarMar
      Jul 7, 2020 at 6:22 pm

      The fossil fuel industry in general, but certainly tar sands in particular, is engaged in the net destruction of value.

    • Prairies
      Jul 7, 2020 at 8:30 pm

      The tar sands is small compared to the majority of Canadian oil. But keep lookin at that little messy spot, the off shore drillers and deep hole drillers will keep on working without many people bugging them.

    • Anthony A.
      Jul 7, 2020 at 8:43 pm

      2/3 of the Bakken Shale is in Canada. We only have the other 1/3 in North Dakota. There’s more than just tar sands oil in Canada.

  5. MarMar
    Jul 7, 2020 at 6:21 pm

    ” In 2020, oil and gas firms have to repay US$3.7 billion (C$5 billion) in debt maturities” but “[t]he energy sector has the most refinancing needs over the next six months, at US$4.43 billion (C$6 billion)”.

    So … which is it? Is there C$1B coming due in the first week of 2021? Or does “the energy sector” include non-fossil fuel companies that have C$1B coming due in the next six months?

  6. Javert Chip
    Jul 7, 2020 at 7:08 pm

    I admit I don’t follow Canadian politics (except for black-face incident, hilarious patronizing stuff in India, and corruption with PM & Atty General), but $C5B = $US3.7B simply does not seem like an industry-ending crushing debt.

    Are we missing a zero here?

    • Petunia
      Jul 7, 2020 at 8:10 pm

      Canada has only 30M people, a very small economy, mostly based on real estate values in a handful of cities.

      • sunny129
        Jul 7, 2020 at 8:22 pm

        Energy companies are going bankrupt even before covid 19, so what’s big deal for Canadian oil cos?

  7. Augusto
    Jul 7, 2020 at 9:14 pm

    As a Canadian and someone who lives in Alberta and worked in the oil patch most of my life this is sad, especially with all the people affected. I have many friends still working in the industry. There is no capital going into the oil and gas markets anywhere in the world right now, that includes sustaining capital, spending just to maintain production, and long term capital investment to replace lost production in the long term. With economies shut down or on half speed, lost oil production is not missed, in fact the overabundance results in low costs for consumers and cheered. This cheering will not last long. Oil makes the world go round, not solar panels, not dilithium crystals, not sea water, not green fantasies about tides, methane, hydrogen, ethanol, and wind-its just the same old perpetual energy stories I’ve heard all my life (my father was in the oil industry and I remember all the same nonsense (oh, its really “science”) in the 1970’s). On the good side for Canada and Alberta, oil prices will go up, and they will be going up a lot. The drop in Shale investment/production in the US and limited capital investment in the rest of world’s energy markets will make oil once again expensive when the economy recovers sufficiently. And folks, all those oil sands and other heavy oils we produce here ( we produce everything here in O&G, we have lots)…and you all like to kick around…what some call “dirty oil” well that’s good for making diesel, and maybe Tesla’s can replace some cars and reduce gasoline consumption, but you need diesel to run trucks and heavy equipment. So grin or lament at Alberta and Canada’s predicament if you please…lets see what the price of gas is this time next year, because there is such a thing as supply and demand. We have it and you are going to need it.

    • MarMar
      Jul 7, 2020 at 11:20 pm

      In the US, electricity is 37% of energy produced and rising. Oil generates about 0.6% of that electricity and falling. Worldwide, oil generates about 4% of electricity (mainly on islands) and falling.

      The electrification of everything continues. Oil and gas use will end, the only question is when. And COVID-19 might be the shock that ushers in an early peak.

      • Augusto
        Jul 8, 2020 at 12:14 am

        Having spent a good part of my life around production and use or Oil and Gas, and having worked with all manner of alternative energies, I just don’t know what to say to the true believers in this coming carbon free age of eternal prosperity. Carbon based energy provides life on this planet, not just energy, heat, light, power, but plastics, clothes, homes, medicines, etc.. it provides the fertilizers for our food not to mention its production and distribution. Gas, Oil and Coal, the only thing remotely close to their productive capacity is nuclear, and most environmentalists want this to be eliminated as well. Everything comes to an end, that is true, and the end for carbon based energy will come as well someday-maybe because we will be gone someday. But what we have developed to date as alternatives will not replace Oil and Gas. So we are left with fantasies of what is next supported by some kind of religious certainty. Just wishing will not make something appear, except perhaps in Harry Potter. Build it and they will come? But what is it?

        • Thomas Roberts
          Jul 8, 2020 at 2:36 am

          Fusion is the holy grail of energy and might be ready in near future. Until then, maximize use of renewables and eliminate nuclear. Use coal for baseline power and natural gas for backup and peak demand. Ban mountain top removal mining for coal.

          As for houses, the newer type wood siding and wood based insulation is on the rise. Eliminate disposable plastic as much as possible. There are ways to make plastic without oil, for remaining uses (if plastic use plummets, this can be pushed off). Generally, reduce waste. There’s a lot like this to reduce oil use. Some oil will needed for awhile to make various random things, but, overall oil use could be dramatically less.

          Use on farms is a bit more difficult to replace, but, is possible, this will be among last things to still use alot of oil.

          As soon as a better battery is developed, electric cars will take over.

          Overall, I more concerned with using resources sustainably and using homegrown renewable resources. Alot of young people mention global warming, but, are more concerned with resource scarcity/”a poorer future”. Alot of people in environmental groups or who say they support them don’t mention it, but, becoming sustainable is often partly about, becoming, self sufficient (America and Canada combined), though sometimes Europe + Australia/NZ and sometimes the rest of the Americas is combined in this self sufficient sphere. It’s important to mention Europe uses environmentalism to push self-sufficiently.

          With oil, last time I heard it’s 70% transportation and 30% everything else. The goal is develop good electric cars, once they replace ice cars (will take at least 10 years, once better battery is developed), total oil use should go down something like 60% (planes and some remaining vehicles like semis will still use oil). Next is to reduce and replace enough in the 30% other category, until we are total, using only a third of current oil use. After that concern will plummet, then greatly reduce remaining third of oil use, over a long time, 100+ years is fine.

          This is something like what the vast majority of the young people I know (that support environmentalism), want to happen (it of course varies by person). Sometimes they want to push for environmentalism, because, they think it could lead to building a bunch of, something like idealized European cities, where they think they will be much better off. Usually, this idealized city, would have something like a college campus atmosphere, but, alot bigger. Most with this idea, have no idea how a European city is laid out or necessarily know much about Europe. If they mention any kind of city planning, this is what they are probably referring to. Natural gas use is almost never gets brought up, except for fracking and methane emissions.

        • Javert Chip
          Jul 8, 2020 at 4:36 pm

          Thomas Roberts

          “Fusion is the holy grail of energy and might be ready in near future”

          LOL.

          For my entire life, fusion has always been 20-30 years away from commercial rollout. I’m 73 years old…you do the math.

        • Thomas Roberts
          Jul 8, 2020 at 8:33 pm

          Javert Chip,

          Steady progress has been continuously made. There’s no reason fusion can’t work, just issues that have to be solved, and we are probably not far off.

          You are the kind of person who would have described airplanes as lunacy and never gonna happen. And you would have been smug about knowing better than those “eggheads”. Even when, the airplanes and jets came out, you would have said they are dangerous and won’t last.

          But hey, maybe you can support politicians that defund high end science projects, that way they never come to fruition, it’s worked for decades, except now, when other countries are catching up to America. Countries in Europe could easily surpass America, if you have your way. You might support politicians that successfully defund fusion in America (or at least decrease funding to the point it will take an additional 20 to 30 years for America), but, ITER will go on without America. Tax breaks that keep the top 10% happy at the expense of America’s future is the reason, your state doesn’t have its own fusion plant. We probably would have along the way, also developed many other useful things.

          There’s a difference between probably impossible (time travel) and takes alot of investment (fusion power). Eventually, fusion power will be ready, but maybe, along the way, we would have discovered a better cheaper way to make power. But, if you don’t try very hard, you will probably never finish.

      • char
        Jul 8, 2020 at 11:15 pm

        IIRC that .6% is grid

        Oil refining creates a waste product. Oil coal. Very dirty bu burned to generate electricity. I always wonder how much of that .6% is oil coal.

        ps. One barrel of oil is around 5.8 mmBTU so the energy content of oil is much more expensive than gas. If the world really electrifies than the gas industry may survive but the oil industry will be killed.

    • BuySome
      Jul 8, 2020 at 12:39 am

      Water makes the world go round. Here in Orygun, it has been like late March/early April forever now and were already past the July 4th start of normal heat wave week. So far, this means less water usage to stay green. Translates to savings. If gas prices go up, you just get more efficient and cut out all that unnecessary driving until they go back down…for some, that might include that vacation spending in Canada. It’s not about laughing at Canada…it’s about bad economic choices across the whole darn planet and the environmental nightmare it is leading towards. How’s your weather? The birds are loving it here.

    • normansdog
      Jul 8, 2020 at 3:56 am

      I also worked in Seismic in the 80’s but that indusry has contracted massively as the oil majors have cut surveying becasue oil is too cheap becasue less people want it. This is a good thing becasue we have to take climate change seriously.
      The old saw “lots of jobs will be lost” is just short-termism of the highest order, it reminds me of the laments of the cod fishermen who when asked to reduce catches to save fish populations complained that jobs would be lost, continued to catch too many fish and then all jobs were lost as the entirely predictable environmental catastrophe occured. People are in many ways short sighted and basically stupid.

    • No Expert
      Jul 8, 2020 at 7:25 pm

      You have it now, the US has tanks that will take it if required.

  8. Annette
    Jul 8, 2020 at 7:15 am

    Everyone here, commenting against O&G, what do you think was used to create that laptop, tablet or smart phone? Diesel to mine the minerals to make the guts for your device and the metal for its frame. Oil or natural gas to melt the ore to fabricate the frame. Oil to create the plastic screen on your device. The chair or sofa you are sitting on right now. Made of materials derived from oil.
    Get educated before you blather on about the EVILS of O & G.

    • James Levy
      Jul 8, 2020 at 8:21 am

      Except that if we keep burning oil, gas, and coal there is this thing called a Greenhouse Effect, which is not a theory but a proven fact, and it will kill billions of people.

      Maybe you should “get educated.”

      • Augusto
        Jul 8, 2020 at 11:33 am

        It may not be “if” we burn it but “how”. Most internal combustion engines are only about 16% efficient, that is 84 percent of the energy in fuel is lost in heat, noise, exhaust, etc…or not used to power the engine. If you build a more efficient engine, you can go a long way in reducing greenhouse gases. Then there are the potential for better gas filtration systems, carbon capture, reduction in consumption levels, etc….Of course, such enlightenment would involve something beyond the normal platitudes of eco-zealotry.

Comments are closed.