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 percent 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 percent 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. Delphi Energy Corp launched in May 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.”