While producers are on firmer footing, oilfield service companies are still keeping restructuring advisers and lawyers busy as the effects of nearly three years of depressed oil prices continue to roll through one of Canada’s most important industries. About 48 percent of Canada’s publicly traded oil, gas and consumable fuels companies aren’t in any danger of insolvency, whereas only 34 percent of energy equipment and services companies are in the clear, according to data analyzed by PwC.
“The big oil producers have seen the worst; it’s the continued fallout that’s causing even more concern,” said Kyle Kashuba, a partner in Torys LLP’s restructuring practice in Calgary. “It’s the ripple effect now and the second big ripple becomes the service companies.”
Sustained low oil prices have divided the industry into those that can survive current conditions and those hobbling on their last legs. Big investment-grade Canadian oil producers like Suncor Energy Inc. and Canadian Natural Resources Ltd. have bought assets and started expanding production amid stable prices while the fates of some oilfield servicers still hang in the balance.
Calgary-based Calfrac Well Services Ltd. will need to restructure its nearly C$1 billion ($750 million) in debt due to high leverage, low interest coverage and earnings, and continued weakness in the pressure-pumping subsector, according to Paresh Chari, a Moody’s Investors Service credit analyst. Leverage will top 15 times adjusted earnings in 2017 and interest coverage is around 0.7 times, with negative free cash flow, according to Moody’s. It rates Calfrac Caa3, which implies very high risk, with a negative outlook.
“We recognize the current concern in the market surrounding Calfrac’s leverage and maturities, but at the same time we are observing ongoing improvement in the fundamentals of our business,” Calfrac spokesman Scott Treadwell said in an emailed statement. “We also believe all of our stakeholders are best served by an appropriate amount of leverage that allows the company to focus on safe and efficient field execution for our employees and clients while delivering growth for our shareholders at reasonable risk and cost.”
The company’s 2020 bond trades around 91 cents on the dollar after falling to less than 36 cents in February 2016. It’s still selling at a discount, with a yield spread of more than 900 basis points over government debt and a yield to maturity around 10.5 percent.
But activity seems to be increasing in the oil patch, costs have come down, and most high-yield bonds are refinanced rather than redeemed at maturity — an option open to Calfrac, said Geof Marshall, head of corporate bonds at Toronto-based CI Investments’ Signature Global Asset Management unit. CI ranks among the largest holders of the 2020 bonds, according to Bloomberg data.
Banks are hiring companies like MNP LLP, a chartered accountancy and business advisory firm, to review oilfield service borrowers before putting the company into bankruptcy or pushing it to find other financing, Grant Bazian, president of MNP’s insolvency unit, said by phone from Vancouver.
“They’re having some tough times,” Bazian said of the sector. “They’ve been operating on very thin margins, downsizing as much as they can, but they’re barely hanging on. So what I’m hearing is that we may see more of that.”
Nearly 60 percent of energy services companies are experiencing “financial discomfort” or behaving similar to firms that have progressed toward a distressed state, compared with 44 percent of oil and gas producers, according to the PwC data. Seven Canadian oilfield services companies have filed for bankruptcy since 2015, according to the Haynes and Boone law firm.
Examples have included Sanjel Corp., which sold its assets to STEP Energy Services Ltd. and Liberty Oilfield Services LLC in April 2016 after being under creditor protection. Tervita Corp. restructured outside of court and eliminated C$2 billion of debt last September.
Debt deals have allowed many companies to push maturities out to 2019 and 2020, giving them a little more time to wait for a recovery before refinancing, said Manmit Pandori, a debt analyst at BMO Capital Markets. Companies will rely on their credit facilities until they can access the debt market on better terms and banks will make sure they’re getting the necessary credit enhancements to avoid losses, he said.
A broader leg up to $60 and $65 a barrel in the price of oil is needed to reduce some of the concern about the oil sands, Pandori said. That’s not likely until at least 2019, according to the median consensus of analysts surveyed by Bloomberg.
Torys’ Kashuba agrees that although market conditions have improved for companies, no one in Calgary is celebrating just yet.
“I would say comfortably that not everybody’s out of the woods, even the big companies,” he said.