Even in a deluge of bad news gushing from the oil patch over the past two weeks, Bonavista Energy Corp.'s latest statement to investors stands out.
Calgary-based Bonavista took the unusual step on Wednesday of announcing that its banking syndicate had rejected a request to draw $175-million from its $500-million line of credit. The company also made a point of naming the eight lenders, which are led by Canadian Imperial Bank of Commerce.
“Notwithstanding Bonavista’s belief that the draw down conditions under the facility were met, CIBC (the administrative agent) advised Bonavista that the draw request would not be honoured by the banking syndicate,” the company said. CIBC declined to comment.
Such negotiations tend to be done behind closed doors. But these are unprecedented times, and Bonavista – like a large proportion of its industry – is in an existential struggle as it deals with the impacts of COVID-19 and a global collapse in energy markets that threatens the Alberta and Canadian economies.
There’s a backstory. Over the past year, Bonavista, led by chief executive officer Jason Skehar, has sought to deal with approaching maturities on senior debt. Now, the bottom has dropped out of energy and stock markets. Bonavista tried to draw on its line of credit to retire some of the debt. The banks apparently said no to that.
Bonavista stock lost nearly a quarter of its value to close at just 15 cents on the TSX on Wednesday. That’s down from $1.17 a year ago.
Cody Kwong, veteran analyst at Stifel FirstEnergy, summed up what’s at stake: “With the banking syndicate not approving its draw request, the company will be challenged to find an efficient solution to maintain a going-concern business model in an already-challenging macro and commodity price environment.”
To call this challenging is mastery in understatement. West Texas Intermediate crude, the U.S. oil benchmark, sank 24 per cent to a multidecade low of US$20.37 a barrel on Wednesday, pummelled by the global economic slowdown wrought by the coronavirus outbreak and a price war for market share between Saudi Arabia and Russia.
The price of Canadian heavy oil, quoted in U.S. dollars, is in the single digits, covering just small fraction of the cost of any company’s production.
Stocks have been savaged. The S&P/TSX Capped Energy Index fell 12 per cent to a new low on Wednesday, and is worth less than a third of what it was at the start of the year. Survival for many oil and gas companies may require some form of government bailout for the industry to protect workers, who had already been culled by five years of weakness in the sector.
Even the most financially sound companies are straining under the weight of this market. Cenovus Energy Inc., Husky Energy Inc. and a host of others have announced big cuts to their spending plans. Dividends have also been slashed.
For those producers that have been trying to dig themselves out of financial holes, the big question is how to stay afloat as cash flow dries up. The Bonavista case shows that companies may not have the credit capacity they think they do, to use as they wish.
Certainly, banks must to decide how much leniency to offer when an entire industry faces massive losses. It’s a dilemma: forcing asset sales and even pushing companies into receivership for breaching debt conditions would only put more assets into a market that has no buyers.
On the other hand, after the Supreme Court of Canada’s Redwater decision last year, any money left in a company’s insolvency must go to environmental cleanup obligations before paying out secured creditors, making lending all the more risky.
In announcing tens of billions of dollars in aid for businesses and households on Wednesday, Prime Minister Justin Trudeau made a point of saying the banks had made commitments to Finance Minister Bill Morneau that they would “support businesses affected by COVID-19.”
Mr. Morneau said Wednesday that supports for the oil patch are being devised, including money for the cleanup of so-called orphan wells. He also said he was in discussions with officials in the energy and airline industries about “approaches that enable them to bridge through the challenging time.” He had no specifics to offer.
Bonavista said it hopes to deal with its debt maturities while seeking other financing to keep operating in the coming months. The white-knuckle ride being served up by the markets today won’t make that easy.
Jeffrey Jones