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Short Sellers Circle Oil-Sands Debt as Defaults Loom

By Ari Altstedter and Rebecca Penty

Dec. 8 (Bloomberg) — With crude oil prices the lowest in five years, Marc-Andre Gaudreau says the surest way to profit from the debt of energy exploration and production companies in Canada’s oil-sands region is if they don’t pay it back.

Gaudreau, who manages C$4 billion ($3.5 billion) for Bank of Nova Scotia’s 1832 Asset Management unit, is shorting oil-sands bonds after the last two months saw the biggest rout in crude since the 2008 financial crisis. He declined to name the companies he’s shorting, in which an investor sells a security after borrowing it and hopes to repurchase the asset later at a lower price before returning it to the lender.

Southern Pacific Resource Corp. and Connacher Oil and Gas Ltd. announced last week that they’d hired banks to help raise cash so the companies can avoid missing interest-rate payments. Trading in the bonds shows investors expect less than half the principal to be paid back from the energy companies in Alberta’s oil sands.

 “It would be fair to assume more restructuring in 2015 in the oil patch,” Gaudreau said in a Dec. 4 phone interview from Montreal. “As soon as commodity prices come down, your fixed costs, and even your variable costs, are still there, so you get squeezed. When you get squeezed and you have debt, you just can’t service it.”

Cost Squeeze

Oil-sands companies face some of the highest production costs in the world and are being forced to sell their product at a discount, Gaudreau said. Producers there need at least $85 a barrel to make money on new projects, according to the Canadian Energy Research Institute. The North American benchmark traded at $64.46 per barrel at 8:52 a.m. in New York.

“For every dollar you’re losing in the oil price, the oil-sands guys feel it a bit more than everyone else,” said Sonny Mottahed, chief executive officer of Black Spruce Merchant Capital Corp., a Calgary-based private merchant banking firm. “A short on some of these things, if that’s your view that the commodity is going to stay lower, certainly makes sense”

Southern Pacific, with C$432 million of bonds, said last week it had hired Royal Bank of Canada to help address liquidity and capital structure issues after saying it didn’t have enough cash to make interest payments in its latest quarterly report.

The Calgary-based company said in a Dec. 3 statement that it was considering selling itself, all or a portion of its assets, as well as recapitalization and debt restructuring. Investors were only offering about six cents on the dollar on Dec. 5 for its January 2018 bonds, according to prices from Industrial Alliance. Byron Lutes, Southern Pacific’s chief executive, did not respond to a voice-mail message last week requesting comment.

‘Same Situation’

Connacher, with about C$977 billion in debt, said two days earlier that it had hired Bank of Montreal to look at its liquidity and capital structure after saying in November that cash flow may not be sufficient to cover interest payments on debt and it will need to get additional funds next year to stay in business. The company’s August 2018 notes were trading at about 40 cents on the dollar, according to data compiled by Bloomberg.

Chris Bloomer, CEO of Connacher, said he can’t comment on the financial review or whether the company risks defaulting on its debt. The lower oil price is affecting the entire industry, some more than others, he said.

“Everybody is dealing with the same situation in trying to get their head around it in terms of the short and medium term and what to do about it,” Bloomer said Dec. 5.

Industry Issue

Producers across the industry are starting to brace for the worst, an extended period of depressed oil prices.

MEG Energy Corp., a Calgary-based oil-sands developer, said Dec. 4 it reduced its capital budget for this year by a third and plans to keep 2015 spending flat and funded with cash on hand. Canadian Oil Sands Ltd., said Dec. 3 it’s lowering its dividend by 42 percent.

Canadian Natural Resources Ltd., the nation’s largest producer of heavy oil, has set aside C$2 billion it can remove from its budget of C$8.6 billion next year if prices remain low.

Expansion by investment grade oil-sands firms will still be profitable because of the long lives of the projects, while junk-rated companies wouldn’t be able to generate positive earnings with North American crude at $80 per barrel, according to an Oct. 28 report from Standard & Poor’s.

“It’s possible that smaller companies that are credit constrained could see their credit profiles weaken in 2015,” Michelle Dathorne, a credit analyst at S&P in Toronto, said by phone Dec. 5. “It depends on their ability to attract external liquidity, whether it’s through equity infusions through new owners or joint venture partners, or their ability to add leverage on their balance sheet.”

To contact the reporters on this story: Ari Altstedter in Toronto at; Rebecca Penty in Calgary at

To contact the editors responsible for this story: Dave Liedtka at

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