by Stockwatch Business Reporter
U.S. markets were closed for Memorial Day. West Texas Intermediate crude for July delivery added 27 cents to $49.60 in electronic trading on the New York Merc, while Brent for July added 43 cents to $49.75 (all figures in this para U.S.). Western Canadian Select traded at a discount of $11.80 to WTI ($37.80), up from a discount of $11.85. Natural gas for July lost 1.2 cents to $2.157. The TSX energy index lost a fraction to close at 187.95.
Alberta Montney gas producer Delphi Energy Corp. (DEE) plunged 21 cents to 93 cents on 5.79 million shares, after receiving some bad news from its bankers: The $132.5-million borrowing base of its senior credit facility has been reduced to $115-million and will likely be further reduced to $85-million at the end of June. Delphi estimates that it currently owes $105-million under the facility. The company also has another $14-million in subordinated debt, which was previously due at the end of June but has now been extended to Aug. 31. This means Delphi must quickly retire about $35-million in debt. With that in mind, it has filed a preliminary prospectus for a $40-million offering, consisting of 40,000 units that will each comprise a $1,000 note (due in 2021 and secured by second-priority liens) and 245 warrants (exercisable at $1.60 a share). Delphi says it must close the offering by June 30. Failure to close will constitute an event of default under the senior credit facility.
Of course, even assuming that the financing closes, Delphi's problems will not be over. As Scotia Capital analyst Cameron Bean pointed out in a research note this morning, Delphi's debt after the financing is likely to be barely below the new limit, limiting the company's flexibility while also forcing it to pay higher interest costs. "With this, we believe [Delphi] would be severely capital constrained and challenged to maintain its production base absent a significant rally in commodity prices," wrote Mr. Bean, while lowering his price target to 60 cents from $1.10. Delphi's official guidance calls for production of 8,300 to 8,800 barrels of oil equivalent a day on a budget of $33-million to $38-million. It seems to be sticking to these figures for now, repeating them in its offering prospectus, but may feel differently once the offering closes. Mr. Bean's take is that the company can afford to spend just $25-million in order to match cash flow and keep its debt within the required limit.
One debt-laden producer still awaiting the verdict of its lenders is Twin Butte Energy Ltd. (TBE), up half a cent to seven cents on 4.07 million shares. The company had net debt of $294-million as of March 31. Of this, a virtually impossible $85-million was originally due on April 30, but earlier this month the lenders extended the due date to May 31 -- that is, tomorrow. The question now is what the bankers will do next. Twin Butte is presumably hoping for another extension, which would give it more time to continue with its "strategic alternatives process," a euphemism companies use when putting themselves up for sale. Twin Butte did this in December and hired Peters & Co. and National Bank Financial as its financial advisers. Their promotional materials emphasize the company's 7,855-barrel-a-day medium oil production in the Provost area of Alberta and 6,783-barrel-a-day heavy oil production in the Lloydminster area along the Alberta-Saskatchewan border. (Those production figures are for the third quarter of 2015. Twin Butte has not been able to afford to keep production at those levels. As of the end of the first quarter of 2016, production had fallen to about 7,160 barrels a day at Provost and 5,325 barrels a day at Lloydminster.) Provost, with its relatively high-netback medium oil production, is likely of more interest to more potential buyers than Lloydminster, but Twin Butte is presumably reluctant to sell one without the other. One risk it faces is that its bankers will give it no choice.
That said, life in Lloydminster has surely become easier lately as a result of the recent strengthening of Canadian heavy oil prices, something benefiting all domestic heavy oil producers. President and chief executive officer Ingram Gillmore of Gear Energy Ltd. (GXE), unchanged at 61 cents on 61,700 shares, made the benefits clear in a on-line letter to shareholders published last week. "Wow!" was his opener. He explained that Gear's realized oil price, which was just $17.11 a barrel in February as the industry "suffer[ed] the lowest heavy oil prices essentially ever seen," is expected to go up to $44.45 a barrel in July. This in turn means that Gear's netbacks (profits per barrel), which were "slightly negative" in February, are forecast to be over $24 a barrel in July, "a staggering 4,100-per-cent increase." Mr. Gillmore published his cheerier-than-usual letter on May 26. On May 27, according to public data, Gear licensed its first two wells of the year, both of which are in the core Wildmere heavy oil area of Alberta. Gear said at its annual meeting earlier this month that it plans to drill three horizontal wells at Wildmere this year and six at the relatively new core area of Paradise Hill in Saskatchewan. It also plans to drill one exploration well a "potential new core area," which it does not identify, saying only that the area is in Saskatchewan and the well will target the Mannville formation. This 10-well drill program is expected to begin in July.
Niko Resources Ltd. (NKO) added four cents to 24 cents on 14.9 million shares, after scoring a victory (though a potentially hollow one) in its arbitration proceedings against Bangladesh. The company has two arbitrations against the country in progress. Both are related to two blowouts at a Niko-operated gas field in Bangladesh in 2005. The government of Bangladesh and the national oil company, Petrobangla (which had a joint venture with Niko at the field), held Niko responsible for the blowouts and demanded over $100-million (U.S.) in compensation. Niko denied responsibility. It also said Petrobangla owed it money for gas from a different field. (Petrobangla was apparently withholding the money on purpose as it demanded the blowout compensation.) In 2010, Niko went to the International Centre for Settlement of Investment Disputes (ICSID) and filed two arbitration claims: one for the gas payments (which Niko calls the payment arbitration), and one to clear any responsibility for the blowouts (which Niko calls the compensation arbitration). The payment arbitration has seen the most progress so far, though the progress has been typically slow. In September, 2014, ICSID determined that Petrobangla does indeed owe Niko money, roughly $34-million (U.S.). The parties were unable to come to an agreement on how the money would be paid, so in September, 2015, ICSID told Petrobangla to put the money (by then $34.6-million (U.S.) because of interest) into escrow accounts, where it would be held pending ICSID's decision on the separate compensation arbitration. This decision was supposed to arrive after a hearing last November. One hearing was not enough, however, so more have been scheduled for the fourth quarter of fiscal 2016 and the second quarter of fiscal 2017. (Niko's fiscal 2015 year ended on March 31, 2016.)
Now ICSID has changed its mind about the payment arbitration. Niko announced this morning that ICSID has ordered Petrobangla to pay the owed amount, now $35.3-million (U.S.), "forthwith and free of any restrictions." Niko does not say why the money is now payable immediately, but it is not complaining; it can definitely use the cash. Less than a week ago, it lost an unrelated lawsuit in Texas and was ordered to pay $20-million (U.S.) to a drilling contractor (as discussed in the May 24 Energy Summary). A payment of $35-million (U.S.) from Petrobangla would certainly help. Of course, Petrobangla must actually make the payment, and Niko says there is no guarantee of that happening. It is not clear whether Petrobangla ever put any money into escrow accounts. If not, that could explain Niko's vague reference to "difficulties which have occurred in the past with respect to the payment." Petrobangla and the government of Bangladesh have previously expressed reluctance to give Niko any money until the compensation claim is settled. Their position seems to be that their claim is much larger, at over $100-million (U.S.). Niko has warned that if it loses this claim, it could also lose its assets in Bangladesh altogether.