by Stockwatch Business Reporter
West Texas Intermediate crude for August delivery lost 43 cents to $39.27 on the New York Merc, while Brent for August lost 56 cents to $41.15 (all figures in this para U.S.). Western Canadian Select traded at a discount of $9.50 to WTI, unchanged. Natural gas for August added four cents to $1.75. The TSX energy index lost a fraction to close at 76.45.
June 30 marks the end of the second quarter, the end of the first half of the year and, for many oil and gas companies, the end of their extended review periods for credit facility redeterminations. The spring banking review season typically starts in April, but in the wake of the COVID-19 pandemic and the related support programs being offered by the government, many banks opted to extend the deadlines. Some are still doing so; Bonterra Energy Corp. (BNE: $1.36) and Painted Pony Energy Ltd. (PONY: $0.47) both announced after the close that their bankers have postponed their reviews past June 30 (to July 15 and July 30, respectively). For many others, however, it is now time for the axe to fall.
Two companies saw a chop, but won some covenant relief to go with it. One was Darren Gee's Alberta gas producer, Peyto Exploration & Development Corp. (PEY), which lost two cents to $1.79 on 1.25 million shares. Its bankers have cut its credit line to $950-million from $1.3-billion. As the facility was $715-million drawn as of March 31, Peyto sees the remaining availability as "adequate [for] its three-year strategic business plan." In addition, the bankers, as well as the holders of the company's $415-million long-term notes, have agreed to relax some of the debt covenants. All of this put Peyto in a fine mood as it talked of the "continued support" of every single one of its lenders in allowing the company to "move forward with confidence and certainty over the next two years." The lenders may appreciate such fine words, but doubtless what they will truly enjoy is their higher expected income. As part of the amendments, Peyto will face higher borrowing costs, higher standby fees on the facility and an interest rate increase on the notes.
Peyto remained upbeat as it shifted its attention to its operations. The company has been one of the industry's busiest drillers lately -- alas, not a high bar to clear these last few months -- and drilled 11 wells during the second quarter, bringing its total drill count for the first half of the year to 29. Its full-year budget remains intact at $200-million to $250-million. Current production is 78,500 barrels of oil equivalent a day, in line with analysts' forecasts. One analyst, Scotia Capital's Cameron Bean, applauded Peyto for reducing its drilling costs per metre by 10 per cent in the second quarter relative to the first quarter, adding that the company is expecting further savings of 10 to 15 per cent over the rest of the year. Mr. Bean maintained his "sector perform" rating and left his price target at $3.50. That is just about double today's close of $1.79. Considerably less bullish is TD analyst Aaron Bilkoski, who today lowered his price target to $1.75 from $1.90, even if he did upgrade his rating to "hold" from "reduce."
The other company whose covenant relief came at a cost is Jim Riddell's Alberta Montney-focused Paramount Resources Ltd. (POU), up six cents to $1.59 on 1.27 million shares. Its bankers have chopped its credit facility to $1-billion from $1.5-billion. Yet only $900-million is easily available; drawings above that amount will be subject to lender approval and to the raising of "junior capital." Specifically, for every $5-million of extra availability under the financing, Paramount will have to raise $10-million. This means it needs to raise $200-million to push the credit facility up to $1-billion. Paramount did not specify the ways it could do this, but presumably government liquidity programs, asset sales and equity financings are all among its options.
Given that Paramount had flagged a potential future covenant breach in its first quarter financials, the covenant relief offered by the bankers is good news, if not particularly surprising. What is surprising is how fast the debt has been rising. According to Paramount, the facility is currently $760-million drawn, a significant increase over the $651-million figure disclosed as of March 31. For context, Paramount's entire budget for this year is $165-million and it already spent about $64-million of that in the first quarter. Investors likely would have appreciated an explanation as to how Paramount went $110-million deeper into debt in the second quarter. Worth noting is that Paramount's working capital deficit as of March 31 was also $110-million, including just $5-million cash. The company may simply have drawn down the facility so it could have a cash pile instead of a cash piddle.
Two other companies had credit facility reviews worth a mention. Brett Herman's Alberta and Saskatchewan light oil producer, TORC Oil & Gas Ltd. (TOG), stayed unchanged at $1.70 on 1.02 million shares, after announcing that its bankers have set its credit facility at $425-million. It opted not to mention that the facility was previously $500-million. TORC has no covenants on the facility, which was $309-million drawn as of March 31.
Meanwhile, Jim Evaskevich's Alberta Cardium-focused Yangarra Resources Ltd. (YGR) added three cents to 66 cents on 337,400 shares, after its bankers set its facility at $210-million. Yangarra also opted not to mention that this was a reduction (if just a modest one) from the previous amount of $225-million. The bankers appear to have saddled Yangarra with some extra amendments, including unspecified changes to the "interest rate grid" (it is not uncommon for interest rates to vary alongside a company's debt-to-EBITDA ratio, for example) and the requirement that Yangarra eliminate its share buyback program (easy enough, as Yangarra has not been using this program). The $210-million facility is currently about $195-million drawn. This means Yangarra has limited availability remaining, but it is unbothered. It claims that its current spending program will allow it to generate $1-million in monthly free cash flow. All of the extra cash will go toward debt repayment.
Moving away from credit facility news, Grant Fagerheim's Alberta- and Saskatchewan-focused Whitecap Resources Inc. (WCP) edged down one cent to $2.23. Its chief executive officer, Mr. Fagerheim, had a discussion yesterday with Desjardins Securities analyst Scott Van Bolhuis, who has now provided an obligingly boosterish write-up. Mr. Van Bolhuis praised Whitecap's "improved sustainability metrics and sustained cost savings." Whitecap reacted quickly to the downturn by cutting both its budget and its dividend in March (the current 1.425-cent monthly dividend represents a yield of 7.7 per cent). Given that the company spent roughly $140-million in the first quarter, out of a revised full-year budget of $190-million, the implication was that it would spend about $5-million a month from then on. Mr. Van Bolhuis confirmed that Whitecap is sticking to this plan and continues to expect a year-end production rate of 59,000 to 60,000 barrels of oil equivalent a day. This is down from about 73,500 barrels a day in the first quarter, reflecting limited activity. Mr. Bolhuis said Whitecap will consider accelerating its activity only if WTI oil prices stabilize at $42 (U.S.) to $45 (U.S.).
Mr. Bolhuis does not believe that Whitecap will continue to let production slide after 2020. His expectation is that next year's production will stay flat, at around 60,000 barrels a day, on a budget of $200-million to $250-million. Whether Mr. Fagerheim gave him those numbers or Mr. Van Bolhuis pulled them out of his crystal ball was not disclosed. In any case, Mr. Van Bolhuis maintained his "buy" rating and hiked his price target to $2.75 from $2, compared with today's close of $2.23.