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Alberta fund buys Precision Drilling stake AIMCo offers C$280 million in debt, equity financing for land drilling contractor; Precision acquired Grey Wolf in late 2008 Gary Park For Petroleum News
An investment arm of the Alberta government is taking up to a 19 percent ownership position in Precision Drilling Trust by way of a lifeline to keep one of the world’s largest land drilling contractors from being sucked into a debt bog.
Through the Alberta Investment Management Corp., AIMCo, which runs C$70 billion in public-sector financial assets, the province is offering C$280 million in debt and equity financing and could acquire 15 million purchase warrants for another C$48 million.
Duane Mather, president of rival Nabors Canada, offered a blunt assessment, despite assurances from AIMCo and Finance Minister Iris Evans that the government was in no way directly involved in the deal.
“It smells to high heaven,” Mather said, arguing Precision’s balance sheet is weaker than most other companies in the business.
“They’ve got a public venture that is there to rescue them,” he told the Globe and Mail. “You bet it bothers me.”
He said Nabors may now turn to AIMCo for money to build two or three C$17 million horizontal drilling rigs it has been unable to finance through traditional lending sources.
Political criticism There was also a wave of political criticism, with the opposition Liberal Party’s energy spokesman Kevin Taft asking how the government planned to manage energy resources “now that they are the regulator; they own the resource and they’re investing in companies exploiting the resource.”
Brian Mason, leader of the New Democratic Party, said he did not accept that the investment was appropriate for AIMCo which is responsible for managing provincial pension and endowment funds.
“What you want is secure investments, not bailouts of threatened companies,” he said.
AIMCo, by way of private placement, will buy C$105 million in trust units to take a 15 percent stake in precision and lend the company C$175 million in unsecured notes at 10 percent interest.
Precision has been paying 17 percent interest on a C$296 million bridge loan it incurred last year in a mistimed US$2 billion acquisition of Grey Wolf, adding 122 rigs to its fleet, which includes 151 land units in Canada, another 29 in the U.S., two in Mexico and one in Chile, with a combined payroll of 7,200 employees.
The Grey Wolf deal closed last December “under the most challenging credit markets of the past several years” and resulted in “punitively high financing costs,” Precision Chief Executive Officer Kevin Neveu told a conference call April 20.
Cash distributions suspended Precision announced two months ago it was indefinitely suspending its cash distributions in response to falling commodity prices and tight credit markets to focus on paying down debt from the Grey Wolf deal.
Neveu said at the time that the North American outlook for oil and gas development over the next few quarters would be “depressed,” although the decline in activity could result in a supply challenge when the economy recovered.
He said April 20 that AIMCo sees value in Precision’s “strategy to provide high-value, high-performance drilling and well services globally.”
With some critics accusing the government of being ready to “privatize profits and socialize losses,” AIMCo Chief Executive Officer Leo de Bever said acquiring a stake in Precision is an investment “not an aid project.”
“You always invest when nobody else thinks it’s a great idea, because things look really black,” he said.
He said AIMCo is taking an opportunity to help Precision re-structure its balance sheet and position itself for “what we see as the next upturn two or three years from now.”
De Bever said Evans was told of the investment April 17 after the decision had been made, reinforcing the government’s own decision last year to keep AIMCo investments independent of the political process.
Evans told the Alberta legislature that if either she or the government were “calling the political shots on investments, the people of Alberta would have the right to revolt.”
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