Two of Canada’s largest oil sands producers are trying two different routes back to financial strength.
Suncor Energy, which is estimating its costs from the Fort McMurray wildfire at C$1 billion, has launching a C$2.5 billion equity offering, while offering to buy back C$1.5 billion of debt.
Cenovus Energy, having already reduced its payroll by 31 percent over the past 18 months is hoping to follow that by searching for tenants to fill unoccupied space it is leasing in a new Calgary office tower that is due to open by late 2017.
Indicating that it is not yet convinced oil prices are on a sustained recovery path, Suncor has dangled premium prices to slash its debt rather than continuing to pay high interest rates of 4.5 percent to 8.2 percent, with maturities ranging from 2019 to 2042.
The notes were part of its acquisition early this year of Canadian Oil Sands, the largest partner in the Syncrude Canada consortium.
Michael Dunn, an analyst with FirstEnergy Capital, said Suncor has a “lot of credit room facility” to achieve its priority of strengthening the company balance sheet.
He said the result for Suncor will be to lower its future interest costs “because short-term borrowing costs are a lot lower than long-term.”
Suncor said it expects to match the usual take-up for tender offers of about half the targeted debt.
The move follows Suncor’s C$2.5 billion share issue announced earlier in June which is also tagged for paying down debt, some tied to its purchase of Murphy Oil’s stake in Syncrude Canada.
Chief Executive Officer Steve Williams said it is also possible the company will sell up to C$1.5 billion in assets.
The measures coincided with comments from Moody’s Investors Service that oil producers and oil exporting countries remain under pressure, despite a recovery in commodity prices from the low of under US$30 a barrel.
Terry Marshall, senior vice president with the credit-rating agency, pointed to the fundamental problem facing many companies that borrowed heavily to finance production gains when oil was above US$100 and are now unable to generate the cash flow needed to carry that debt, while high development costs are exacerbating the financial pressures.
The hopes of stressed companies are reflected in the options being weighed by Canadian Natural Resources, which is aiming for production growth of 8 percent assuming a US$60 oil price, but is prepared to scale that back to 1 percent if crude trades in the range of US$45-US$48 through 2019.
Whatever happens, the company intends to pare debt with cash from its Horizon oil sands mine which is ramping up output in the face of what President Steve Laut admits is deep uncertainty about where oil prices are headed.
Stephen Poloz, governor of the Bank of Canada, said in a speech earlier in June that he does not expect a rebound in crude will see a recovery in industry spending.
“Indeed, market intelligence suggests there is further downside risk to investment at these still-low prices,” he said.
For Cenovus the persistent gloom is forcing it to lower a 2013 commitment to occupy 1 million square feet of Brookfield Place, a 56-storey tower that will be the tallest structure in Western Canada.
Cenovus now thinks it will need only 400,000-500,000 square feet, putting it in the same category as MEG Energy and others who are trying to offload unused space in towers now nearing completion that will add another 2.5 million square feet to a market now at saturation point that is forecast to face a vacancy rate of 25 percent in 2018.
MEG reported it booked a C$58.7 million expense in the final quarter of 2015 that was tied to “onerous” lease contracts, while Cenovus is turning to subleasing after cutting 1,600 jobs since the end of 2014, shrinking its payroll to 3,600.
For now, Cenovus is the sole tenant in Brookfield Place, having an agreement to occupy 71 percent of the building, although it can sublet about 18 months after the building is completed.
The winners from this downturn are prospective tenants, who are being enticed with offers such as a year’s free rent and breaks on interior decorating.
