|
Canadians opt for debt Historic lows for interest rates, highs for commodity prices, plus vast pools of capital in U.S. prompt oil sands operators to issue debt rather than shares Gary Park For Petroleum News
For almost a quarter century debt has been out of favor in the Canadian oil patch, tarnished by the collapse of Arctic explorer Dome Petroleum, which buckled under an unmanageable load of C$6.2 billion.
But it seems debt is now back in favor, especially in a world of low interest rates, high commodity prices and the long-life assets of oil sands operators.
In a couple of days in late June, Suncor Energy, Western Oil Sands and OPTI Canada issued a combined US$2.25 billion in new debt, coming less than two months after Nexen issued US$1.25 billion of 30-year bonds at a rate of 6.4 percent, the largest single amount of U.S.-dollar debt in Canadian financing history.
OPTI, a 50-50 partner with Nexen in the Long Lake oil sands project, announced a new financing for up to US$750 million in senior secured notes to be issued by way of a private offering.
A spokesman for OPTI said the bond market is so attractive right now that it is not surprised by the rush to take advantage of the pools of capital — private, pension funds and mutual funds — hungry for returns in the United States.
Nexen’s issue was 1.60 percent above the rate for 30-year treasury bills, but that was less expensive than issuing shares, which would not have pleased existing shareholders.
It also means Nexen has access to cheap money for a prolonged period, which makes sense given the reserve life of its oil sands holdings, combined with using the debt as a hedge against oil prices.
Western Oil Sands closes five-year credit facility Western Oil Sands, a 20 percent partner in Shell’s Athabasca project, closed a new C$805 million five-year credit facility, to replace its existing C$340 million revolving credit facility.
The proceed will primarily cover its share of the C$11.2 billion first-phase expansion of Athabasca, which is scheduled to add 100,000 barrels per day of production by late 2010 (20,000 bpd net to Western).
Suncor has tapped the market for US$750 million in senior unsecured notes that have a coupon of 6.5 percent and yield 6.564 percent.
The net proceeds will be used for general corporate purposes, including repayment of short-term borrowings, supporting Suncor’s ongoing capital spending program and for working capital needs.
The sale was managed by BNP Paribas, Deutsche Bank Securities and JPMorgan Chase & Co.
Philip Skolnick, an analyst at Genuity Capital Markets, told the Globe and Mail the scramble for debt financing may not be over yet because so many oil sands companies face major capital spending programs.
UTS Energy says it will likely enter debt market William Roach, chief executive officer at UTS Energy, a 30 percent partner in Petro-Canada’s Fort Hills project, has already indicated his company is likely to enter the debt market.
The scope of the startup company’s financing challenge was evident June 28 when the Fort Hills partners (Petro-Canada 55 percent, UTS 30 percent and Canadian mining giant Teck Cominco 15 percent) announced they will proceed with 12 months of front-end engineering and design to provide a “a definitive cost estimate” and set the stage for a final go-ahead decision in 2008.
The first stage — a 160,000 bpd mine and 140,000 bpd upgrader — is budgeted at C$14.1 billion to be fully operational by 2012, while a second phase to add 120,000 bpd of mined bitumen is projected to cost another C$12.1 billion.
Once other costs such as third-party investments for pipelines, power generation and work camps are factored in, the total price tag could run to C$33.4 billion.
That works out at about C$100,000 per barrel of production for the first phase, similar to the expansion budget for Athabasca, but four times what oil sands projects cost a decade ago.
But the first phase estimate, although it makes an allowance for inflation, does not include about C$1.1 billion worth of engineering work over the next year.
Carmata: labor, materials competition “We’re up against some tough competition (for labor and materials),” said Neil Carmata, Petro-Canada’s senior vice president for oil sands.
At the construction peak, Fort Hills will require almost 8,000 workers, some of whom may be imported as Canadian Natural Resources has done with its Horizon project.
Adam Zive, an analyst with Desjardins Securities, said Fort Hills is being developed at a time when capital costs are much higher than they were even two years ago.
“By building larger stages the consortium is getting economies of scale, but in practice that could increase the execution risk,” he said.
However, Roach said the risks and rewards are “well-balanced,” given that Fort Hills has a possible 50-year operating life.
He said there is little risk for the partners in calculating the capital costs on a base oil price of US$45 per barrel, which is projected to generate a return of 8.2 percent, climbing to 12 percent with oil at US$60.
Petro-Canada Chief Executive Officer Ron Brenneman said he was “OK with an 8 percent return on a project of this quality and this longevity.”
Carmata said the difficulty of recruiting skilled labor “is what keeps me awake at night.”
He has previously said that final decisions involving oil sands development are no easier with oil at US$60 than they were at US$20. “If it was that easy everybody would do it,” he said.
| 