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Nexen rescues junior partner Becomes sole operator of Long Lake project, builds defenses against unwanted takeover bid; deal helps OPTI Canada meet cash call Gary Park For Petroleum News
Nexen and OPTI Canada, partners in the Long Lake oil sands project, know what it’s like to be caught in the rumor mill.
The objects of apparently ill-founded takeover speculation earlier in December, they went on a stomach-churning roller-coaster ride that may have come to an end Dec. 17 when they struck a deal that will make Nexen the sole operator of the resource and upgrader and provide a lifeline for cash-strapped OPTI.
For C$735 million, Nexen bolstered its ownership stake to 65 percent from 50 percent, perhaps creating a firewall against hostile invaders in the process.
For OPTI, an oil sands startup that is struggling to meet its financial obligations, the outcome is less certain.
The two companies saw their shares rocket up as much as 53 percent over a week at the start of December after London’s Financial Times reported that France’s Total — which some believe has been eying Nexen for several years — was gearing up for a C$19.7 billion bid for Nexen, which some observers thought would be accompanied by an offer for troubled OPTI that would clean out the Long Lake joint-venture.
But those shares fell back about 10 percent in a day when the Times of London reported that Total had no intention of mounting a hostile takeover.
Still at risk That didn’t exactly squelch the speculation, with John Stephenson, who oversees about C$1.5 billion in assets, including Nexen and OPTI shares, at First Asset Investment Management, saying there was still a “risk you’ll see these companies go.”
“They’re pretty much on bended knee at this point. The commodity (oil) is so much weaker now that it builds a case for takeovers.”
In that climate there was no shortage of analysts ready to toss the names of Royal Dutch Shell, BP and Italy’s Eni into the ring.
Whether Nexen has bought itself some time to shake off some of its international assets, such as Yemen, Nigeria, the British North Sea and Colombia, and boost its shareholder value in the process is unclear.
But the Long Lake deal got a decidedly cool reception from Moody’s Investors Service, which put Nexen senior unsecured and subordinated ratings under review for possible downgrade.
It was displeased that Nexen has added C$235 million to its debt on the heels of a US$1 billion debt hike from a United Kingdom financing in the third quarter which it offset with cash in hand.
Moody’s noted that Nexen also faces increases in current and future Long Lake capital spending because of its higher ownership stake.
Other potential problems OPTI, although happy to report that the deal concluded a process started in November when it hired TD Securities to help with a review of funding operations for its continuing cash requirements, flagged a bunch of other potential problems down the road.
Dundee Securities analyst Menno Hulshof told the Globe and Mail the deal takes care of OPTI’s single largest challenge — finding a way to finance what remains of phase one at Long Lake and embarking on the engineering and design of the second phase.
UBS Securities analyst Andrew Potter said that although the deal valuation is low for OPTI it basically removes any financial risk for the junior company.
OPTI Chief Executive Officer Sid Dykstra said funds from the Long Lake transaction would enable his company — which brought a patented technology to the project’s upgrading process — to “withstand lower commodity prices and the significant uncertainty in current financial markets.”
But OPTI, with a market capitalization of just under C$400 million compared with C$4.9 billion in mid-June, has indicated it has just enough cash on hand to carry it through to the startup phase of the Long Lake upgrader in early- to mid-2009.
It warned Dec. 17 that it was lowering operating cash flow for the opening quarter of 2009 because of various project delays and “dramatically reduced” oil prices; said that if the Nexen deal collapsed it would be unable to satisfy key ratios it is required to maintain under its loan agreements; and said there would be a significant increase in the risk that it will not be able to repay a separate C$150 million revolving loan that is coming due, as well as a US$71 million interest payment due on other high-yield debt.
But completion of the deal on schedule by late January would give OPTI the ability to cancel its C$150 million revolver and permanently lower its C$500 million revolving credit to C$350 million, while feeding C$85 million into its 2009 capital budget. The majority of banks behind the C$500 million facility have still to approve the deal.
The joint venture partners had earlier stalled a decision on a second phase at Long Lake until 2009. The first phase has recently come onstream at C$6.1 billion and stage-two would have doubled production of synthetic crude to 120,000 barrels per day at a cost yet to be disclosed.
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