Tag: OPC

Connacher – Short term yield

Connacher Oil and Gas (TSX: CLL) is a small oil sands producer. Like OPTI (TSX: OPC), it is heavily in debt. Unlike OPTI, there is a valid business case to be made that would suggest that it could actually pay its debt without bankrupting its shareholders. The forecast does depend on the price of oil (and specifically bitumen) continuing to be high. The bulk of the capital expenditures on its two primary oil sands projects (Pod One and Algar) has been completed and so the cash requirements have been primarily maintenance and additional exploration.

The company is capitalized with roughly $500 million in equity and $1 billion in debt. The company was able to perform a term extension on its first lien and second lien notes, pushing the maturity away from 2014/2015 to 2018/2019 and incurring less of an interest rate bite (in exchange for some capital – the loan went up from roughly $800M to $900M).

There is also a $100M senior unsecured debenture (TSX: CLL.DB.A) which is due to mature on June 30, 2012. Given the company’s cash flow situation and available credit (having extended a credit facility for $100M for three years, a facility currently not used) it is quite probable that the debentures will be redeemed at maturity.

At a 98 cent price that would imply a yield to maturity of about 6.8%. The primary risk to the successful maturity of this issue would be if the price of bitumen dropped significantly beyond existing levels. Closer to the maturity date, it is likely the company will float another convertible debt offering to refinance.

My assessment is that there are probably worse places to put short term investment money than the debenture issue.

Disclaimer: I own some of these debentures from the economic crisis (early 2009) when they were trading under 40 cents.

How will OPTI restructure?

OPTI Canada (TSX: OPC) is an oil sands producer that is facing insolvency. They have $2.6 billion in debt and they have failed to make an interest payment on their secured notes.

Suffice to say, the equity is trading in anticipation of it becoming worthless (presently 10 cents per share, which is about 9.99 cents over-valued at present).

The company has first-lien notes which as the name suggests, is a first claim on the assets of the company. Those bonds (US$825M face value outstanding) are trading at nearly par. The senior secured notes ($1.75B outstanding) are second in line and are trading at 40 cents on the dollar. Senior to all of this is a $165M line of credit.

OPTI obviously has leveraged themselves too deeply and their shareholders will be taking a large bath on their investments. The question is how the company is going to get carved up, with the first lien debtholders having the trump card – they will negotiate the senior secured noteholders a deal to salvage some value for them to expedite the uncertainty caused by creditor protection.

For retail shareholders, probably the best thing for them to do is to sell their shares, take a capital loss, and get on with life. If the company formally declares bankruptcy, the shares will be halted on the TSX and it will become much more difficult to dispose of the security and take the loss.

OPTI Canada – Not looking too good

OPTI Canada owns an equity stake in an oil sands operation. Equity investors in OPTI Canada (TSX: OPC) have not been feeling too good lately – the latest catalyst to their downfall has been them sacking their prior consultants that they employed failed to find “strategic alternatives” (a.k.a. creative financing or an outright sale).

The following is a chart of their recent trading:

Equity investors have lost about 60% of what remains of their investment.

Looking quickly at the financial statements is a company that has a massive amount of debt and little chance of being able to pay it off. They have a total debt of about $2.6 billion. One major maturity will start on December 15, 2012 – approximately $525 million. As there is no chance of internal cash flows being able to pay off this amount in the next 22 months, they will either have to renegotiate some package with their creditors or take their chances in bankruptcy court. Either way, the equity investors in OPTI still look like they are holding an overvalued stock.

Bond traders are not faring much better – OPTI has two issues of senior secured notes, due 2014 and par value of $1.75 billion – they are now trading at 49 cents on the dollar, down from 80 cents back in November 2010. These bonds are effectively junior to $850 million of other debt that is due to mature at an earlier date.