Bloomberg News

Gas Producers’ Credit Lines Shrink With Price: Corporate Canada

April 11, 2012

Perpetual Energy Inc. (PMT), which owns almost a decade worth of natural gas reserves in Canada, has lost half its market value in five months as the price of the fuel has plummeted. Now it’s lost part of its credit line too.

With natural gas reaching its lowest price in more than a decade this spring, Calgary-based Perpetual’s credit lines were cut by 10 percent or C$20 million ($20 million) on March 1 by banks including the Bank of Montreal, reflecting the drop in value of the company’s reserves.

“Because of their exposure to gas, banks have reduced their credit limit twice this year,” said Kyle Preston, director of oil and gas research at National Bank Financial in Calgary. “Much of their future depends on what happens in the next readjustment of their credit lines.”

Perpetual, with C$171 million of remaining credit lines, is one of several Canadian natural gas producers struggling to fund operations using bank loans guaranteed by reserves. As funding dries up, companies may halt drilling or shift to oil, which may provide a boost to prices, said Bill Gwozd, vice president of gas services at Ziff Energy, an advisory firm.

“It’s not a matter of if, but when we start to see these impacts because of the lower prices,” Gwozd said.

Perpetual, which gets about 90 percent of its revenue from gas production, suspended its dividend and is selling oil leases and a gas storage facility to cope with the low prices. Perpetual Chief Financial Officer Cameron Sebastian didn’t return calls seeking comment.

Reserves Pledged

Compton Petroleum Corp. (CMT), a Calgary-based gas producer whose shares have declined 44 percent this year, said on April 9 its credit facility was cut by 21 percent to C$110 million after lenders took into account the lower price of natural gas. The company said it hired RBC Capital Markets in March to help raise money and compensate for lower commodity prices.

Companies with investment-grade ratings typically get credit from banks on an unsecured basis. Unrated or speculative- grade producers need to pledge reserves for the loans. Under Canadian law, producers must readjust their reserve valuations by the end of April.

“Banks want to make sure they have a viable asset -- you can’t blame them,” said Gwozd. “As these lower valuations start to come out, company valuations will begin to drop in addition to higher costs for borrowing.”

Volatility

The price for natural gas traded on the New York Mercantile Exchange has averaged $2.48 per British thermal unit this year through April 9, versus an average of $4.03 for 2011. It hit a low of $2.054 on April 10, its lowest since February 2002.

“A lot of people are not used to the kind of volatility in natural gas prices that we’re seeing now and were more common in the 80s and 90s,” said Michael Tims, co-chairman of Peters & Co., a Calgary-based investment bank.

Perpetual Energy arranged its C$210 million credit line in May 2005 with six lenders led by Bank of Montreal, Canada’s fourth-biggest bank. It had drawn C$130 million of it as of Dec. 31, leaving it with C$41 million after C$39 million was cut. Perpetual has a market value of about C$97 million.

Lone Pine Resources Inc. (LPR), located a block from Perpetual, has lost about half its value since an initial public offering in May. In an effort to wean itself off bank loans, the Calgary- based producer issued bonds for the first time in February. The company paid 989 basis points more than government debt for the $200 million five-year bond rated Caa2 by Moody’s Investors Service and B- by Standard & Poor’s.

Bond sales

Lone Pine’s bond sale “gave them a bit more of a cushion on the liquidity side,” said Brian Lively, an analyst at Tudor Pickering Holt & Co. in Houston, who has a hold rating on Lone Pine’s stock. “Lenders’ redetermination of credit facilities is a concern.”

The producer agreed to pay 100 basis points more than inter-bank lending rates for its C$500 million credit facility, according to data compiled by Bloomberg. Bank of Montreal (BMO) and Toronto-Dominion Bank (TD) helped arrange the loan for Lone Pine, which has a market value of C$540 million.

Lone Pine is investing in its Evi oil field and shifting away from its natural gas project at Nikanassin, both in northwest Alberta, said Terry Marshall, senior vice president at Moody’s Canada Inc. in Toronto. The Caa2 rating Moody’s assigned is two levels lower than S&P’s B-rating.

The company doesn’t expect to add to its credit facility this year, said Chief Financial Officer Ed Bereznicki in response to a question during the company’s fourth-quarter conference call on March 23.

Scaling Back

Investors of Lone Pine debt demanded a higher premium than for PetroBakken Energy Ltd (PBG:US)., which raised $900 million of eight- year notes on Jan. 25, paying a 714 basis-point spread. The bond issue by the Calgary-based company was rated a level higher than Lone Pine’s at Caa1 by Moody’s and a level lower at S&P at CCC+.

PetroBakken also produces oil, lessening its reliance on natural gas for revenue and valuations. All of Lone Pine’s assets are pledged to banks under its revolving credit line, according to a Feb. 6 Moody’s report.

Withdrawing credit from smaller producers may help speed a decline in production across the industry, said Gwozd. Wells that aren’t profitable will be shut as money for drilling dries up, he said.

“It’s not necessarily just the small producers that will be affected” by falling commodity prices, Gwozd said.

Larger competitors, which are less dependent on bank financing, have already begun to curb output. Encana Corp. (ECA), Canada’s biggest natural-gas producer, said Feb. 17 that it would scale back North American supplies by as much as 600 million cubic feet a day, joining Chesapeake Energy Corp. (CHK:US) and EQT Corp. (EQT:US), which have made similar moves.

Supplies Surge

Supplies of the fuel have surged in North America helped by technology known as hydraulic fracturing which injects sand and fluids into horizontal wells to unlock hydrocarbons trapped in deep, underground rocks. At the same time, slower economic growth has limited demand as producers push to expand the fuel’s use to vehicles and power plants as well as for export in the form of liquefied natural gas, or LNG.

Supply and demand of natural gas will probably reach a balance as soon as the stored reserves diminish, said Michael Kohut, chief financial officer of Trilogy Energy Corp. (TET) At that point, prices will come back to levels that are more profitable for producers, he said.

One way Trilogy and other explorers are offsetting penalties on their credit lines from the decline in natural gas prices is to boost the oil component of their reserves because the funding is tied to the entire value of an explorer’s fossil fuel reserves.

Boosting Oil

Trilogy, also based in Calgary, has increased oil and natural gas liquids production to about 40 percent of its total, from less than 20 percent last year to help avoid paying higher borrowing costs, Kohut said in a phone interview.

The company has a syndicated loan worth C$525 million that it will add to this year and isn’t getting any “push-back” from banks because of the increasing value of its oil reserves, he said.

“There’s no question that companies heavily-weighted in gas will be hurt this year,” Kohut said. “We have the luxury to allocate capital depending on what happens to the price of gas.”

To contact the reporter on this story: Jeremy van Loon in Calgary at jvanloon@bloomberg.net; Cecile Gutscher in Toronto at cgutscher@bloomberg.net

To contact the editor responsible for this story: David Scanlan at dscanlan@bloomberg.net


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