CALGARY – Distressed oil prices continued to take their toll on the sector as small oilsands player Connacher Oil and Gas Ltd. Monday filed for creditor protection while another larger player, Penn West Petroleum Ltd., warned it may be in default of its lending agreements by the end of next month.
Increasing numbers of struggling oil and gas companies have been filing for creditor protection in recent months as the oil price rout has dragged on and as banks have conducted scheduled revisions of their borrowing bases.
In a release Monday, oilsands junior Connacher said depressed oil prices and an inability to raise money had forced it to seek protection from its creditors at Alberta’s Court of Queen’s Bench. Connacher filed under the Companies’ Creditors Arrangement Act, which allows financially troubled corporations the chance to restructure their affairs.
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In recent months, Connacher had struck agreements with some of its lenders, in which the creditors agreed not to exercise their enforcement rights against the company for its failure to make interest payments.
Connacher had also reached deals last year to recapitalize and restructure its debts following the dramatic collapse in oil prices.
Similarly, Penn West, a Calgary-based light oil producer, restructured its debts last year in March, but executives warned Monday it needed to renegotiate lending agreements again to avoid defaulting by the end of June, the end of the second quarter.
Penn West shares fell as much as 25 per cent Monday after it announced during an earnings call that it had hired U.S. investment bank Rothschild Group as well as accounting firm PricewaterhouseCoopers as advisers in its negotiations. A default would allow the lenders to demand immediate repayment.
“We are focused on reaching an agreement with our lenders in the current quarter, otherwise at current commodity price levels we do not believe that we will be in compliance with our existing financial covenants at the end of the second quarter,” Penn West senior vice-president and chief financial officer David Dyck said during a call to discuss first quarter earnings.
Dyck said the company was trying to sell additional assets to pay down its debt, which totalled $1.8 billion at the end of the first quarter, to avoid breaching its debt-to-cash flow covenants.
RBC Dominion Securities analyst Greg Pardy said in a research note there is a risk — acknowledged by Penn West in its press release — the company may not be able to renegotiate its debts and thereby default.
“I believe this company will persevere,” Penn West president and CEO David Roberts said during the earnings call.
Roberts said Penn West would continue to drive down its costs in an attempt to ride out the oil price rout, bringing the company’s expected operating cost for the year down to between $17 and $18 per barrel.
Penn West pulled in $231 million in revenues in the first quarter, down 32 per cent from its $340 million in revenues from the same period last year. The company also posted $89 million in cash flow, down 21 per cent from the $112 million of cash it produced in the first quarter of 2015.
FirstEnergy Capital Corp. analyst Michael Hearn said in a research note that Penn West’s first quarter results beat expectations, but added “We expect the market to continue to focus on the company’s ability to continue as a going concern given the company’s need for a second round of covenant relief by the end of the second quarter to avoid default on its outstanding debt.”