Canada's high-flying juniors fall to earth
Smaller companies that push at the frontiers of technology and geology are going bust
Canada's junior oil and gas companies were once the darling of the North American upstream. Innovative and nimble, smaller companies were known for applying new technologies to new unconventional resource plays like oil sands and shale gas.
Now the sector lies in ruins. According to the Alberta government all indicators are pointing to the worst year for bankruptcies since the 1980s bust.
On 26 September, Calgary-based Lightstream Resources became the latest casualty after it obtained court protection under Canada's Companies' Creditors Arrangement Act (CCAA)-the equivalent of Chapter 11 in the US. Formerly known as PetroBakken, the company was an early pioneer in the underdeveloped Saskatchewan portion of the Bakken shale play, which straddles the 49th parallel border.
Before going into bankruptcy, Lightstream had success with multistage hydraulic fracturing, drilling hundreds of extended-reach horizontal wells into the prairie. But that all changed with the oil price rout in 2014 and the company is now saddled with more than C$1.3bn (US$0.987bn) in debts it can't pay. After going public in 2008 at an initial price of C$10, its shares are now worth barely C$0.10.
Connacher Oil and Gas-a thermal oil sands producer that owns a refinery in Montana-is also under CCAA protection. Hong Kong-listed Sunshine Oil Sands, a major Chinese investor in the oil sands, ceased trading in mid-September.
In April, Terra Energy, a mid-sized Montney shale producer, closed its doors and laid off its staff, shutting in all of its production after the management and board of directors resigned en masse.
Laracina Energy, which is developing oil sands in the Grosmont carbonates-a vast untapped formation thought to contain around 250bn barrels-in February reached a deal with the Canada Pension Plan Investment Board to restructure its debt and continue work with limited operations.
It's not just producers that are at risk. In April, privately held oilfield-services company Sanjel-which specialises in hydraulic fracturing-was liquidated after owing more than C$1bn. The fate of its 2,200 employees hangs in the balance.
They aren't alone. The country's big three banks-the Royal Bank of Canada, ScotiaBank and the Canadian Imperial Bank of Commerce-have placed nine more companies on their respective watch lists, the last step before calling in loans. The names are confidential, but Calgary is a small town and most have a fairly keen reckoning of who they are.
Many companies have tried to escape bankruptcy by putting themselves up for sale. But white knights have been hard to find in the oil patch. According to a report by TD Securities, the trading arm of Toronto Dominion Bank, 15 companies have put themselves up for sale in the past 18 months and only three have found buyers. It seems potential buyers are simply waiting for them to go fully broke to avoid assuming accumulated debt and scoop up the assets for pennies on the dollar.
The weight of debt
There could be more coming. According to the Conference Board of Canada, a non-profit think tank, cumulative oil industry losses are forecast to surpass C$10bn in 2016, on top of the record C$11bn lost last year. It would mark the first time in modern history the sector has posted back-to-back annual losses.
The industry's profitability problems are leading to a significant pullback in investment, which by definition hits speculative juniors the hardest. According to the Conference Board, total spending by Canada's oil producers is estimated to have been slashed by C$25bn in 2015, with cutbacks expected to continue this year and next. From 2014 to 2017, industry investment will have been gutted by a combined C$38bn.
The pullback will, in turn, result in lower production levels. Canadian oil production increased marginally in 2015, as rising oil sands offset lower conventional crude oil output.
This year, production is expected to decline by 1%, as a result of cutbacks and disruptions from the Fort McMurray wildfires in May.
Having small companies that often operate at the frontiers of technology and geology could also set back innovation across the industry and slow development of potentially resource rich but under explored areas.
The Conference Board notes that fundamentals are expected to improve modestly in 2017-assuming Opec implements its agreement to reduce production and prices stabilise above $50 per barrel, a big uncertainty.
Until then, Canadian juniors will be scraping for shrapnel amid the wreckage of the oil patch.