November may be emerging as a crunch month for Canada’s small and mid-sized fossil producers, as banks go through a semi-annual review of whether their borrowers’ financial health and future prospects justify the level of operating loans they depend on—particularly with a second wave of the pandemic gaining momentum.
It may even turn out that the banks are slowing down the credit relief the Trudeau government has been trying to extend to the troubled fossils through the Business Development Bank of Canada (BDC) Export Development Corporation (EDC), the Globe and Mail reports.
“Usually rather staid affairs, the coming editions [of the semi-annual review] promise much more tension, with companies that are starved of capital and shedding thousands of jobs fearing the lenders will reduce their access to credit,” the Globe writes. That prospect has fossil execs looking ahead to next month “with equal measures of anticipation and dread.”
Earlier in the year, after fossils warned their survival was imperilled by the “double whammy of collapsing oil prices and out-and-out lack of demand” brought on largely by the COVID-19 pandemic, Ottawa responded with C$1.7 billion to fund clean-ups at abandoned wells, the Globe recalls, plus another $750 million for methane controls. Fossils also had access to the federal government’s emergency wage subsidy, and to the generous loan supports through BDC and EDC.
But “it’s been an arduous process,” writes mergers and acquisitions reporter Jeffrey Jones, with fossils and their lenders taking months to work through the terms of the federal guarantee. “The whole process is complicated by the various corporate predicaments and, perhaps most importantly, existing credit deals with lending syndicates,” Jones explains, citing Tristan Goodman, president of the Explorers and Producers Association of Canada.
And now, the clock is running down. “Unless more deals are wrapped up in time for November, the industry’s debt worries could get worse,” Jones writes.
“Hopefully, EDC and BDC are doing a really good job,” Goodman told Jones. “I appreciate their efforts in a very difficult situation, but we do need to get this done. If you can hear the tone in my voice, I am now actually getting a little more nervous. These are good Canadian companies that are onboard with where Canada is trying to go, but they’ve got to make it through.”
But while fossils complained over the summer that the bailout plan was too complicated and overly focused on environmental performance, last week’s news report suggests the companies’ own lenders may be a major barrier. “The banks themselves have at times been resistant to federal programs that might extend their financial exposure to oil and gas companies when their long-term health is not assured,” the Globe writes, citing Canadian Association of Petroleum Producers Vice-President Ben Brunnen.
“Definitely banks are a bit hawkish right now and they’re not particularly oriented towards automatically supporting more liquidity and taking more exposure to companies,” Brunnen told Jones. “That’s pretty much all what EDC has put on the table, and as a result of that, unless EDC is willing to take over on behalf of the banks, it’s not an easy proposition to advance.”
The Globe’s news report last week landed not long after Suncor Energy, previously the biggest producer in the Alberta tar sands/oil sands, announced 2,000 layoffs due to slumping oil demand, while Alberta’s Orphan Well Association said it was in line to inherit 12,000 new abandoned sites from fossils that had gone bankrupt and cleared out of town without cleaning up behind themselves. [Okay, that’s not quite the way the Orphan Well Association said it—Ed.]