Is this a nightmare- Invsetors saying to stay away now The junior oil and gas companies, which are the entrepreneurial players in Canada, the ones that enjoyed the ride up as energy went into the stratosphere, they put on a lot of debt in this cycle,” O’Leary tells BNN. “Most of this debt is coming due in the next 36 months. Most of them are going to go bankrupt.”
Oil-sands companies face some of the highest production costs in the world and are being forced to sell their product at a discount. Producers there need at least $85 a barrel to make money on new projects, according to the Canadian Energy Research Institute. The North American benchmark closed at $63.05 US per barrel Monday.
As crude prices crater, O’Leary says we’re about to see a wealth transfer in the junior oil and gas space as distressed bond holders claim assets from shareholders – who won’t end up with anything.
“During this period of turmoil it’s a nasty place to be. You get no bid on these juniors, you don’t know how to price the assets, the oil continues to go down in price – because people keep forgetting when commodities correct they don’t touch the sides on the way down.”
“Grown men are going to weep.”
O’Leary’s doomsday scenario is already playing out. Southern Pacific Resource Corp. and Connacher Oil and Gas Ltd. announced last week they’d hired banks to help raise cash so the companies can avoid missing interest-rate payments.
Southern Pacific, with $432 million of bonds, said it didn’t have enough cash to make interest payments in its latest quarterly report. Investors were only offering about six cents on the dollar for its January 2018 bonds, according to prices from Industrial Alliance.
Connacher, with about $977 billion in debt, said in November that cash flow may not be sufficient to cover interest payments on debt and it will need to get additional funds next year to stay in business. The company’s August 2018 notes were trading at about 40 cents on the dollar on Friday.