Tar sands stocks hit 52-week lows on financing fears
Carrie Tait, Financial Post Published: Monday, October 06, 2008
CALGARY -- A slew of Canada's most respected oil and gas outfits slammed into 52-week lows during Monday's tumultuous trading session, highlighting fears that companies in the oil patch face a struggle to rustle up the cash necessary to plow ahead with expensive projects.
Private oil and gas companies, unable to offer investors liquidity, are in the worst spot, but larger publicly traded oil sands entities are also feeling the pinch. Connacher Oil and Gas Ltd., which produces crude oil, natural gas and bitumen, Monday iced plans to more than triple the capacity at its heavy oil refinery in Montana.
"Definitely anything with a tight time fuse is in trouble right now," said John Wright, chief executive of Petrobank Energy and Resources Ltd. "Someone who has to commit to a long-lead [time] items and needs the money in the next little while, they are just not going to be able to make those commitments."
Stalwarts like Suncor Energy Inc., the largest oil sands company, and Canadian Oil Sands Trust, the largest partner in Syncrude Canada Ltd., were swept up in the sell-off Monday.
Suncor fell $4.29, or about 12%, to close at $32.15, a 37% drop over the past two weeks. It touched a low of $28.68 Monday, which would have been a drop of 21%. Canadian Oil Sands, which also touched a 52-week low Monday, shed $1 or 3% to end at $32.
Petro-Canada, EnCana Corp., and Talisman Energy Inc. were among those that set new yearly lows before the trading day was over.
The Standard & Poor's/TSX energy index accounted for 269 points, or 46%, of the 572.92 drop in the benchmark Canadian stock index Monday. The index has seen $240-billion of its market capitalization evaporate since it peaked in mid June.
UTS Energy Corp. - once the hottest oil sands play, but now a financial basketcase - skidded into penny stock territory, closing at 93 cents, down 19%. Connacher, which said its oil sands project secured funding before the debt and equity markets seized up, dropped 28 cents, or about 12%, to $2.10.
"Connacher's decision to suspend the refinery expansion was also influenced by the emergence of weak overall economic conditions and the volatile and uncertain state of both capital and credit markets," the Calgary-based company said in a statement.
As a further warning to the sector, the company noted it "made arrangements to appropriately prefund" its Algar oil sands project "before the events of the recent months effectively closed the financing window for almost any new projects."
Light sweet crude closed the day off US$6.07 to US$87.81 on the New York Mercantile Exchange. It will have to hover above US$90 per barrel to make expensive projects such as those in northern Alberta worth the investment, according to a report published by Merrill Lynch last week.
"Oil sands, offshore or Arctic projects will all likely require oil prices above US$90 per barrel to maintain a certain level of profitability," the brokerage said. "As a case in point, some green-field Canadian oil sands projects require US$100 per barrel to get a 10% internal rate of return, suggesting that the recent price action risks crowding out investment in Alberta.
"Perhaps more importantly, should the ongoing financial crisis permanently shift up the cost of money, investors could require a much higher [internal rate of return] than 10%."
Brant Sangster, an independent senior advisor to Deloitte Canada's energy and resources practice, as well as the former senior vice-president of oil sands at Petro-Canada, noted integrated oil and gas companies – those which produce, upgrade, refine and sell products to consumers – will be better off because they can fund projects using cash from other areas of their business.
"[But] if you're one of the smaller entities who are trying to finance the only project you have ... then I suggest [you] are in some difficulty," he said.
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