PetroBakken Energy Ltd. , an oil company plagued by a weighty pile of debt, has hired investment bankers to ease pressure on its balance sheet and is considering asset sales or cutting its dividend.
The disclosure comes less than a week after PetroBakken's chief executive, John Wright, sent letters to roughly 400 employees, select shareholders, and board members, outlining options the company may take. However, the letter, which was not public disseminated to investors, goes further than Monday's announcement, indicating which options he would rather avoid as he tries to steer the company out of a financial tight spot.
PetroBakken's woes -- and those of its controlling shareholder, Petrobank Energy and Resources Ltd. , which recently said its experimental oil sands project had failed -- highlight the difficulty that energy companies can face even when controlling slices of popular oil plays. The Bakken zone, in southeastern Saskatchewan, has proven lucrative and is expected to be a major contributor as Canada's oil production grows, but despite growing production and high oil prices, PetroBakken shares have fallen almost 70 per cent this year.
PetroBakken said it hired TD Securities Inc. as a financial advisor early in the second quarter, and is considering cutting its budget; lowering its 96-cent annual dividend or creating a dividend reinvestment program; taking on more debt; renegotiating the terms of its convertible debt; and asset sales. All of these are mentioned and expanded upon in Mr. Wright's letter, which was written in response to a BMO analyst report that outlined a variety of scenarios for the company, including a possible dividend.
Mr. Wright's letter said BMO's report, written by analyst Jim Byrne, "takes an assumed fantasy position of what we would look like if we failed to meet our production targets, continued spending capital without any positive result and took no strategic action over the next year and a half in the face of a looming debt conversion." The Globe and Mail obtained the letter from two sources -- one institutional fund manager and one investment banker -- and Mr. Wright confirmed he wrote it. A similar but more casual version was sent to employees, he said.
In last week's letter, Mr. Wright raised the possibility of issuing new stock. He also addressed renegotiating the company's $750-million (U.S.) worth convertible bonds, which come with a put option in February, 2013. "We have the ability to renegotiate the existing convertible debenture, albeit at a cost in terms of dilution," the CEO wrote. The problems with this option were not part of Monday's public statement.
The letter details PetroBakken's assets in Saskatchewan's Bakken, Alberta's Cardium play, and notes that it has a "material contiguous land positions" on new oil plays in Alberta and natural gas in British Columbia. Before saying that "any or all" of these assets could be sold or put into joint ventures, Mr. Wright noted the company has "a number of conventional drilling opportunities which don't meet our hurdle rates."
PetroBakken is trying to sell itself or assets, two industry sources said. Bids were due about two weeks ago, they said. Mr. Wright would not discuss the validity of the sources' claims. He said he wrote the letter in response to questions from shareholders and analysts following BMO's report and it is not "hinting" at anything.
As for Petrobank's oil sands demonstration project, Peter Cheung, the company's chief financial officer, last week said that it failed to work as expected. While Petrobank's new oil sands system successfully extracted and processed crude, it was not economical at the Conklin project, he said. Despite the failure the company hopes it will work at its other sites in nearby May River, and in Kerrobert, Saskatchewan, which boast thicker reservoirs, Mr. Cheung said.