Sunshine Oilsands faces flood of lawsuits

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Sunshine Oilsands Ltd., largely backed by state-owned Chinese enterprises and Asian retail investors, faces 71 lawsuits seeking a total of $94-million for unpaid bills as the company struggles to raise the money it needs to restart development of its stalled northern Alberta project.

The flood of legal action is the latest in a string of disappointments for Sunshine, which had turned to Asia for its initial public offering in 2012, partly to set itself apart from a crowded field of small oil sands developers that sought funding in Canada at the time.

Its project, the 10,000-barrel-a-day West Ells steam-driven venture, has been on hold since August, when Sunshine ran out of cash after investing about $400-million. The shortfall is despite the roughly 40-per-cent ownership in the company by Chinese financial and energy concerns that together control assets of more than a trillion dollars.

They include China Life Insurance, Bank of China, China Investment Corp., Sinopec and Orient International Resources Group Ltd.

Their unwillingness to date to advance more money contrasts with long-held views in Canada that the Chinese government had directed its enterprises to secure and develop resources at any cost.

Sunshine has raised $67-million through four equity issues since December, though that is not nearly enough to restart work. It had $15.9-million in the bank at the end of the fourth quarter, according to its 2013 financial report, released last week.

The shares closed on Friday at 18.5 cents on the TSX, less than half their value at the start of 2013.

Meanwhile, Sunshine is still without permanent leadership after John Zahary resigned as chief executive and Robert Pearce left his post as chief financial officer in December.

"Recent financing efforts have been helpful, but not enough to pay off the $94-million of liens against the company as of year-end 2013 and the $200-plus million of additional capital we think is needed to fund West Ells," TD Securities analyst Michael Dembicki said in a research note. "In our view, financing will not come until new leadership has been put into place."

At the end of February, Sunshine struck a collective deal with the litigants to hold off on actions until May 31, according to a company filing. It paid 25 per cent of its outstanding bills in December and another 20 per cent at the start of March, it said. The extra time will allow it to continue its efforts to secure the financing it needs.

Among other small oil sands developers, Laricina Energy Corp. has had success tapping its large owners for funding. Two weeks ago, it issued $150-million in 11.5-per-cent senior notes to Canada Pension Plan Investment Board, which has been an investor for four years.

It raises questions why Sunshine could not secure a similar arrangement with its wealthy backers to help the company restart development. The first 5,000-barrel-a-day phase is 81 per cent complete and Sunshine estimates it would take five months to start injecting steam.

Sunshine officials, including interim CEO David Sealock, did not respond to requests for comment.

Mr. Dembicki said he believes it is possible that the company will get the necessary equity financing to finish the project, but that it will be highly dilutive to current shareholders.

Precision Drilling Ltd. and Halliburton Co. are among the latest to file suit against Sunshine, whose property and mineral interests are the target of numerous builder's liens, according to the financial report. Liens ensure a property cannot be sold without the associated financial obligation being settled.

The Precision lawsuit, filed March 25 in a Calgary court, claims the driller did work for Sunshine, which was also acting as an agent for Bonavista Energy Corp. and Enerplus Corp. The contract, from July 2010, was worth $3.2-million. Sunshine has made payments since Precision registered a lien last October, and the balance is about $1.69-million, Precision alleges. Precision also said the contract came with an interest rate of 18 per cent.

Halliburton, one of the world's largest energy service providers, claims Sunshine owes it about $3.3-million, with its contract dating back to January 2011. Halliburton filed liens last October.

"The refusal or neglect of Sunshine to pay Halliburton for the performance of the contract amounts to a breach of contract," the claim says.

None of the claims have been proven in court, and Sunshine has not filed a defence.

In an unrelated action, a shareholder is suing Sunshine for $40-million plus interest, claiming it is refusing to honour an agreement to repurchase 4.1 million shares acquired under a 2011 share subscription. Sunshine said the claim is unfounded and will file a defence on April 2.