OPTI Canada says recent debt sale boosts liquidity, buys time for operations ramp-up, strategic review

By Paul Deckelman

New York, Oct. 28 - OPTI Canada Inc. said on Thursday that its recent $400 million junk bond deal has given the Canadian energy company the liquidity it needs to continue ramping up its ambitious Long Lake oil sands project to the point where it can eventually break even, while also continuing its previously announced strategic alternatives review process, which it hopes will yield a longer-term solution to its debt-load problem.

"With the financing, we have time to ramp up and to withstand, if necessary, occasional interruptions during our ramp-up," the company's president and chief executive officer Christopher Slubicki declared during OPTI Canada's conference call with analysts following the release of its earnings for the third quarter ended Sept. 30.

"We remain committed to our process as we move into the fourth quarter and next year."

OPTI Canada sold $100 million of 9% first-lien senior secured notes due 2012 as an add-on to its existing 9% paper, as well as $300 million of 9¾% first-lien senior secured notes due 2013, pricing those tranches on Aug. 11 at 99.51 to yield 9.228% and 96.5 to yield 11.162%, respectively.

The new bonds boosted its total junk-bond debt load to $2.575 billion from just over $2.1 billion pre-deal, which consisted of the $425 million of original 9% secured bonds due 2012 sold in November 2009, as well as $750 million 7 7/8% second-lien senior secured notes due 2014 sold back in June 2007 and $1 billion of 8¼% senior notes due 2014 sold in December 2006.

Even that earlier $2.1 billion-plus level was "too much debt for our current phase and too much to contemplate future expansion," Slubicki declared while speaking at a Calgary investor conference in June, adding that this necessitated the search for strategic alternatives.

Debt problem downplayed

During Thursday's conference call, though, neither Slubicki nor Travis Beatty, the company's vice president for finance and chief financial officer, alluded to the drag on the company's finances from the increased debt load, but instead touted the transaction as a key step that would further the operations ramp-up "and will enable us to address our leverage position with a strategic alternatives transaction," Beatty said.

The company used proceeds from the bond deal to repay most of the C$50 million that it had outstanding under its C$190 million revolving credit facility and set up an interest escrow account to fund the slightly less than $90 million of interest that will come due on the 9¾% notes over the next three years until their maturity, with the rest to be used, along with cash on hand, to fund operations during the ramp-up period of its project and other general corporate purposes.

Beatty said that as of Sept. 30, OPTI Canada had liquidity of C$610 million, consisting of C$340 million of cash and cash equivalents, C$180 million of availability under its revolver and the C$90 million in the interest escrow account.

When the company released its earnings for the second quarter ended June 30 - before the bond deal - it said liquidity at that time totaled C$267 million, comprised of C$117 million of cash and equivalents and C$150 million available under the revolver.

OPTI Canada's ratio of total debt to capitalization stood at 65% at the end of the third quarter, up from 60% at the end of the second quarter, reflecting the impact of the $400 million bond deal in August. However, it remains under the maximum allowable figure permitted under the terms of the revolver, which was amended in August, around the time of the bond deal, to raise that ceiling to 75% from 70% previously.

When asked by an analyst during the conference call about the level of additional incremental secured borrowing beyond its revolver maximum that the company would be permitted to incur under the terms of the revolver as well as the indentures of its various bonds, Beatty noted that it would depend upon a lot of different factors, most importantly the company's estimates of its potential reserves of bitumen - a very heavy, viscous grade of crude petroleum - and regular light sweet crude that could be distilled from it, but the company was in the process of putting together its new reserve estimates for the coming year.

No word yet on alternatives

Neither Slubicki nor Beatty offered any update on OPTI Canada's strategic alternatives process during the conference call - but none had been expected, as OPTI Canada had already said when it undertook the review process earlier in the year that no such interim updates would be forthcoming.

The company said at the time that these could include capital market opportunities, restructuring OPTI Canada's current credit facility, asset divestitures, a corporate sale, merger or other business combination, or possibly some combination of any of these.

For the third quarter, OPTI Canada - currently in phase 1 of its ambitious development plan, having built a major facility at Long Lake in the province of Alberta for extracting bitumen from the extensive underground oil sands deposits there and converting it into the more marketable light sweet crude - lost C$46 million, or 16 Canadian cents per share, versus its second-quarter loss of C$152 million, or 54 Canadian cents per share.

The company's performance was negatively impacted in the latest quarter by unexpected problems with parts of its facility in August and September, which caused a drastic fall in output.

Slubicki acknowledged that OPTI Canada executives felt "some frustration this quarter" in dealing with the problems. But he dismissed them as only "temporary surface issues," as opposed to potentially more serious problems with its underground operations and said that those glitches "are behind us, and we see nothing in our way to prevent further ramp-up."

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