OPTI Canada: Oil sands project keeps ramping up - but heavy debt load must come down

By Paul Deckelman

New York, June 16 - OPTI Canada Inc.'s chief executive officer says the company's phase 1 oil sands extraction and conversion plant is running like "a Swiss watch," and now that start-up issues have been overcome, "there's nothing standing in front of us [to keep us] from further ramp-up."

That is, at least not from an operational viewpoint. But Christopher Slubicki also acknowledged to investors that on the financial side, his company's $2.2 billion debt load is "too much debt for our current phase, and too much to contemplate future expansion," essentially putting OPTI Canada's ambitious plans for additional plants on hold for now.

In a presentation at the Canadian Association of Petroleum Producers' Oil and Gas Investment Symposium on Tuesday in Calgary, Alta., Slubicki, who also serves as the president of OPTI Canada, said that the crushing debt burden "is why we're in a strategic alternatives process," which began last November, and which is aimed at bringing down the company's total leverage and positioning it to move onto its phase 2 development.

He called dealing with that heavy debt "our Number-One issue" at this point.

"We need to transact [a deal] in order to address our balance sheet. Whether it's an asset sale or a corporate sale, or anything else remains to be seen - but it's our intent to transact this year."

On Wednesday, the company - saying it was responding "to [media] comments erroneously attributed" to Slubicki, declared that its board of directors continues to move forward with its exploration of strategic alternatives, which it said "may include capital market opportunities, restructuring the current credit facility, asset divestitures, and/or a corporate sale, merger or other business combination."

The company also warned that it would not further disclose developments relating to its strategic alternatives review until the board has approved a definitive transaction or strategic option.

An unusual technology

Calgary, Alta.-based OPTI Canada is a 35% partner in an oil sands joint venture with Nexen Inc., which owns the remaining 65% stake.

The companies have constructed a large facility near Fort McMurray, Alta., for extracting crude bitumen - a very heavy, viscous form of petroleum - from the extensive Athabasca Oil Sands Region and converting the dense liquid into usable synthetic premium sweet crude oil, a highly desirable refinery feedstock due to its low-sulfur content.

The thick, almost rubbery goo is melted into a more easily handled form by the injection of hot steam through a system of horizontal wells that run parallel to the collection wells, from which it is pumped to the surface for conversion.

The OPTI Canada/Nexen Long Lake project makes use of an OPTI-owned proprietary technology called OrCrude to cut down on its natural gas usage and production costs; however, the economic viability of oil sands refining in general is considered still chancy, since it requires a relatively high crude oil price of around $80 per barrel - right around current world crude price levels - to make it feasible. Environmentalists meantime charge that the oil sands conversion process produces more greenhouse gasses than conventional oil production.

Floating on a sea of debt

OPTI Canada funded its share of the project's development mostly through the debt markets. In December 2006, it sold $1 billion of 8¼% notes due 2014. In June 2007, it sold $750 million of 7 7/8% second-lien senior secured notes due 2014, and in November 2009, it sold $425 million of 9% first-lien senior secured notes due 2012. It also entered into a C$190 million revolving credit agreement, although that revolver remains undrawn at this time.

The company also raised funds via a $300 million initial public offering in April 2004, and in December 2008, OPTI Canada - which originally had been equal partners with Nexen in the Long Lake project - sold a 15% slice of the project to its partner for $735 million, giving Nexen 65% and reducing its own stake to the current 35%.

This past November, OPTI Canada announced its plans to undertake a review of strategic alternatives in hopes of increasing shareholder value and improving its balance sheet. It hired Scotia Waterous Inc. and TD Securities Inc. as financial advisers to assist in the process.

In his presentation at the CAPP conference, Slubicki said that the company's market capitalization was $550 million, and total enterprise value, including the debt, was about $2.8 billion. He said that the company had about $400 million of liquidity - the undrawn revolver availability, plus a little more than $200 million of cash and cash equivalents.

"When people talk about OPTI, our financial situation is probably foremost in their minds," the CEO said. "We've made progress in establishing liquidity to get us through our strategic alternatives and through our ramp-up."

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