Oilsands face credit hurdles

A combination of falling oil prices and high costs have left the creditworthiness of oilsands producers "on a slippery slope," according to a report by rating agency Standard and Poors.

That in turn could lead to higher credit costs and tighter access to capital, according to report author Jamie Koutsoukis, an S&P analyst based in Toronto.

"We're not saying that oilsands are a credit risk--it's just not as strong a credit positive as it used to be," she said in an interview.

The report, which is used by bond traders and investment banks to assess creditworthiness, warns of reduced profitability and the possibility of financial losses after oil prices fell from an all-time high near $150 US a barrel last summer.

Although costs have fallen since then, the price of the basic commodity has fallen further, briefly touching lows near $30 earlier this year. Prices have moderated, holding near the$68 mark in New York on Monday, but the report notes some producers'operating costs topped $40 in 2008.

"Although there have been indications that the slowdown in oilsands development may result in cheaper costs per unit, we believe the average for a mining operation with an up-grader will remain above $30 (Cdn.) per barrel," the report states.

"It's not as dire a situation as it was in February or March,"Koutsoukis added. "Costs drive a lot of the credit analysis on oilsands and we do have concerns on the cost profile."

Unlike conventional producers that can shift spending relatively quickly in response to market conditions, oilsands producers are less flexible in the way they can allocate dollars.

Nonetheless, Standard & Poor's said it maintained an investment grade status on the sector despite the storm clouds. The last time the agency produced a similar report on the oilsands industry was in December 2006, before the subsequent rise and fall in oil prices.

Although big names like Suncor and Canadian Oil Sands Trust have weathered the crisis, Koutsoukis said several smaller producers have faced liquidity issues as the financial meltdown limited their ability to raise money.

In January, Opti Canada completed the sale of a 15 per cent interest in the Long Lake oilsands project to Nexen for $735 million to shore up its balance sheet.

Last winter, Connacher Oil and Gas temporarily curtailed some production at its Great Divide oilsands project and suspended most construction activities at its Algar site in response to market conditions. Pod 1 production was restored in February and, in March, Connacher expanded the terms of reference for the combined Algar and Great Divide projects to 44,000 barrels per day from 20,000.

In May, the company said it was taking steps to enhance liquidity, but said it is able to meet all its financial commitments for the balance of 2009 with an oil price of $40.

Last week, the company closed a $172-million equity offering that president Richard Gusella said will provide it with the funds to restart the Algar project, possibly by summer.

"The equity market is tough, but credit markets are tougher," he said. "Nothing's easy. I'm satisfied we have enough cash on hand before we restart Algar and I'm not going to do that until I'm satisfied we have all the dough we need."

Gusella said the worst of the credit crunch appears to be over, and he remains optimistic that life for smaller oilsands producers will return to normal after banks--like oil companies--rebalance portfolios and address priorities.

"We're in a brave new world as far as credit is concerned. The system is slowly wrenching its way to some better solution."

spolczer@theherald.canwest.com