Connacher issues $150 million in notes to finance oilsands construction

CALGARY - After failing to land an acceptable construction loan, Calgary-based Connacher Oil and Gas Ltd. is issuing $150 million US worth of first lien secured notes to get its Algar thermal oilsands project back on track this summer.

The company announced the note offering had been launched early Wednesday. A few hours later, Moody’s rating agency cut its corporate family credit rating to CAA1 from B3 and assigned a rating of B1 to the new issue.

President and chief executive Dick Gusella said the notes will replace a construction loan the company was trying to land. They are expected to mature in 2014.

Connacher is still working to finalize a $50-million revolving working credit line.

Gusella said he hopes the final $200-million investment in Algar, the second phase of its Great Divide in situ oilsands project, will be approved.

“We’re not going out to raise this money if we didn’t intend to reactivate Algar so as soon as it’s completed, I’ll go to my board and get formal authority to crank up the volume and get going again,” he said, adding he hopes to start construction while the weather is warm.

He estimated $150 million has already been spent on the $350-million, 10,000-barrel-per-day steam-assisted gravity drainage project.

“We couldn’t negotiate the terms we were looking for (with the bank). We opted for certainty of capital,” said Gusella, adding that the notes are better than loans in terms of independence. “We aren’t exposed to a lot of covenants or credit committees changing their minds.”

He said Moody’s rating may affect the cost of the notes issue, which is expected to be priced in the next day or so.

An investment analyst who asked not to be identified said he thinks there’s a lot of interest in the notes, based on the oversubscription to a recent issue of 192 million common shares for gross proceeds of $172 million (net $164 million).

He agreed there are risks in the oilsands but suggested that Connacher’s completion of the first phase of Great Divide on time and on budget makes it a good bet, especially against a backdrop of rising oil prices, tighter heavy oil price differentials and falling costs in the oilpatch construction industry.

Last winter, Connacher temporarily curtailed oilsands production and suspended most construction activities at its Algar site in response to market conditions.

Pod 1 production was restarted in February.