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Opti's future hinges on oil sands performance

Scott Haggett

Monday, July 13, 2009

CALGARY — Opti Canada Inc. needs to show some progress at its underperforming oil sands project if its shares – down a hefty 93 per cent over the past year – are going to recover lost ground.

The company, which holds a 35 per cent stake in Nexen Inc.'s $6.1-billion Long Lake oil sands project, has had a rough year, with a long list of woes that pummeled its stock.

Those troubles included plunging oil prices, which caused once-optimistic investors to doubt the earnings power of the pure-play oil sands company. As well, in December, it was forced to sell a 15 per cent stake in the project to Nexen, raising $735-million to avoid breaching debt covenants, and cutting its holding in Long Lake from 50 per cent.

Earlier this year Opti was incorrectly named in media reports as the subject of rumors in a trading scandal. And last month the company diluted its outstanding shares by half in an equity issue that was initially nixed by the Toronto Stock Exchange because the new shares were priced too low.

The raft of troubles has combined with a slow start to production for the first phase at Long Lake. Technologically innovative, the project has struggled to boost the output of tar-like bitumen to its 70,000 barrel per day goal.

Without a better performance there, the value of Opti shares is unclear, analysts say.

“Until they deliver (on Long Lake) it is hard to foresee the market giving them much value,” said Menno Hulshof, an analyst with Dundee Securities. “As far as I can tell it's trading at a sharp discount to the full value of Phase One if you believe they can actually deliver.”

Instead of the open-pit mining techniques used in most major oil sands projects, Long Lake uses thermal methods, in which it pumps steam into the ground to liquefy the tarry deposits so they can be pumped to the surface and upgraded into refinery-ready synthetic crude.

Nexen, which operates the project, has had problems generating the massive amount of steam needed, restraining output of bitumen to only about 18,000 barrels a day.

Nexen has argued that these issues are typical for any new thermal project and Long Lake's performance is in line with similar developments in the oil sands region of northern Alberta, with full production often taking two years or more to achieve.

But, lacking other operations to bolster its bottom line, Opti needs the Long Lake project to be successful if it is to offer any reward to investors.

“The biggest challenge they've had is that they're a pure play,” said William Lacey, an analyst at FirstEnergy Capital. Other companies “developing a project like this have it in a broader portfolio so the focus is somewhat diminished ... Opti has the pain of being entirely this project and any hiccup is magnified.”

Opti's woes weren't helped when it decided it had to issue millions of new shares last month to pay for capital expenditures and ensure it stayed onside of credit covenants. The company had wanted to issue almost 90 million new shares at $1.70 each, at a time when its existing shares were trading at $2.50.

The Toronto exchange blocked the issue, saying that because the discount was more than 20 per cent from the current share price, shareholders ought to approve the deal. That caused Opti to withdraw the offer and look to re-price the shares.

Somewhat predictably, Opti stock quickly plunged, falling 24 per cent from June 23, the day before offer was announced, and June 30, when Opti was able to revamp the offer at $1.75 a share. The company successfully placed nearly 97 million shares, diluting the outstanding stock by half.

The shares closed on Friday at $1.49, down 16 cents or almost 10 per cent.

Analysts say the move may have left a host of disgruntled investors in its wake, but they credit Opti chief executive Chris Slubicki, a former investment banker, for doing what was needed to ensure the company's survival.

“I don't think anyone was happy about it but people recognized it needed to get done,” Mr. Lacey said. “Chris made a tough decision.”

With that financing behind it, Opti has the chance to go forward as an operating company, subject only to the vagaries of oil prices and Long Lake's operating issues.

“They now have enough cash in the bank to last them through the end of 2010,” Mr. Hulshof said. “But they have to do something operationally.”

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