Canada’s Beleaguered Oil Firms See Funding Costs Soar

By Tsvetana Paraskova

One of Canada’s largest oil firms, Suncor Energy, has just announced the issue of new bonds, for which it had to pay triple the borrowing costs that it did for a similar debt issuance last year—a sign that funding costs for energy companies in Canada are surging as the price of Canadian oil collapses to below US$10 a barrel.

Suncor Energy is issuing US$889 million (C$1.25 billion) of ten-year notes with a coupon of 5.00% that have been priced at $99.697 per $100 of notes to yield 5.039%.

As per Bloomberg estimates, Suncor Energy paid 420 basis points over similar Canadian government securities in this issue–triple the premium that the company had offered to investors when it issued similar 10-year notes in May last year.

With prices crashing, and the price of Western Canadian Select (WCS) now below US$10 per barrel, investors are demanding higher premiums over Canadian Treasuries from Canada’s energy corporate debt issuers to hold their notes.

Suncor is still investment-grade rated at rating agencies, and this may have been one of the reasons why its latest bond received orders three times the issued amount, Bloomberg quoted sources with knowledge of the matter as saying.

Moody’s assigned on Tuesday a Baa1 rating to Suncor Energy’s notes offering, saying that “Suncor’s liquidity is good” and that “should oil prices remain low, Suncor will take necessary actions to maintain its capital structure, cash flow and liquidity, and reduce negative free cash flow.”

Suncor plans to use the proceeds from the notes to repay short-term debt and for general corporate purposes.

Like many other Canadian oil firms, last month Suncor revised down its capital guidance by 26 percent in response to the crashing oil prices.

Over the past two weeks, Suncor has increased its liquidity by US$2.7 billion (C$3.75 billion), and this “financial flexibility ensures the company will have access to adequate financial resources should it be required,” it said.

By Tsvetana Paraskova for Oilprice.com