Thursday, 21 January 2016

Cdn Natural Resources 2020 2.89% MTNotes

I was looking at these bonds yesterday because they showed up at Waterhouse again.

Here they are at Waterhouse, priced to yield around 4.3%

And here they are at Candeal yesterday, priced to yield 4.44%

Here is my initial calculation of interest coverage using the last 5 years of reported results, and my payback on the bonds if I were to purchase them today:

As can be seen, these are rated BBBh, and yield about 100 BPS over comparable BBB corporates, and I'm wondering if this is enough given the deceleration in EBIT over the last year.

What I find truly amazing is how quickly things have changed economically for the company.  Prior to 2015, interest coverage wasn't a plausible concern as the company generated sufficient earnings from operations to cover interest charges.  What a difference a couple of years make.

Here are the company's recent disclosures regarding liquidity from the Sep 30 1/4ly:

And, on the subject of balance sheet strength, here is the most recent balance sheet:

And here are the company's most recent 9 month 1/4ly results:

Here are my observations in no particular order:

  • I'm not sure where the balance sheet “strength” is.  The business is a juggling act.  They either run working cap deficiencies or rely on sustained production (at a loss to cover fixed costs) and access to debt and equity markets to finance continued production and exploration, and in years like 2014/2015, they defer capx to ensure they can meet fixed charges. 
  • You can get a feel for how much they rely on access to credit by reading the disclosure from the 1/4ly report on different avenues of credit available
  • I’m curious as to why these bonds are only priced at 107 bps above other BBB's
  • Regarding the comparative P/L from the Sep 1/4ly, my observation is that this is an overall business with huge gearing!  Rev’s (production + royalties) are off 38% and 34% respectively, but production expenses are highly fixed in nature, & are only off 7%, to me this means that there must be significant lag time to adjust cost structure.  Transportation & blending seem to have adjusted faster at -27%

Concluding Thoughts

If WTIC doesn't rebound (and soon), how are they going to continue paying fixed charges if cost to produce exceed costs to sell for a prolonged period of time?  Why aren't these bonds junkier?  2020 is 4.5 yrs, a lot can happen in 4.5 yrs.

I suppose that if they really got into trouble, they could sell off non strategic assets…maybe this is why they still carry a BBBh rating, because there's $53B of assets they can parcel off to meet the fixed obligations. 

It's interesting to look at this from this perspective.  EBIT is in the toilet, but PPE is worth something.  Even if it's worth $.50 on the $1, it's still $25B.

Amazingly, they raised the dividend recently.  This will be the first thing they cut.

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