Spyglass Resources receivership raises well abandonment liability questions by Dan Healing, Nov 26, 2015, Calgary Herald
The failure of junior Spyglass Resources Corp. on Thursday is the first for a conventional Calgary-based oil and gas producer in the current downturn and raises questions about how the province will deal with well reclamation liabilities if the trend continues. [What an understatement this turned out to be!]
Spyglass shares were halted Thursday morning as it announced its creditors were going to Court of Queen’s Bench to request that Ernst & Young Inc. be appointed receiver. A few hours later, it announced the receivership had been granted and all of its directors had resigned.
Company officials did not return a request for comment.
“From a traditional conventional asset base, I think this is the first one and, from what I’m hearing, it might set a precedent as far as how the province treats this,” said Thomas Matthews, an analyst who covers juniors and intermediates — but not Spyglass — for AltaCorp Capital in Calgary.
“If the province is on the hook for some of these asset liabilities but then banks are on the hook for the debt, then who takes precedence? [Thus the reason for Justice Niel C. Wittmann’s God awful ruling in Redwater!?]
“The banks want to reclaim the loans they have outstanding, so they’ll run the process for selling the assets. But if they just sell the high-graded assets and leave the legacy pools with the huge liabilities in the receivership structure, then the province doesn’t really get their fill.”
In a filing Nov. 10, Spyglass said it estimates it will incur decommissioning costs of $357 million over time to abandon and reclaim well sites, gathering systems and processing facilities as wells are depleted and retired.
Alberta Energy Regulator spokesman Ryan Bartlett said Thursday the question of who inherits liability in the event of insolvency is being discussed now in a Court of Queen’s Bench case involving ATB Financial and Redwater Energy Corp., a small oil and gas producer headquartered in Okotoks that went into receivership in May.
In a filing made earlier this week, the regulator asks the court to compel the receiver, Grant Thornton, to comply with closure and abandonment orders issued by the AER using the funds in the estate.
Spyglass has struggled to maintain its growth-plus-yield business model. It has been forced to sell assets and last December cancelled its dividend.
The company agreed to make a series of payments to reduce debt when it renegotiated with its banking syndicate in June. It was placed in receivership when it became clear it would not be able to make a $35-million payment as required by Monday.
It said net debt at Sept. 30 was $175 million, made up of $168 million of bank debt and a working capital deficit of $6.4 million.
Spyglass shares were halted from trading on the TSX and the exchange has started a delisting review. They last traded at a 52-week low of five cents, having fallen from a peak of 73 cents last November. They reached $2.57 in April 2013.
The company was formed in 2013 in a merger of Calgary juniors Pace Oil and Gas Ltd., AvenEx Energy Corp. and Charger Energy Corp. and had initial production of 17,000 barrels of oil equivalent per day.
The merger, proposed in December 2012, was opposed by Vancouver-based Nova Bancorp Securities Ltd., a minority Pace shareholder, which criticized the sustainability of its dividend, the quality of the sales process by Pace and the financial case for the merger.
“During 2015, drastically lower commodity prices have presented a challenging business environment for the company,” Spyglass said in its recent third-quarter results news release.
“Spyglass continues to prudently manage costs and debt levels through reductions in staffing levels, renegotiating contract rates with business partners, compensation reductions and running a minimal capital program. ”
It said its 2015 capital program would be $11 million, primarily focused on maintenance capital expenditures, and it would post average production of 9,000 boe/d for the year.
It said it would continue to sell assets to pay down debt, reporting raising $6.5 million from sales in the three months ended Sept. 30, bringing to total to $120 million since the last quarter of 2014.
Its net loss for the third quarter of $39 million or 30 cents per share came after taking impairments of $35 million due to low oil and gas price expectations.
Several Calgary-based junior oilsands companies have gone through court processes in the past year, including Ivanhoe Energy Inc., Connacher Oil and Gas Ltd., Southern Pacific Resource Corp. and Laricina Energy Ltd.
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