By David Yager, August 25, 2016
Entrepreneur. Consultant. Journalist. Political Activist.
The quote in the business press August 16 tells the story. Ryan Wong, Vice-President, Treasury for Tervita told Bloomberg News, “At the moment we have more debt than the asset can service. The card we have in our hand is that the company is worth more as a going concern and kept whole than it if were broken into pieces and sold off”. Days earlier Tervita revealed it had exercised its option to suspend interest payments for 30 days on a portion of its $2 billion+ in debt to negotiate a restructuring. For the oilpatch it’s best not to get your name in the paper these days.
This isn’t the first tough negotiation an oilfield services (OFS) borrower has had with one or more of its lenders and it won’t the last. Since bankers pulled the plug on Sanjel Corp. this spring it is clear there is no such thing as “too big to fail” in the battered OFS industry.
The subject of Tervita’s capacity to service its debt has been common since its $3.5 billion, private equity-funded privatization in the heady markets of 2007. Tervita’s debt has been in the news more frequently in recent few years as it has refinanced some portions under less-than-attractive terms and, more recently, publicly defaulted on others. On April 21, 2016 debt rating agency Moody’s Investor Service announced about $2 billion in Tervita’s debt was downgraded to Caa2 defined as, “An obligator (borrower) is CURRENTLY VULNERABLE and is dependent upon favorable business, financial and economic conditions to meet its financial commitments”. A materially improved marketplace has yet to materialize.
How Tervita went from an OFS jewel valued at $3.5 billion in the summer of 2007 to one with an uncertain future it a useful trip down memory lane. At one point it was one of the most spectacularly successful operators in the business. Today’s its future lies in the hands of lenders and the marketplace.
What’s now called Tervita was founded in 1979 in Valleyview as one-rig contractor Concord Well Servicing by David Werklund and Gordon Vivian. In 1993, following the acquisition of a private company in the oilfield waste and oil recovery business, the company went public as Canadian Crude Separators Ltd. What followed was an acquisition binge buying operators in hazardous waste, drilling fluids, well abandonments plus many more service rigs. The core waste disposal business opened treating facilities and acquired storage caverns.
As a listed company, Canadian Crude Separators caught the wave and levered its listing. In 2001 it made an unsuccessful attempt to acquire the shares of major competitor Newalta Corp., a combination the company said had the potential to achieve a market capitalization of $300 million. This is only 10% of what it would be worth six years later. In 2002 it reinvented itself as CCS Income Trust as was not uncommon for oil-related public companies at that time.
Concord/Canadian Crude/CCS was well positioned for the best growth years Canada’s OFS industry may have ever enjoyed. The expansion started in the 1990s with the deregulation of natural gas exports and oil and gas prices and continued well into the 21st century. Service rigs were essential and in growing demand and waste disposal and oil recovery expanding with production and environmental protection legislation. By early 2008 Alberta’s upstream petroleum industry was doing so well the provincial government actually fought (and won) a provincial election on jacking up production royalties substantially because the economy was “overheated”.
In June 2007 CCS Income Trust announced founder Werklund and a group of investors would offer $46 per trust unit and take the company private. As a listed company CCS had enjoyed a spectacular ride. At the end of 1993 (after adjustments for splits and consolidation) it traded at $1.08 per share. Fourteen years later the offer of $46 was a 14-year average compounded annual growth rate of over 34%. What a ride! A $1,000 investment in Canadian Crude in 1993 would have yielded $46,000 in 2007. Some of the participants on the buy side included CAI Capital Partners, Goldman Sachs Capital Partners, British Columbia Investment Management Corporation, Alberta Investment Management Corp, CIBC Capital Partners and several others.
At the time the offer was a 21.4% premium to the prior day’s trading price on the TSX. Regardless, a remarkable number of investors felt Werklund et al were taking the shareholders to the cleaners. An article in The Globe and Mail August 21, 2007 was titled, “The private pleasures of David Werklund”. It called CCS Income Trust “…one of the best get-rich stocks in the past decade…The numbers say that if Mr. Werklund’s not an entrepreneurial legend, he should be”. It went on to say, “A buyout of CCS was always going to be controversial. Canadian fund managers aren’t famous for their backbone, but few will readily give up a stock that has delivered 41% annual returns. The timing of the deal – eight months after the feds imposed on a new tax on income trusts and in the middle of a lull in the oil services sector – is opportunistic, to say the least. But the biggest sore point is that while Mr. Werklund wants his share owners to sell, he’s keeping most of this equity, and plans to own 28% of the privatized CCS. Do as I say, not as I do?”
The terms of the CCS take-private financing were not disclosed but sources in the private equity space say it was funded about 30% equity and 70% debt. But these were heady days in global debt markets. In the middle of the media battle of whether Werklund was hosing CCS shareholders two events occurred. On August 9, 2007 the first seizure of the world’s banking system took place when French bank PNB Paribas announced it would no longer invest in three hedge funds specializing in U.S. mortgage debt. To quote the economics editor of The Guardian in a retrospective analysis of the world debt meltdown four years later, “This was the moment it became clear that there were tens of trillions of dollars worth of dodgy derivatives swilling round which were worth a lot less than the bankers had previously imagined”.
Closer to home the mortgage debt markets began to seize up as investors began to refuse to buy Asset Backed Commercial Paper, or ABCP. In the summer of 2007 with $33 billion of this stuff on the books in Canada alone, the Caisse de depot et placement du Quebec (Quebec’s big pension plan) and the Bank of Canada intervened with a negotiated solution which eventually converted Canadian ABCP into long-term debt. This saved Canadian banks and investors a lot of misery. A year later the wheels would fall off the world’s financial markets resulting in the collapse of oil prices and Lehman Brothers and the U.S. government forced to bail out insurance companies which had sold new products to protect investors from their losses, something called Credit Default Swaps.
At this point equity investors gathered their wits and after ratification at a shareholders’ meeting accepted the $46 offer. In November of 2007 CCS disappeared from the public eye and $3.5 billion changed hands. One of the sponsors called it, “…one of the largest ever privatizations of a Canadian income trust”. It was known thereafter as CCS Corporation.
By 2012 CCS was back in the news. It has merged all of its subsidiaries and operating companies into Tervita Corp. It sold its drilling fluids division to Canadian Energy Services and Technology Corp. for an undisclosed sum. On July 11th The Globe and Mail reported, “Calgary’s Tervita looking to launch huge IPO”, backed up with unsourced information that the company was hoping to raise up $1 billion and its revenues were $5 billion annually. The article mentioned the post-recession debt markets were not kind to Tervita. In June 2011 it unsuccessfully tried to issue $675 million in new debt to pay down US$612 million in existing debt at an 11% interest rate. The IPO never occurred but it was becoming public that Tervita was paying top dollar to refinance its obligations.
On February 7, 2013 The Financial Post reported Tervita had raised US$290 million at 9.75% in the fall of 2012 following previous large financings totaling over US$600 million at 11% for seven years in the spring of 2008. That debt has already matured. The article also said the company was trying to refinance several hundred million in debt due in 2014. All Canadian companies with U.S. dollar denominated debt are currently struggling because of the low value of Canadian currency.
Three years ago Moody’s had rated Tervita’s debt at B2 defined as, “MORE VULNERABLE” and, “Adverse business, financial or economic conditions will likely impair the obligator’s capacity or willingness to meet its financial commitments”. Which is of course what happened when oil prices collapsed in late 2014. While its revenues may have been $5 billion per year three years ago, Tervita apparently carries as much or more debt than Trican Well Service Ltd., Calfrac Well Services Ltd. and Sanjel Corp. combined in early 2015. The struggles Trican and Calfrac have endured to remain operating are well documented and Sanjel didn’t make it.
By 2016 Tervita was frequently in the news for all the wrong reasons. All the debt rumors were true. It has defaulted more than once and is struggling to figure out how to get through this mess. As the Bloomberg News story quoted previously wrote, “Tervita Corp. plans to seek new credit after completing restructuring talks with lenders to slash its $2.5 billion worth of obligations”. If converting debt to equity occurs, as has been the case with recent transactions of this type the current equity owners won’t be left with much, if anything. It certainly won’t be $46 a share, the number many sneered at in 2007.
Why tell this complex and unpleasant story? Because the financial challenges every operator faces today ultimately revolves around how much money they owe. Canadian Crude Separators was a fabulously successful company that fell into the hands of financial engineers who made two egregious blunders: more focus on short than long term performance and forgetting OFS is cyclical.
To all the fine people who still work at Tervita, may this saga end well for all of you.
About David Yager – Yager Management Ltd.
Based in Calgary, Alberta, David Yager is a former oilfield services executive and the principle of Yager Management Ltd. Yager Management provides management consultancy services to the oilfield services industry in a number of areas including M&A, Strategic Planning, Restructuring and Marketing. He has been writing about the upstream oil and gas industry and energy policy and issues since 1979.
David Yager can be reached at Ph: 403.850.6088 Email: [email protected]