Laricina Energy was an early mover in a corner of the bitumen business that had yet to yield commercial success – oil from carbonates, or sedimentary rock-like limestone, where it has applied steam-assisted technology used in traditional oil sands development.
Laricina Energy Ltd. is the just latest in a string of small oil sands developers to implode, but a deteriorating relationship with its high-profile major shareholder, Canada Pension Plan Investment Board, gives the tale a dark twist.
An Alberta court granted privately held Laricina protection from its creditors on Monday, after the CPPIB demanded it repay $150-million in debt that had been in default for months, something it was unable to do.
Documents filed with the application show how Laricina believes that CPPIB shifted from supporter to predator as the company struggled to fund development of its early-stage, technically tricky oil projects.
In an affidavit, Laricina chief executive officer Glen Schmidt accused CPPIB of setting a trap to push his company into insolvency so it could scoop up the assets on the cheap.
CPPIB, which has a 15.3-per-cent equity stake, says it demanded payment of its loan because Laricina offered no realistic way to remedy the default, resisted promised spending cuts, and came up dry in a "strategic alternatives" search.
It says it lost confidence in Laricina's managers, even telling the board in a letter on March 16 to "conduct yourselves responsibly and in accordance with your duties."
Not exactly the stuff of love letters. So how did the relationship turn so sour?
Laricina was an early mover in a corner of the bitumen business that had yet to yield commercial success – oil from carbonates, or sedimentary rock-like limestone, where it has applied steam-assisted technology used in traditional oil sands development.
It attracted an impressive board of directors, including such Calgary energy veterans as former investment banker Ian Bruce and TransCanada Corp. chairman Barry Jackson.
Rather than take the company public, Mr. Schmidt tapped private equity, which, it was assumed, could be patient as Laricina went about researching and developing its Saleski and Germain deposits.
From its inception a decade ago, investors were happy to wager. The company raised $1.3-billion in equity in the private market, including $350-million from CPPIB, according to its filing. However, in 2012 and 2013, as Laricina sought up to $500-million to complete the first phase of its Saleski operation, investor interest in new oil sands plays tailed off.
In March 2014, CPPIB provided $150-million in bridge financing in the form of 11.5-per-cent senior secured notes. This marked a major change in the relationship. The debt had requirements to maintain spending levels and boost production each quarter.
Laricina says it and CPPIB agreed that funnelling cash into the projects at previous levels made little sense as oil prices tumbled. It says it understood from talks with the lender that it would not have to achieve the production goal for the fourth quarter of 2014.
Last fall, Laricina hired Bank of Montreal, Peters & Co. and Morgan Stanley to search for ways to raise money, including selling assets or even the entire company. The timing could hardly have been worse as it coincided with the most brutal oil-price crash in years.
Another wrinkle: The company wanted to keep the oil reservoirs "hot" – that is, injected with steam, so that potential suitors would not be faced with the lengthy and costly process of restarting operations should they decide to do a deal. This, according to Mr. Schmidt, kept spending above agreed-upon levels.
He said the parties negotiated amendments to the terms of the loan, but CPPIB decided to reject them and instead wanted the company to go into technical default. It would give Laricina 20 days to deliver a buyer in exchange for a $50-million payment on the loan. Laricina rejected that.
Larcina alleges CPPIB refused to negotiate a solution that would benefit all sides in the ensuring months, and charged that its moves were designed to "opportunistically acquire Laricina" after diluting the interests of other shareholders.
Last week, CPPIB applied to have the business placed in receivership. In the application, CPPIB's Mustafa Humayun says the lender now believes Laricina has "fundamental value-impairing challenges," that not all are related to the downturn in energy markets, and its cash on hand is eroding. The application was adjourned as Laricina was granted court protection.
"We reached the conclusion that calling our loan was the best course of action. Ultimately, we believe that this is the best step for preserving and protecting the interests of CPP's 18 million contributors and beneficiaries," it said in a statement.
A host of small, publicly traded developers have faltered owing to surging costs, project delays and, lately, dwindling oil prices, showing how oil sands require very deep pockets. Laricina found that even patient money can become impatient, and when it does, niceties quickly go by the wayside.
Jeffrey Jones