Barry Olson is the President and CEO of Toro Oil & Gas Ltd., which cancelled its credit facility with National Bank this month.
Barry Olson's relationship with National Bank of Canada goes back more than a decade through two small oil companies he started. Now, the relationship is in tatters.
This month, his Calgary-based junior energy producer, Toro Oil & Gas Ltd., cancelled its credit facility with National and he won't rush to the bank for other services in the near future either. It was the culmination of months of frustration for Mr. Olson, Toro's chief executive officer, who says he's been penalized by the financial institution despite the fact that he's run his company conservatively through the oil-price collapse.
The move followed decisions by National, the most active major-bank lender to small and mid-size oil companies, to cut its $7-million operating line of credit and scrap an $18-million facility it had in place for specific projects. For the latter, Toro was paying fees even though it did not use it.
"It really didn't cause too much of a fuss internally, but on a market optics perspective those things matter, because the market thinks you've got full access to $25-million, but indeed you've only got access to $7-million," Mr. Olson said in reference to the first cut. Toro issued stock to help shore up its balance sheet, but that $7-million credit line was cut to $4-million, and on Oct. 1, $2-million.
It all occurred after a semi-annual redetermination of the value of oil and gas reserves last spring, the likes of which saw borrowing bases slashed throughout the industry by National and other lenders. Mr. Olson doesn't mince words about National's tough medicine, saying a "long-term relationship has been tossed to the curb."
"Toro has elected to terminate our operating line of credit with National as they continue to be disruptive to our ongoing business," he said. "We would rather not pay standby fees to a bank that will not allow us to use the facility in the first place and who constantly change the rules to their benefit."
Stories like Mr. Olson's are not rare in Calgary after two years of financial pain due to the oil-price crash. Several small producers have had to go to their shareholders to explain their credit capacity shrinking after tense meetings with National. The bank had worked for years to become the go-to lender and investment banker for the small and mid-size energy segment. That part of the industry was hit quickest and hardest in the downturn, and National's energy loan book became a major source of worry.
In its second quarter, it surprised analysts and investors with a $250-million sectoral provision – as much as 10 per cent of its energy lending – to account for bad loans. Including its credit card and commercial banking divisions, the bank booked a total of $317-million in losses. (In the previous quarter, the bank's total loan-loss provision was just $63-million.) The losses were one of several factors that saw National's share price tumble 35 per cent from late 2014 to early 2016, following the drop in crude oil prices.
It is now seeking to shore up its energy business, and cut its risks, by courting larger companies with more financial wherewithal. A key step in that effort is its recent hiring of three respected banking and research professionals who come with strong ties to the industry.
At the same time, National is trying to assure oil-patch executives that it did not cut credit indiscriminately and is still open to serving the junior sector, albeit a shrinking one.
"I want to be clear about that, because that's important to me," said Yanick Blanchard, National's Montreal-based head of corporate and investment banking.
"I know there's been a lot of negative talk about that; the reality is that we will have a $250-million loss in that segment, mostly the smaller size.… So we need to reinvent ourselves because we don't see any new guys coming in with $5-million to $10-million saying, 'Okay we're going to start a company.' We don't see that.
"Our bet is that we're going to continue to be there for the smaller guy, for sure, because we're a bank that funds entrepreneurs in Quebec, Calgary, Toronto, across Canada. But if they're not showing up, we need to find another way to deploy our capital."
The bank must assuage concerns among oil-patch clients that there's a dichotomy between raising equity and corporate lending – one side of the business in search of fees while the other is reducing exposure. Another worry in downtown Calgary was that the bank was planning to exit the energy business altogether as the downturn dragged on – speculation that its CEO, Louis Vachon, put to rest in a conference call in June.
"There will be structural change to the industry, but the industry will continue to exist and we intend to continue to support the industry," he said.
Indeed, all the major banks have been careful to express their commitment to the sector, as producers and oil service providers coped with dwindling cash – and high debt levels – by auctioning off assets, slashing spending and laying off staff.
"That was kind of the mantra and National Bank was no different, especially earlier in the year when the Street was freaking out," said Meny Grauman, bank analyst at Cormark Securities Inc. "All the banks were very careful to mention that they were in the oil business for the long haul. They emphasized that they've seen cycles before and the impression you got was they learned from their mistakes. For a sector that is such a big user of investment banking services, they realize that it doesn't make sense to make enemies. You want to make sure your risk is protected, but you need these customers on the other side of this oil cycle."
"The energy sector is very important to the big investment banks," said Joe Kan, a veteran Bay Street headhunter. "At the worst of times, energy represents about a third of total capital markets revenue and at the best of times it represents closer to half."
It is in National's loan book that the energy bust hit hardest. Its top executives conceded they had failed to consider how dire conditions in the industry could get. The bank rushed to cut its exposure as crude prices sank below $30 (U.S.) a barrel from more than $100, with spring borrowing-base evaluations representing the main event. Its energy loans were slashed to $2.5-billion (Canadian) in the third quarter of this year from $3.2-billion in the first quarter. Even healthy companies were caught up in what they considered to be a wholesale cut.
Heading into discussions with National and other lenders last spring, Delphi Energy Corp. had cut debt by a third and squeezed costs from its operations. But in May, its borrowing limit was shaved to $115-million, from $132.5-million. A month later, it dropped to $85-million, even though the company had not run afoul of its debt obligations. To shore up finances, it issued $60-million in new debt at a higher cost.
The reduction came as a jolt. David Reid, Delphi's chief executive officer, had built a 23-year relationship with the bank. Suddenly the lender was playing hardball, eager to cut its exposure to an industry in the throes of a generational slump. "It's a shotgun approach," he said in an interview. "Who can do it and by how much? The more you can do and help them, the more they're going to expect out of you."
For National, the smallest of the six major Canadian financial institutions, it wasn't a matter of being tougher on customers than the other banks, but rather a function of who its customers are. The juniors are known for lean operations but have less financial heft than larger rivals such as Canadian Natural Resources Ltd. and Suncor Energy Inc.
Now, with oil markets still shaky, the bank is attempting to add more of the industry's big players to its lending and investment banking client base. Its recalibration underscores broader changes in the energy industry – not least a sharp contraction in the junior end of business. Since the oil crash began more than two years ago, 17 Canadian oil and gas companies have filed for bankruptcy, law firm Haynes & Boone LLP said in a recent report, the vast majority being small.
That has accelerated a dropoff in corporate lending and financing fees that for years helped sustain a food chain of independent and bank-led deal-makers. As recently as five years ago, banks and investors alike poured in as oil prices rebounded to triple-digit highs and panic sparked by the financial crisis subsided. The cash flowed freely, and buzzwords carried weight.
"Frankly, all you had to do was just drop a name like Cardium or Viking and they were writing cheques," said Richard Thompson, CEO of Marquee Energy Ltd., another National client, referring to two prominent Western Canadian oil formations.
The industry's debt pile grew as drillers borrowed heavily to fund an emerging style of development that harnessed new technologies, often requiring in excess of $10-million for a single well. It was a hefty price tag that left Marquee and others overextended when oil markets began to buckle in mid-2014. Marquee has sold assets, cut staff and renegotiated its downtown office lease to save cash. But, still, in August, the company saw its borrowing base slashed to $50-million – less than half what it was two years ago.
Indeed, dozens of National clients struggled to cover basic expenses, let alone make debt payments, as the downturn intensified. Mid-cap heavy-oil producer Twin Butte Energy Ltd. was pushed into receivership by the lender in August carrying about $205-million in bank debt after a proposed takeover was torpedoed by the company's bondholders. It followed numerous other small players whose assets were auctioned off after they missed debt payments.
National helped ease investor fears by reassuring them that the higher provisions would cover any future risk resulting from the bank's lending in the sector. But it also reflects its outsized role as a lender-of-choice to more vulnerable producers and their service providers. Just 46 per cent of the bank's loans to oil and gas producers were considered investment grade as of the third quarter. That compares with about 52 per cent at Bank of Nova Scotia, another lender viewed as having relatively high exposure to the sector.
Mr. Blanchard says National has winnowed its client base to 90 companies from 125. It's now targeting bigger names that have weathered the oil slump and are expecting a return to growth, he said.
In investment banking, a new team is putting the plan in gear. In August, the bank rehired a former National investment banker, Arun Chandrasekaran, from private-equity firm Stream Asset Financial Management, to lead the effort. It added Cristina Lopez, who had been an analyst at Macquarie Capital Markets Canada and vice-president of corporate development at PrairieSky Royalty Ltd., to the banking team.
National brought aboard Travis Wood, formerly with TD Securities, as analyst for large-cap energy companies. In recent weeks, Mr. Chandrasekaran has met with Calgary clients in an attempt to help patch up some strained business relationships and explain the bank's strategy in the oil patch, as has John Swendsen, the bank's vice-chairman of corporate and investment banking.
It certainly will not be a quick transition to a large-cap segment that is already well served by National's Canadian banking rivals as well as U.S. and international institutions. The energy banking business is heavily dependent on relationships within a city where most energy executives know each other, if not sit on boards together and socialize.
"Memories are long in this business," Toro's Mr. Olson said. "We would not rush back into a scenario with National should they offer it."