Southern Pacific faces the wall
Southern Pacific Resources announced yesterday that it failed to make an interest payment on it's convertible debenture.The payment was due on December31,2014 and was for $5.2 million.This was likely a six month payment on their indenture of $172.5 million.The company has a 30 day cure period on this payment.The company announced in it's release that this was due to the drop in oil prices and because production has not come back from earlier levels.
Production levels
Southern Pacific has it's yearend on June 30;it announced on June 30,2014 that it had average production of 4,173 barrels per day for 2014.This was down from 4271 barrels per day in March of the same year.In November it had production of only 3,350 barrels per day and it announced that it had put new inflow control devices(ICDs) in October and expected increased production after 4 to 6 weeks.In this release they announced that they did not have the increased production in Decmber that they had expected in October.Nevertheless production did rise from 3,350 barrels per day in November to 3,425 barrels per day in December-an increase of about 3%.This does not solve their cash flow problems because the price of oil has fallen to record lows.A 3% increase in production cannot offset a 40% decrease in oil prices.
Short term pain for long term gain
STP now has 30 days to cure this payment problem.Their debt matures in June 30,2016.Presumably their next payment is due on June 30,2015.Royal Bank can give them short term support and tell them to make a $10.4 millon payment in June or push the payment back to maturity as a balloon payment on maturity.STP had just raised $100 million in a first lien term loan in September and there must be a little room left on this facility for working capital.It is unlikely that RBC will pull the plug on a $177 million liability if they see any increase in production or oil prices.Probability says that oil prices should start to move back towards historical trends by June 30,2015 and certainly by June30, 2016 when their debt instrument matures.But RBC may insist on seeing production from these new ICDs come onstream by as early as June 30, 2015 or they could appoint an interim operator to get STP back on the right path.The next few monthly operational updates will be quite important to the bank and to Southern Pacific.
Production levels
Southern Pacific has it's yearend on June 30;it announced on June 30,2014 that it had average production of 4,173 barrels per day for 2014.This was down from 4271 barrels per day in March of the same year.In November it had production of only 3,350 barrels per day and it announced that it had put new inflow control devices(ICDs) in October and expected increased production after 4 to 6 weeks.In this release they announced that they did not have the increased production in Decmber that they had expected in October.Nevertheless production did rise from 3,350 barrels per day in November to 3,425 barrels per day in December-an increase of about 3%.This does not solve their cash flow problems because the price of oil has fallen to record lows.A 3% increase in production cannot offset a 40% decrease in oil prices.
Short term pain for long term gain
STP now has 30 days to cure this payment problem.Their debt matures in June 30,2016.Presumably their next payment is due on June 30,2015.Royal Bank can give them short term support and tell them to make a $10.4 millon payment in June or push the payment back to maturity as a balloon payment on maturity.STP had just raised $100 million in a first lien term loan in September and there must be a little room left on this facility for working capital.It is unlikely that RBC will pull the plug on a $177 million liability if they see any increase in production or oil prices.Probability says that oil prices should start to move back towards historical trends by June 30,2015 and certainly by June30, 2016 when their debt instrument matures.But RBC may insist on seeing production from these new ICDs come onstream by as early as June 30, 2015 or they could appoint an interim operator to get STP back on the right path.The next few monthly operational updates will be quite important to the bank and to Southern Pacific.
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