Terms of survival: renegotiating a business loan
Deep in debt, this once-mighty junior needs relief from its lending institution. But it won’t come easy
by Robbie Jeffrey
Volterra Oil and Gas
CEO: Bradford Goetz
2015 revenue: $10.2 million
2014 revenue: $16.6 million
Bradford Goetz* is the last person you’d expect to see flailing in the trash heap of failed juniors. Usually, the all-star of Albertan junior oil producers, who landed in Fairview with his parents when he was six, is the one lending a hand to someone in sad straits. Or at least that’s how it seems to him; his peers would preferably characterize the longtime oilman as a vulture circling on high. From the early 1990s on, the brash Goetz led a host of takeovers under the auspice of his exploration company, Siena Energy, which was mostly active around the oil plays near Lloydminster and Macklin. Goetz earned his standing as a calculating, farsighted executive who could wrangle deals from oil-and-gas careerists. “The owners of these companies hated to sell their business at such a discount,” he says, declining to name his sorrowful vendors of days long gone. “But hey, it was a lot better than not selling it at all, right?”
Years after Siena hits its stride, however, a major industry player made him an offer for Siena that he couldn’t refuse, and he got the taste for selling. With some of the $100-million proceeds he bought two companies within five years and enacted cost-cutting measures that seemed draconian until shareholders saw the balance sheets. “When I bought Living Sky Energy for $10 million, it was just enough to stave off bankruptcy for them,” he says, referencing a 2008 deal. “But those assets had paid for themselves by the end of the financial crisis. I knew they would.” Since then, his modus operandi has been to buy overleveraged companies, fine-tune them to a state of relative profitability, and then discard them for robust returns. Goetz’s prowess has caused industry investors to follow his trail like a pack of scent hounds.
There’s just one problem: now he’s the overleveraged one.
That brings us to Volterra Oil and Gas, Goetz’s most recent – and longest-lasting – producer. Like Siena, Volterra found success drilling around the oil-rich areas near the Alberta-Saskatchewan border. But it also has land holdings in the southern Alberta fairway near the Bakken shale formation, which is blotted across southern Saskatchewan, Montana and, predominantly, North Dakota. In predictable fashion, Goetz had ratcheted up Volterra’s bottom line over the course of several years. When he bought it in 2011, it had assets valued at less than $15 million; by September 2014, that amount had nearly doubled. Some of the investments were deemed risky, which meant that with dampened enthusiasm Goetz injected some of his own money to fund new projects he had faith in. It paid off – soon, Volterra was producing more than 1,500 barrels of oil per day.
But by the end of that year, oil prices were starting to tank. The company’s debt-to-asset ratio began to reverse itself. By mid-2015, Volterra had almost $20 million in liabilities and its 2015 assets shrunk by $5 million. Months later, it took out a production loan for $7.8 million. That, in the end, would prove to be a potentially fatal move. Because by the time the price of oil had made some modest gains, it was too late. Volterra wrote down a $5-million loss in 2015 and broke the capital covenant for its $7.8-million loan, and though the bank granted Volterra a temporary waiver, Goetz – a creditor – and Volterra now need a plan to pay it back, and fast.
Or is there another way?
Wellington Holbrook is executive vice-president, business and agriculture, at ATB Financial. He has more than 20 years of experience in commercial debt. He says that in a period of extended downturn such as this, it’s increasingly common for small- and medium-sized businesses – especially junior oil and gas producers like Volterra – to renegotiate the terms of their loans with lending institutions. And the banks are all too happy to oblige, because their financial health rests, in part, on the success of these companies. “We’re all in, we have to be,” he says of ATB Financial and the province’s energy sector. “This is our market, this is our province, this is the only place we have to do business. If we ever gave up on the energy industry, we’d be giving up on our own business!”
Not that help comes easy. Holbrook says renegotiating “is an art as much as a science.” But even art has rules. The company needs to demonstrate to its lender that it will return the money in a reasonable fashion. He uses a few different guidelines to judge this. First, does the company have any capacity to generate revenue from its assets? And how long will it be before the company can provide the bank with some kind of comfort that the value of those assets will rebound? But most importantly, “How committed is management to making the tough decisions that are often necessary to get the company back on solid footing?” Holbrook asks. “That’s the biggest piece that financial institutions are looking for.” Management needs to present a plan and act on it; reputation is, perhaps, the most important type of credit. (Goetz’s prominence in the oil and gas sector will surely help him.) And putting off commitments grinds that reputation down, because it clouds the transparency that ought to exist between the company and the lender floating it.
A bit of goodwill never hurts, either. A business could, for example, sell some redundant assets that were part of a previous strategy. Volterra, in fact, has some assets in southern Alberta that fit the bill. Goetz is holding onto them in the hopes that they’ll be productive once the recovery gets into full swing. But Holbrook says now might be the time to get rid of them. “As a note of goodwill, [Volterra] could sell those assets, take some of that capital and give it back to the financial institution, because they understand that [the bank’s] debt is a priority,” he suggests. “It’s often acts of good faith of that nature that buy a lot of good faith. And the banks are often willing to extend credit lines, waive capital requirements or other types of conditions on whatever financing is in place, to give the company breathing room.”
It ultimately comes down to deal making, which is music to Goetz’s ears, master negotiator he is. “Can you make a deal where both parties feel they have the opportunity to come out of it successfully? If you can, you’re going to win,” Holbrook says. The crash in crude prices often feels like a war of attrition. It’s a relief to Goetz to know it can be won.
Follow Volterra throughout Management Intel as it …
- Examines strategic alternatives to increase shareholder value
- Decides how to maximize new capital
- Prepares for the next oil boom (fingers crossed)