OPTI Canada Inc. (OPTI) has entered into a definitive agreement to sell a 15% working interest in all its joint venture assets to Nexen Inc. for $735 million. Following the transaction OPTI will have a 35% working interest in all the joint venture assets, including Phase 1 of the Long Lake Project (the Project), future phase reserves and resources, and future phases of development. Nexen will have a 65% working interest and will be the operator of both the Steam Assisted Gravity Drainage (SAGD) and Upgrader facilities for Phase 1 and future phases.
It is anticipated that after a transition period Nexen will make employment offers to OPTI's operating and Project staff. Closing is expected to occur in late January 2009 and is subject to approval from a majority of OPTI's bank lenders in its $500 million revolving credit facility and customary closing conditions, including regulatory approvals.
"This is the conclusion of our previously announced process to review 2009 financing options," said Sid Dykstra, President and Chief Executive Officer. "OPTI is pleased to announce this transaction with our current partner and, importantly, to retain a significant working interest in Phase 1 as well as in all future phases of development. These funds, combined with reduced capital expenditures, position the Company to withstand lower commodity prices and the significant uncertainty in current financial markets while preserving the opportunity for shareholders to benefit from future development of OPTI's significant resource base."
2009 Capital Expenditure Plans
OPTI's capital expenditure plans for 2009 will be significantly reduced as a result of this transaction to approximately $114 million for our new working interest share. Approximately $71 million of 2009 capital expenditures relate to OPTI's share of costs for Long Lake Phase 1. Phase 1 expenditures will be primarily directed towards sustaining capital for the SAGD operation, including the drilling of the first sustaining well pad, sustaining capital for the Upgrader, and costs associated with start-up of the SAGD debottlenecking project. As previously announced, final construction completion of the ash processing unit has been deferred to 2010 in order to avoid interference with initial Upgrader operations and to reduce 2009 capital expenditures.
In light of the current global economic situation and reduced commodity prices, the joint venture partners have agreed to reduce near term capital expenditures on future phases of development. OPTI anticipates remaining capital expenditures of approximately $43 million in 2009 primarily to advance Phase 2 planning, drill delineation wells in the Phase 2 area to define future horizontal well locations, and to advance regulatory work for the Phase 3 upgrader. The partners have also agreed that Phase 2 will not be presented for approval prior to mid-2010.
Operational Update
Based on the volume of steam OPTI have been able to inject, reservoir performance has been consistent with expectations. Bitumen production volumes averaged 15,100 bbl/d in the month of October and reached as high as over 20,000 bbl/d in the first half of November. However, more recently steam capacity has been limited as OPTI work through the transition from the use of natural gas to a combination of natural gas and synthesis gas (syngas) and continue to optimize the water treatment process. Lower steam volumes affect operating pressures which consequently leads to flat or declining production volumes. In addition, one SAGD well pad is currently shut in due to a damaged steam line with repairs expected to be completed in late December. As a result of these issues, average volumes for November were 16,100 bbl/d. On December 7th OPTI experienced a plant wide power outage that impacted operations during a period of cold weather. December production is anticipated to be lower than November volumes as all the wells were shut in after the power outage and are in the process of being brought back on stream.
Prior to the power outage the Upgrader complex was ready to produce the initial barrels of PSC(TM) from the hydrocracker. Two gasifier trains have been operating producing syngas, which was sweetened and used in the SAGD facility. Hydrogen has been produced and used in the preparation of the hydrocracker. The sulphur plant produced sulphur and the air separation plant has passed the majority of its performance tests. Re-starting the Upgrader is underway with first PSC(TM) now expected by the end of December. Based on industry experience, it is anticipated that the Upgrader will ramp up to full design rates of approximately 58,500 bbl/d of high quality, 39 degree API
PSC(TM) and other products in 12 to 18 months. The Project is expected to operate at this rate without production decline for approximately 40 years.
Financial Update
As a result of lower than forecast SAGD production volumes, delays in start-up of the Upgrader and dramatically reduced commodity prices, the Company expects operating cash flow in the first quarter of 2009 to be lower than previously assumed. As a result, in the absence of completing this transaction or another transaction with significant cash proceeds and the associated amendments to its financing covenants, the Company would expect to be unable to meet its financial covenant ratio with respect to first lien debt to earnings before interest, taxes and depreciation (EBITDA) commencing in the first quarter of 2009. In addition, assuming continued reduced cash flows from these operational factors, then in the absence of this transaction, OPTI expect a significant increase in the risk that the Company will be unable to fund the maturity of its $150 million revolving credit facility and its US$71 million high yield interest payment in June 2009.
The transaction, if completed as proposed, would provide additional liquidity and significantly mitigate the likelihood of an impairment of covenants included in the Company's revolving credit facilities. A condition of closing of the transaction is the requirement to gain the consent of the majority of its lenders in the Company's $500 million revolving credit facility. This consent includes: approval of the sale; and amendment to the company's financial maintenance covenants which are senior debt to EBITDA and debt to capitalization ratios. In the absence of an amendment to these financial maintenance covenants, the Company would be challenged to meet its debt to capitalization ratio after consideration of the expected book capitalization adjustment arising from the transaction.
A primary use of proceeds is expected to be to reduce the Company's debt outstanding under its revolving credit facilities including repayment and cancellation in full of the Company's $150 million revolving credit facility, a partial repayment of amounts owing on the Company's $500 million revolving credit facility, and a permanent reduction of that facility to $350 million.
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