CALGARY _ A private Calgary oilsands producer is selling a portion of future production to raise money to expand its northern Alberta project, a funding method gaining traction in a sector having difficulty attracting investors.
Osum Oil Sands Corp. said Monday it has approved a 3,000-barrel-per-day expansion of its Orion project to take output to over 12,000 barrels per day by mid-2019.
The company said it will pay for the expansion with part of about $92.5 million in cash it has raised by selling to an unnamed buyer a four per cent share or royalty in all future production from Orion.
Similar royalty sales have been used recently by publicly traded Calgary-based oilsands producers BlackPearl Resources Inc. (TSX:PXX), Pengrowth Energy Corp. (TSX:PGF) and Athabasca Oil Corp. (TSX: ATH) to raise growth capital.
“It’s a substitute for issuing equity which, at these (share) prices for many issuers, would be highly dilutive for their shareholder base, even when considering the recent bounce off of the bottom,” said AltaCorp Capital oilsands analyst Nick Lupick.
“It is definitely being pitched to companies as an alternative source of financing other than debt and equity.”
Osum CEO Steve Spence says the royalty sale will allow the company to accelerate its staged expansion. Eventually, it aims to reach its regulator-approved capacity of 20,000 barrels per day despite current low oil prices, hovering around $50 a barrel.
“We looked at all the options and, in the current business environment, this was the best one available to us,” he said.
“It’s a way of getting some funds to enable us to accelerate our growth strategy … in a relatively low oil price environment.”
The company has been financed so far through private equity, sovereign wealth and pension funds, as well as private individuals, Spence said.
It used term debt to buy Orion, which uses steam to produce bitumen from wells, in 2014 from Royal Dutch Shell for $325 million, he added.
Earlier this year, as part of an exodus of foreign companies seeking better returns elsewhere, Shell sold most of its oilsands mining assets to Calgary-based Canadian Natural Resources (TSX:CNQ).
Other foreign companies that have reduced or divested oilsands assets include Norway’s Statoil and Houston-based ConocoPhillips and Marathon Oil.