Will Oilexco's New Bridge Financing Be Enough to Ensure Survival?

Oilexco Inc.'s (OILXF.PK) new bridge financing buys the beleaguered North Sea E&P some valuable time but will it be enough to save the company from closing its doors?

That's the question making the rounds on the Street these days, and for CIBC analyst Robert Paré, it's not an easy one to answer.

Mr. Paré said in a note to clients:

We continue to believe that Oilexco has a number of viable strategic alternatives under consideration, including key asset sales, an outright corporate sale and (less so) private debt/equity interests. [But,] we believe there is a risk that Oilexco may not be successful in pursuit of its financing options or strategic alternatives and may not be able to successfully extricate itself from its current situation.

Mr. Paré left his "sector underperformer" rating and C$3 price target unchanged. Shares in Oilexco, which fell more than 40% on Thursday, continued to fall Friday, losing another 27% to C$0.83 in value in morning trading in Toronto.

The C$47.5-million bridge loan that Oilexco received from the company’s banking syndicate, led by The Royal Bank of Scotland (RBS), appears to give the company enough cash to continue operations until maturity of the loan on January 31, 2009. Mr. Paré said the the cost of the loan is pricey, and as a result indicates a larger deal is probably in the works.

He noted cash fees payable on the loan are between C$5-million and C$37.5-million and premised on the repayment of approximately C$700 million of bank debt. As well, equity success fees payable on the bridge loan upon the sale or recapitalization of the company amount to 24.9% of the common shares of Oilexco.

"We believe the term of the bridge, cash costs and the magnitude of the equity success fee imply a larger strategic deal before January 31, 2009," the analyst wrote.

Given an enterprise value of approximately C$1.2-billion, Mr. Paré said the number of suitors interested in a takeout of Oilexco, remains limited. Among his frontrunners is UK-based BG Group, who currently a have a working interest partnership with Oilexco.

Scotia Capital analyst Gavin Wylie also weighed in on the question of Oilexco's future, telling clients the bridge financing deal

signals the banking syndicate is likely anticipating a significant cash inflow before the end of January that could be realized by way of selling all or part of the company - takeover, private equity deal, or asset sale.

He maintained his "sector underperform" rating and lowered his one-year target from C$5.50 to C$3 per share.