Bottomless Pit
Korea National Oil Corporation (KNOC) has decided to provide 500 billion won (US$457.54 million) worth of additional payment guarantee to Harvest, a Canada-based resources developer, including oil, which is in a liquidity crisis. Market experts point out that the KNOC is facing a growing a burden as the company has kept making an investment, like a bottomless pit, after acquiring cash-strapped Harvest in 2009.
According to the KNOC on December 10, Harvest issued a new bond worth US$200 million (218.58 billion won) earlier last month. The KNOC stood surety for Harvest when Harvest fails to pay back its principal or interest rates. This is because Harvest cannot take out a loan without guarantees as it has a Moody's rating of Caa1- and a S&P rating of CCC+ that are unqualified for investments.
The KNOC said the reason of new bond issuance is to secure operational funds for drilling.
According to the data of People's Party lawmaker Lee Chan-yeol from the National Assembly's Trade, Industry, Energy, SMEs and Startups Committee from the KNOC, Harvest issued US$285 million (311.25 billion won) worth of bonds in September. The bonds, which were the full payment guaranteed by the KNOC, were used to repay US$282.5 million (308.6 billion won) worth of unsecured bonds which had a maturity date of October 1. The additional amount of loans guaranteed by the KNOC this year is US$485 million (529.72 billion won) in total.
With the issuance of new bonds worth US$200 million (218.58 billion won), the total amount of Harvest’s debts increased from US$1.8 billion (1.97 trillion won) to US$2 billion (2.18 trillion won). All the Harvest’s loans worth 2.18 trillion won at the current exchange rate were guaranteed by the KNOC.
The problem is that Harvest cannot pay back its debts on its own. Harvest recorded a cumulative operating loss of CA$95.5 million (US$74.26 million or 81 billion won) from the first to third quarter this year. The KNOC expects to pay back US$630 million (687.39 billion won) worth of Harvest’s debts to be matured in May next year with its guarantees. According to the KNOC’s outlooks for Harvest’s medium to long-term financial conditions, Harvest’s net cash flows will be negative in the next three years – minus CA$205 million (US$159.45 million or 174.04 billion won) in 2018, minus CA$144 million (US$112 million or 122.25 billion won) in 2019 and minus CA$65 million (US$50.56 million or 55.18 billion won) in 2020, and then will become positive with CA$4 million (US$3.11 million or 3.4 billion won) in 2021.
Therefore, industry sources are also raising questions whether it is desirable to continuously provide financial support to Harvest at the board meeting. According to the KNOC’s 475th board reports in July, a board member said, “We should be able to collect guarantees later at the end but there is a slim chance in this business.” However, Kim Jung-rae, then president of the KNOC who submitted a resignation in October, said, “When the current price of oil remains at the same in the next five years, there is no hope in a way. It is better to help keep Harvest afloat, rather than reorganization, including liquidation and sale, and wait for an opportunity in order to cut KNOC’s losses.”