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    Saturday, November 08, 2008


    Opti Canada (OPC

    I've written extensively about Canadian Oil Sands Trust since 2005. I've recently looked into Opti Canada. An oil sands company about to start commerical production with a somewhat modified, cheaper, process. OPC ( is trading at CAD $2.54 and is almost certainly worth CAD $10 +, potentially even closer to $20 over the longer term as they have a very long reserve life and a cheap cost of production.

    The problem is debt!

    They CAN run out of cash and/ or they can violate covenants on their debt. S&P announced today that Opti was placed on CreditWatch with negative implications. There is a "very real risk of violating its covenants on its revolving credit facilities should there be start-up problems with the upgrader or bitumen production does not ramp up to expected levels in first-quarter 2009,"

    It is important to understand that the risk of violating convenants doesn't mean that they ran out of cash. They can still have cash available but their $500M credit line could be withdrawn.

    It's very likely that there will be problems getting the plan to commercial production, we just don't know if they'll be sufficient to violate covenants. I can't even find a good reference to what all the convenants are. I've been able to find that there is a covenant relating to debt to equity (though not calcuated on a GAAP basis) and I've also found that they need to declare they have sufficient cash to complete the project before drawing down any additional cash. Furthermore their $100M short term revolving credit line expires in June 09 and will need to be refinanced or extended.

    Anyone buying this needs to understand that you have a chance to make a lot of upside and a chance to lose all you investment. Compare that with a Canadian oil sands trust or Suncor; you have a chance to make 3+ upside and no (almost no) chance of losing it all.

    I've bought a little OPTI but without detailed disclosure on the covenants you're flying blind. The Notes are selling at 68c on the dollar or a 17% yield to maturity.
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    Disclaimer and Disclosure Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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