A small Alberta oil driller appears to be the first North American oil and gas upstream producer to issue bonds linked to meeting its environmental and social goals.
Tamarack Valley Energy Ltd. said Feb. 10 it closed on the sale of C$200 million of bonds due in May 2027 with a 7.25% coupon. The interest rate on the bonds is tied to the company reducing the carbon intensity of its production and hiring more Indigenous workers.
The company aims to lower the carbon intensity of its production 39% by 2025 from a 2020 baseline of 37.5 kilograms of CO2 equivalent per barrel of oil equivalent.
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Tamarack Valley told investors in January it expects to spend roughly C$260 million in 2022 to produce 45,500 barrels per day of light and heavy oils from four fields in Alberta.
While major U.S. oil and gas producer Occidental Petroleum Corp. in 2020 tied the interest rate on its revolving credit line to targets in environmental, social and governance issues, Tamarack and outside analysts said the Canadian company is the first to issue a bond linked to ESG targets.
European producers are far ahead of their North American counterparts in linking their financing to ESG targets because they face a stricter regulatory environment and a price on carbon, S&P Global Ratings' team leader for oil and gas, Tom Watters, said in an interview.
S&P Global Market Intelligence data indicates Tamarack did not have to offer a higher interest rate than its peers to sell the bonds. Tamarack's 7.5% coupon was roughly in the middle of the rates being paid by B-plus rated bonds in the past year.
In its January ESG Finance newsletter, Ratings said it analyzed $69 billion worth of U.S. green financing — green bonds, sustainability bonds and others — and most have been for renewable energy and water projects.
"More than 50% of our green transaction evaluations come from Europe, the Middle East and Africa," Ratings said in the newsletter.
A bond is a type of debt security, and "there is not a lot of appetite for a company raising new debt," Watters said. "That's been another reason why new, increased debt issuance hasn't really taken off in this space, because investors don't want it."
Sustainability-linked bonds, or SLBs, are a growing alternative to green bonds, according to Pavel Molchanov, the director of Raymond James & Associates' Energy Group.
"SLBs can be used for projects and business development that does not specifically focus on environmental improvement," Molchanov said in an email. "While SLBs broaden the sustainability issues that can be addressed with the proceeds, they also tend to have more short-term key performance indicators that act as clear targets with legally enforceable terms, giving investors more oversight over the use of proceeds."
Charles Johnston, the senior high-yield analyst at credit research firm CreditSights, said SLBs are becoming more popular with investors who are suspicious that 20- to 30-year green project bonds might be "greenwashing" by issuers. Unlike long-term targets that may allow companies to earn favorable ESG press without taking concrete steps to achieve them, SLB goals are near term and specific.
"The coupon step-up for not meeting goals isn't often onerous, but there is reputational risk associated with missing SLB targets," Johnston said in an email.
Stakeholders are no longer satisfied with aspirations and commitments to meet ESG targets, said Tisha Schuller, the former president and CEO of the Colorado Oil and Gas Association and the founder and principal of Adamantine Consulting, which helps energy companies transition to a low-carbon future.
"These stakeholders, including investors, want more transparency, more data, and more investment," Schuller said. "Serious companies are working toward delivering demonstrable ESG results."