Energy service company Sovereign Oilfield Group has plunged into further financial turmoil, it emerged yesterday.
The Aberdeen-based firm said it had breached a second-quarter banking covenant and reopened talks with a consortium of lenders.
Sovereign, which earlier this year struck an agreement with its lenders to freeze all outstanding defaults and debt repayments until May 31, 2010, added it was confident of a successful outcome to its problems.
A statement from the firm said it had suffered the double blow of payment delays at its fabrication arm and continued losses at its drilling division, which consists of Serco, Maxwell Downhole Technology and RDT Precision Engineers.
In addition to a relaxation of debt-repayment terms, the restructured support deal agreed in May included a reduction in the cost of finance through lower interest-rate margins and a revised covenant package.
“The board considered that these measures alleviated the groups short to medium-term funding concerns,” Sovereign said yesterday. The group has sold some of its subsidiaries during the past 15 months, in line with a strategy to focus on fabrication.
Disposals include Diamant Drilling Services, Vertec Engineering, the offshore-cabin rental business of Labtech, Prodrill Engineering, four properties and some of the assets of oilfield fishing and repair subsidiary, Sovereign Fishing and Remedial Services.
In total, £13million was raised from these deals, which the firm said had been used to reduce debt facilities with its lenders.
It added: “The group continues to implement cost-reduction strategies and the disposals of the drilling business, and the directors continue to focus on the core areas with the greatest opportunities for growth.”
Sovereign also said its fabrication division had continued to trade profitably and generate positive cash flow under continuing difficult market conditions.
The firm revealed however, that some fabrication customers had delayed payments, because of their own “capital constraints”.
Sovereign added: “This in turn has led to a reduction of the short-term working-capital facilities supporting the group.”
In September, Sovereign said pre-tax losses had widened to £9.1million during the year to March 31. This was compared with a deficit of £3.9million the year before, however, the group was confident of an improved performance in the current year thanks to disposals, reduced overheads, lower borrowing costs and a recovery in oil prices.
There has also been a series of boardroom changes at Sovereign this year as it has battled to reduce debt which stood at £30.7million at the end of September 2008.