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“Names like Southern Pacific, we call them hope trades — we don’t like to fund dreams,” Jie Liu, head of credit at Sentry Select Capital, said by phone from Toronto Aug. 22.

Liu said he sold the bonds within months of buying them in January 2013. “At the very beginning we were actually involved. Then when we took a second look at the company we just don’t believe the story presented to us.”

Southern Pacific’s case highlights the risks posed by bonds from oil-sands companies that borrowed in the early stages of development to foot escalating project costs. Investment in the oil sands from China has cooled amid limits on purchases by state-owned enterprises and souring bets.

Names like Southern Pacific, we call them hope trades — we don’t like to fund dreams

Bidders Sought

Byron Lutes, Southern Pacific’s chief executive officer, said analysts’ cash-burn projections assume no improvement in production. Inflow control devices being installed over the next eight weeks will hasten the melting of bitumen through steam and cut losses at its main McKay project, Lutes said. He said he’s not discussing a debt restructuring with creditors.

“Our plan is to be cash-flow positive by the end of the year in terms of that property,” Lutes said by phone from Calgary Aug. 22. “We understand that things are going to be tight for a while. We’re not out there looking at a debt solution today. That would be a downside scenario.”

No suitable bidders emerged for Southern Pacific eight months after it hired Royal Bank of Canada to find a buyer for some or all of the company. The explorer said Aug. 21 that none of the proposals it received were acceptable.