Tuesday, Sept. 9, 2014
Increasing market appetite for Canadian energy stories is fuelling anticipation of more initial public offerings.
Junior companies that grew with private funds are considering making the leap to newly receptive public equity markets.
Larger companies are seeing opportunity to build value by spinning off assets getting little market recognition into new, publicly traded entities. Management teams are regrouping and looking for ways to get back in the game.
Seven Generations Energy Ltd., Teine Energy Ltd., Petrus Resources Ltd., are among the companies being talked about as potential IPO candidates, following this year’s going-public successes of Cardinal Energy Ltd., Journey Energy Inc., Northern Blizzard Resources Inc.
Oil majors such as Canadian Natural Resources Ltd. and Cenovus Energy Inc. are considering taking advantage of pent-up demand by spinning off their royalty-generating lands, after Encana Corp. blazed the trail this week by putting its royalty lands and IPOing PrairieSky Royalty Ltd., and then selling its remaining interest for a rich $2.6-billion.
The IPO talk is another phase of the sector’s rebound, which has also seen lots of interest from private U.S. capital as well as hedge funds. Investors have returned with the easing of pipeline bottlenecks and with firmer oil and gas prices.
But is the oilpatch getting saturated with capital, particularly with oil prices looking weak again — or does the IPO story have legs?
Views are mixed.
“I don’t think this is a top-of-market type phenomenon,” said Terry Shaunessy, president and portfolio manager of Shaunessy Investment Counsel in Calgary.
He welcomes the arrival of new names in Canadian resources, where the number of stocks has dwindled.
Many big names like Nexen Inc. and PetroCanada are no longer available to invest in because of acquisitions. Junior ranks thinned out when investment dried up.
“I think you have another couple of years of good markets to go,” said Mr. Shaunessy, who manages money for wealthy individuals and First Nations trusts. He sees the weakness in oil prices as a temporary reflection of the strong U.S. dollar that will be rectified by stronger global economic growth in the next 12 to 18 months.
Kevin Adair, president and CEO of Petrus, said his company is looking at its options after announcing Tuesday it is increasing the size of a private placement to up to $155-million from $110-million because of strong demand.
Petrus raised the money to fund the takeovers Arriva Energy Inc. and Ravenwood Energy Corp., and to acquire assets in the Ferrier area. The transactions, announced last week, are expected to boost its production to about 10,000 barrels of oil equivalent a day and expand its drilling inventory.
“I don’t think the market is oversaturated,” Mr. Adair said. “Capital has been tight and there has been rationalization. What we are seeing now is a re-alignment” as funds flow back into the Canadian energy space.
Sonny Mottahed, CEO and managing partner of Black Spruce Merchant Capital in Calgary, said there are five to 15 new management teams looking to get back into the game by recapitalizating existing companies.
“I am not suggesting that all of these deals will get done,” he said. “The investor appetite has continued to be selective, even through an active market for energy financings. They have gravitated to known names. It hasn’t been a complete free-for all, and that is going to continue.”
Paul Vaillancourt, senior managing director for Western Canada at Fiera Capital Corp., expects a “frothy” fourth quarter as IPOs, mergers and acquisitions, and divestitures pick up speed.
He believes some of the market activity makes a lot of sense, but some of it looks like “financial engineering” that could prove to be costly for investors jumping in late in the game.
“The oilpatch has certainly awoken from its slumber in 2014,” Mr. Vaillancourt said.
But “I think we are closer to the end of the cycle than the beginning … because we are closer to the end of ultra low rates than normalized rate. The best place to be is still equities, but as rates go up, the returns will not be there in some of these frothy sectors and investors chasing returns might get caught.”
Still, it’s encouraging that after years of scouring the world, particularly China, for capital, with poor results, Canadian energy companies are bouncing back, staying independent, and re-connecting with their natural backers — investors who get the market, and who are able to share in their successes, if and when they come.