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Archive for March, 2015

Oilpatch firms sell stock to shore up finances, but who’s buying?

CALGARY – Energy firms have been looking to raise billions in financing by selling big chunks of their own stock – betting that investors smell a buying opportunity.

There’s been a flurry of equity offerings in recent weeks as the oilpatch looks for ways to cope with low oil prices.

Over the past month alone, Encana Corp. (TSX:ECA), Cenovus Energy Inc. (TSX:CVE) and Baytex Energy Corp. (TSX:BTE) have collectively announced about $3.3 billion in “bought deals.” All three have said they’d use the funds for debt repayment.

In a bought deal, banks normally team up to buy a block of shares from a company, which they are then responsible for selling to investors. The banks usually snap up those shares at a discount, since they’re are on the hook if the offering is a dud. The hefty sums earned in commissions help offset the risks the banks take on.

“They have to be reasonably sure that the deal can get done,” said Les Stelmach, portfolio manager at Franklin Bissett Investment Management.

The fact that the stock has been moving reasonably well sends an encouraging signal.

“Given the weakness in commodity prices, I suppose that’s reassuring that people are interested and they want to put money to work in the sector.”

Encana and Cenovus’ deals have closed, with Baytex’s expected to wrap up early next month.

“The view they’re expressing is that this is the floor. This is the lowest it’s going to go,” said John Stephenson, president and CEO of Stephenson & Co.

Stephenson doesn’t necessarily share that world view – he thinks it will likely get worse in the oilpatch before it gets better.

“If you want to have energy in your portfolio, you can get these same companies still on sale – maybe even at a better discount – in four months time and you’ll have had four months less heartache.”

Sonny Mottahed, CEO and managing partner at Black Spruce Merchant Capital, said “best in class” companies can pull off deals like these in a downturn.

“These businesses have so much underlying value that, unless you have a true doomsday scenario of what the world looks like, it’s probably a decent entry point, particularly for institutions,” he said.

Bought deals may cause some existing shareholders to grumble about their holdings being diluted.

“When you issue a whole bunch of shares at low prices, you’re not doing your long-term shareholders a big favour,” said Stelmach.

He expects there’s a “big debate” in downtown Calgary boardrooms about whether issuing equity is the best way to go, or if other measures – like a dividend cut, capital spending reduction or asset sales – are better. Many firms have been taking a combination of those steps.

Aston Hill Financial portfolio manager John Kim agrees that some existing shareholders might not be “entirely happy” when equity is issued.

“But you accept the fact that it had to be done for the long-term health of the company. You just accept it,” Kim said.

Portfolio managers at Aston Hill have snapped up Encana, Baytex and Cenovus lately, said Kim. He expects more oilpatch names will tap the markets – opportunities that he’ll weigh on a “case-by-case” basis.

“I do think that we’ll probably hit bottom in oil some time this year. It just really comes down to what is the turnaround? Do we get a snap back like we did in 2009 in terms of the oil price or is it a much more muted, gradual recovery in the oil price,” he said.

“So that’s where we’re being fairly selective and going back into the energy market in a much more measured way versus saying ‘this is the bottom’ and kind of piling in.”

Lauren Krugel – Canadian Press

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Encana Corp raising up to $1.25 billion in bought deal to cushion blow of low oil and gas prices

March 4, 2015 CALGARY – Encana Corp. said Wednesday it would raise $1.25 billion in a bought deal offering to strengthen its balance sheet, contributing to a flurry of equity financings in the oil patch amid depressed oil prices and opportunities to purchase distressed assets at bargain prices.

The oil and gas company’s offering comes on the heels of oil sands producer Cenovus Energy Inc. closing a $1.5-billion bought deal Tuesday that struggled to find buyers. Cenovus said it needed the capital to fund its capital program.

Also on Wednesday, Secure Energy Services Inc. announced a $140-million bought deal to fund its programs and potential acquisitions, while ARC Resources Ltd. raised $350-million in a bought deal in January to reduce debt, increase working capital and fund its programs.

The equity offerings come as oil prices bounce around US$50 a barrel, squeezing cash flows but also providing opportunities for acquisitions at what could be the low point in the oil price cycle.

The equity offerings have more to do with companies wanting to strengthen their cash positions in uncertain times than demand for their equity, said Sonny Mottahed, CEO and managing partner of Black Spruce Merchant Capital in Calgary.

“In the case of Encana, they were probably running far too low on cash for a company their size,” he said, though the offering could also represent “a bit of a war chest to allow them to do acquisitions.”

In a statement, Encana said it would use the proceeds to provide additional financial flexibility by reducing its long-term debt and interest expense.

The Calgary-based oil and gas producer said it would sell 85,616,500 common shares at $14.60 a share in a deal led by RBC Capital Markets, Credit Suisse and Scotiabank that will be re-sold to the market.

The company granted the underwriters an option to purchase up to 12,842,475 million additional shares that could increase proceeds to about $1.44 billion.

The shares are being sold at a discount to the market price. Encana shares closed at $15.20 in Toronto Wednesday, down 47¢ or 3%.

Encana CEO Doug Suttles said last week that he was ready to do more deals, even as the company cut capital spending by a further US$700-million in 2015, to about US$2-billion to US$2.2-billion, to cope with low oil prices.

“In my experience and knowledge of the history of the industry, the low points in the commodity cycles are usually the most exciting times,” he said. “And I can tell you we are prepared to respond if the right opportunities come along.”

At the time, he said the company had plenty of cash and liquidity on hand to fund tactical or even strategic moves.

In a research report Wednesday, consultancy Wood Mackenzie predicted Brent oil prices would strengthen to US$68 a barrel by December and average US$71 a barrel in 2017.

Encana said it would use the proceeds and cash on hand to redeem all of its US$700 million aggregate principal amount of 5.90% Notes due 2017 and all of its $750 million aggregate principal amount of 5.80% Medium Term Notes (Series 4) due in 2018.

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