Winners and Losers
Demand for equity financing is burning surprisingly bright, and an M&A trend is now poised to take off
ALBERTA’S ENERGY COMPANIES AND
their shareholders have endured a rough patch due to collapsing commodity prices. Oil and gas stocks have tracked this descent with the Capped Energy Index getting halved recently, while some of the more levered producers have seen much steeper losses. Interestingly, some important themes have emerged in the midst of this chaos that I think are worth keeping a close eye on, especially from an investor’s standpoint.
The magnitude of the layoffs in the oil patch is astounding, with large companies, such as Encana, reducing their head counts by over 50-percent. Unfortunately, the future isn’t rosy when looking at capital investment either, which is expected to fall by US$50 billion from 2014 to 2017, a more than 60-percent drop. Theses themes are also playing out south of the border with the number of people working in the U.S. oil and gas sector falling from 538,000 to under 444,000, according to Reuters. This is important, as when the price of oil and natural gas recovers—and it will—the sector will find itself understaffed and illequipped to react in a timely fashion.
There has been over $1 billion in equity financing raised this year-to-date by Canadian exploration and production companies, which is astounding given the state of the sector and the rapidly shrinking energy fund market that has been the usual source of capital. I am equally surprised by the strong demand coming from retail investors and institutional generalists.
In particular, Advantage Oil & Gas has raised over $100 million, Raging River Exploration has raised $108 million, RMP Energy has raised $34.5 million, Seven Generations Energy has raised $300 million, Spartan Energy has raised $96 million, Whitecap Resources has raised $110 million, Tamarack Valley Energy has raised $44 million and Tourmaline Oil has raised $281 million.
Kelt also recently came to the market with a $65-million convertible debenture that I think will set a trend among other companies looking to raise capital, given its low interest rate and less dilutive structure than an outright equity issue. As a side note, Enbridge also hit the market with a monster $2.3-billion deal that flew off the shelves due to its attractive pricing.
Perhaps it isn’t a coincidence that only the highest-quality E&Ps came to the market as they appear to be shoring up their balance sheets potentially to take advantage of the current environment by undertaking strategic land and/or corporate acquisitions.
We have not seen a lot of M&As in this downturn, with the level activity falling by roughly 70 percent in 2015 over the previous year. This isn’t unusual, as it is tough to get deals done in a weak market with distressed companies often reluctant to sell themselves thanks to entrenched management teams.
Things are starting to change a bit, though, with two larger deals to start in 2016. Suncor was able to turn its $6.6-billion hostile bid for Canadian Oil Sands into a friendly deal, and Bankers Petroleum has agreed to be acquired by affiliates of China’s Geo-Jade Petroleum for $575 million. We would expect this trend to continue especially with the recovery in oil and natural gas prices, which makes it a more conducive environment to getting deals done.
There are those that are past the point of no return already, with creditor protection filings from Laricina Energy, Parallel Energy Trust, Argent Energy Trust, and Spyglass Resources. There are clearly going to be winners and losers coming out of the ongoing downturn in the Canadian energy sector. It’s therefore important to be cognizant of the main themes and position accordingly for the recovery.