A SIGN OF THE TIMES
Bank sector changing
When FirstEnergy Capital officially opened its office on the Tuesday following a long weekend in September 1993, oil prices began to fall — and kept on falling.
“The high point of the previous cycle occurred on the day we opened up our office,” says Jim Davidson, the executive director of FirstEnergy, a Calgary-based boutique investment bank that on Thursday announced plans to merge with GMP Capital. “From that point forward the energy market went down for probably 18 months. So our timing could have been better.”
Davidson, alongside his founding partners Murray Edwards, Brett Wilson and Richard Grafton, launched FirstEnergy at a time when big national and multinational banks had been rapidly snapping up small brokerages. Dominion Securities Corporation was swallowed by Royal Bank of Canada, and Nesbitt, Thomson and Company was purchased by Bank of Montreal, among other acquisitions.
The four saw an opening in the market within the highly capitalintensive energy sector and, as commodity prices began their sharp upward climb in the late ’90s, the 20-person shop eventually grew to become a staple of Calgary’s energy finance ecosystem.
Over the years energy brokerages like FirstEnergy, as well as its main Calgary-based competitor Peters & Co. Limited, developed reputations as leaner, nimbler and more creative alternatives to the big banks. They are particularly useful for small-cap oil and gas companies, which often depend on equity issuances rather than debt to raise cash.
In a news release Friday, the company assured its clients that its fundamental role won’t change under the merger with GMP, an independent Toronto-based firm, saying it will “run the energy business in virtually the same manner we have operated for over 20 years.” It will now operate under the name GMP FirstEnergy, where Davidson will be deputy chairman.
The deal comes at a time when the changing fundamentals of energy finance are putting strain on boutique firms.
“You used to be able to, in 1993, start a company with $5-$10 million after the seed capital round,” Davidson says. “Now, because of the costs of drilling have increased dramatically, a lot of companies are starting with $50 million.”
The merger will give FirstEner- gy a much larger capital position, which Davidson says will allow the company to be more competitive with multinational banks that occupy a growing portion of the market.
FirstEnergy was among the first companies to issue bought-deal financings to its clients in the ’90s, a process by which the investment bank buys the entirety of an equity issuance at a discount, then attempts to sell shares back to investors at a premium.
“A lot of boutiques just weren’t properly capitalized to allow themselves to be aggressive with the bought- deal structure. We were properly capitalized, so we could compete in that space very aggressively.”
FirstEnergy’s deal flow suffered amid the worst oil rout in recent memory, but the company nonetheless managed to partake in a number of bought deals in 2016. It was part of a syndicate that oversaw the $4.4 billion TransCanada deal that was the largest in Canadian history when it closed in April.
In the first seven months of 2016 the company participated in 42 equity financings and private placements, primarily for small- or medium-cap oil and gas companies.
Energy brokerages are likely to continue to face challenges, Davidson says, in a sector that is increasingly capital-intensive.
However he hopes that smaller financiers will ultimately endure.
“I think it’s absolutely necessary for boutique dealers to be a relevant portion of the financial services industry of Canada.”