Making transition

“If Relentless, in its old form, didn’t do this, it would probably be a penny and looking at being de-listed, probably losing their line (of credit) from the bank and probably selling assets in a distressed situation,” Kolochuk said.

Since the transformation, the company’s fortunes have dramatically turned. Its stock price has jumped 125 per cent to 18 cents per share on the TSX-V from eight cents. And though it was previously unable to raise any capital from investors or bankers, SugarBud in early September announced $17 million in new funding.

The company continues to trade on the TSX-V exchange as Relentless until it completes the change-of-business process, at which point its ticker will switch to SUGR and its transformation will be complete.

Several other oil and gas producers have also made transitions.

For example, Calgarybased Iron Bridge Resources Inc. announced earlier this year that it was launching a cryptocurrency mining subsidiary called Iron Chain Technology Corp. and the company’s shares subsequently rose 35 per cent. The company has since agreed to a takeover offer by privateequity-backed Velvet Energy Ltd.

Another energy player, Calgary-based natural gas producer Synstream Energy Corp. has announced its intention to explore a potential change of business, but the company hasn’t said what type of business yet.

And Rainmaker Resources Ltd., which supplied frack sand to oil and gas producers, agreed in 2017 to a reverse takeover by medical cannabis supplier Indiva Corp. A handful of startup mining companies have announced similar moves this year to enter the cannabis business, including Icon Exploration Inc. and Canadian Mining Corp.

Brady Fletcher, managing director of the TSX Venture, said there have been 12 reverse takeovers or “change of business” processes on the public exchanges this year, led by distressed oil and gas and mining companies trying to transition into other industries, including cannabis and high tech.

But the ever decreasing number of oil and gas juniors is considered a sign of bigger problems facing the Canadian energy sector, said Gary Leach, president of the Explorers and Producers Association of Canada, which represents small and mid-sized oil and gas companies.

In years long past, Leach said, Calgary prided itself on being home to more publicly listed oil and gas companies than anywhere else in the world, but “that tide has left for a number of reasons,” including poor access to capital and a lack of access to markets through new export pipelines.

“The most common thing I hear from our member companies is that capital markets have frozen out the Canadian upstream sector, particularly the juniors and intermediates,” Leach said.

This is a concern since oil and gas extraction has become increasingly capitalintensive in recent years, as companies have moved en masse into shale and unconventional oil plays and as drilling and fracking costs have risen.

For a small company or startup, Leach said, “the amount of capital they need is many multiples of what it was a decade or so ago.”

Indeed, the rise of unconventional resources has caused “an enormous sea change for small capitalization companies,” Matco Investments Ltd. vice-chairman Michael Tims said.

“When I started in the business, we used to jokingly say we could start a company with a roll of maps, a box of pencils and $5 million,” said the former longtime head of Calgary-based, oil and gas-focused investment bank Peters & Co. “Now, obviously, you need a lot more capital — a ninefigure number generally — to get critical mass.”

But as the energy industry has become more capitalintensive, the investment industry has become less willing to fund smaller companies as there are fewer active money managers.

“A much larger proportion day as far as access to capital.”

Kolochuk said his company has been the “guinea pig,” but he expects others to follow suit since morale in the sector where he spent his career “is terrible.”

He said many former energy sector colleagues have been “sitting on the sidelines, some for as long as a year,” and are now looking at a career change.

“You had a very hardworking, ambitious, entrepreneurial type of environment here and everyone is deflated,” he said. “Our skill of the investment capital set is very transferable. We is either indexed or in know how to protect a balexchange-traded funds, so ance sheet. We know how to the bulk of the money in look at opportunities.” those funds goes into the top Kolochuk said new pipelines 10 companies in the sector,” and liquefied natural Tims said. “And then there’s gas (LNG) projects are critica number of other managers al to restoring confidence who, while they may be active in the energy sector and to managers, choose the ensuring that private equity, larger-cap companies as which is an increasingly important well.” source of funding for

Matco Investments has juniors, is willing to invest in stakes in a number of smallthe industry. cap energy players, but Tims “If we don’t do something said, “in terms of the value of as far as pipelines go in the the positions, (we) would be next six months, the energy much more weighted to the sector is going to be very larger-cap companies.” stagnant here for the next,

SugarBud’s Kolochuk said well, I don’t know, five to 10 he ran into this exact problem years,” he said. in late 2017 and earlier In SugarBud’s case, Kolothis year as he attempted to chuk said the transition to raise money to drill more cannabis was made easier wells and grow production because the banks viewed at Relentless. Neither investors its oil and gas assets as collateral. nor bankers were willing to provide capital. “After talking to various

”The whole purpose of doing bankers and potential finanthe recapitalization was cial backers, they really liked because this junior oil and the hybrid model,” Kolochuk gas company was stuck and said. “They like that we’re they didn’t have access to the only pre-licensed (cannabis) capital,” he said. “The capital applicant that is cashflow pool has been virtually zero, positive.” so there’s no way as Relentless The company is currently we would have gotten building a 30,000-squarefoot the $17 million. It’s night and greenhouse in Stavely,

FROM DRILLING TO CANNABIS Alta., and expects to start generating cash from marijuana sales in the second quarter of next year.

The difference between approaching bankers as Relentless Resources and approaching them as SugarBud, Kolochuk said, is “night and day.”

Meanwhile, other startup and micro-cap oil and gas companies continue to find themselves cut off from the public markets, while private-equity firms have become more selective about which companies they’ll invest in, Matco’s Tims said.

Even mid-sized intermediate oil and gas producers have struggled to access the capital they need to grow, said Raymond James analyst Jeremy McCrea, and stock valuations have been hurt as a result.

To compensate, he said, established oil and gas companies have turned their focus to cutting costs rather than growth. “It’s making sure that each well that they drill is going to be a good well that’s not going to put the company at risk.”

But in order to gain the attention of money managers, or to gain more presence on energy stock indexes, McCrea said he expects more mergers and acquisitions.

EPAC’s Leach said desperate times could also lead more startup oil and gas companies to transition out of the sector.

“If the industry you’re in is not attracting capital, maybe one of the most valuable things that a company still owns is a public listing,” he said.