Key energy firms could be axed from TSX index

Share price rout places up to 7 companies in precarious position, observers warn

CALGARY Some of the country’s largest natural gas producers and drilling companies could soon be booted from the main Toronto Stock Exchange index amid a share price rout, according to analysts.

After a bruising summer in which their stock prices have fallen to historic lows, as many as seven oil and gas companies are in danger of being removed from the S&P/TSX Composite Index.

On AltaCorp Capital’s list of potential deletions are Kelt Exploration Ltd., Peyto Exploration and Development Corp., NuVista Energy Ltd., Torc Oil and Gas Ltd., Birchcliff Energy Ltd. and drilling companies Precision Drilling Corp. and Ensign Energy Services Inc.

Their depressed market capitalizations have fallen to the point where they no longer meet the threshold required for the 239-member composite index managed by index provider S&P Global Inc. Their deletion would exacerbate the damage already inflicted on the sector because it would preclude major passive funds that track major indices, from buying the stocks.

“The problem is the market has just been so beat up through the summer that there just isn’t anybody listening right now to the oil and gas story,” said Kelt president and CEO David Wilson.

Wilson said neither S&P Global or TMX Group Ltd., which runs the exchange, has contacted him about a potential removal from the composite index, though he’s aware that Kelt is among the names analysts expect will be removed.

“The fact is, right now, there’s such a lack of investor interest in Canadian energy equities that the stock valuations have gone soft and we’re going to fall off the index. I mean, it’s inevitable based on the numbers,” Precision Drilling president and CEO Kevin Neveu said, adding that being included in the index helps reduce the company’s cost of capital and expands its pool of potential investors.

Given the challenges facing the sector such as the lack of new pipelines, Neveu said the outcome is not surprising. “When investors can’t see any potential for production growth or enterprise growth, they’ll look for other sectors,” he said, adding that Precision has been trying to demonstrate the value in its shares by buying back stock. Neveu said he’s been buying shares, too.

A survey of index analysts compiled by Bloomberg also flagged Peyto, NuVista, Torc, Birchcliff, Precision and Ensign as highly likely to be deleted from the index. An announcement is expected within the next few days with deletions occurring on Sept. 20.

Bob Geddes, president of Ensign, said he believes sentiment toward the sector is shifting. He said there’s been “blood in the streets” the last few years in the oilfield services sector but “a lot of bottom-up buyers are back in the market.”

Darren Gee, president and CEO of Peyto Exploration, said the company was first added to the composite index in 2002 when it produced just 7,800 barrels of oil equivalent per day. “Here we just announced Q2 results and we’re over 10 times that size. It’s a bit amazing that we’re so much bigger in terms of the size of the company’s production, cash flow, reserves, everything and having delivered incredible profitability over the last 17 years and yet we’re not big enough to be on the composite index anymore,” Gee said.

“It’s indicative of the direction that the market has taken with respect to oil and gas investing.”

NuVista, Torc and Birchcliff did not respond to requests for comment. All the companies will continue to trade on the Toronto Stock Exchange, but will not be eligible to be re-added to the composite index for a year, if removed.

S&P Dow Jones Indices spokesperson Ray McConville declined to comment on whether a number of oil and gas companies were poised for deletion from the index this month.

The problem is ... that there just isn’t anybody listening right now to the oil and gas story.