Win­ners and Losers

De­mand for eq­uity fi­nanc­ing is burn­ing sur­pris­ingly bright, and an M&A trend is now poised to take off

Alberta Oil - - SMART MONEY -


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.

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