Decline of juniors has become trend
Despite their years of innovation, only 49 remain — and that number could drop further
Time and again throughout the Canadian oil industry’s history, the big shifts came about because of the farsightedness of junior companies. They led the charge in the Bakken, introduced new funding models such as royalty trusts and took chances in Canadian and international frontiers.
The brash bunch provided a platform for Canadian talent, entrepreneurship and innovation in an industry dominated by foreign giants. They underpinned the Calgary-based energy investment cluster and trading on the TSX Venture exchange. They even altered Alberta’s political landscape by backing the rise of the Wildrose party to protest royalty changes.
Some grew to become global giants themselves.
But years of depressed natural gas prices, tight oil pipeline capacity, increased anti oil and gas activism and unsupportive markets have taken their toll on Canadian juniors.
The once-thriving sub-sector has shrunk to half its size from the middle of the last decade, when juniors were such a force they drilled the majority of exploration wells in Western Canada.
There are 49 remaining public juniors in the Western Canadian basin with production of 500 to 10,000 barrels of oil equivalent per day, down from 94 in 2007, according to data compiled by investor relations firm Bryan Mills Iradesso.
That number is expected to shrink further. In a recent report, investment dealer Peters & Co. said the environment in the basin offers “one of the best M&A markets for buyers in the past decade” and predicted an increase in acquisition activity in 2013 and 2014, driven by continuing interest of foreign players in Canadian oil and gas and the capture of natural gas supplies to feed proposed liquefied natural gas terminals on the West Coast.
A Canadian oil patch without a thriving and independent junior sector is like the United States losing its Silicon Valley, said Gary Leach, president of the Explorers and Producers Association of Canada (EPAC).
“I think Canadians would be unhappy in a landscape where the oil and gas industry was dominated by a handful of majors — whether Canadian or foreigncontrolled,” he said. “The junior sector has been nimble, quick to bring new ideas in the market and overall we have seen all the niches filled in the Western Canadian oil patch.”
The trend is worrying legislators in Alberta. While government revenue is increasingly dependent on oil sands activity that is dominated by large companies, they recognize the value of small- er explorers and producers.
Progressive Conservative MLA for Calgary-Varsity Donna Kennedy Glans, chair of a provincial all-party committee on resource stewardship that is looking into what to do about Alberta’s vast natural gas resources, has been talking to junior sector leaders about whether there are areas for policy innovation. Natural gas production used to be the juniors’ bread and butter.
“Smaller companies make an enormous contribution to innovation and research,” Ms. Kennedy Glans said. “Most of these companies employ people with strong personal ties to the province. In fact, this often fuels the resiliency of their response to adverse market conditions.”
Indeed, during past industry downturns, it’s juniors and other local companies that stayed active and found ways to adapt, while foreign companies pulled up stakes and moved elsewhere.
Today, juniors are embracing the new energy frontier — about implementing new drilling and completion technology, rather than about success through exploration, Mr. Leach said.
“The number of exploration wells in Western Canada has plummeted in the last few years,” Mr. Leach said. “We have moved to a more resource-play type of business model, where we know where the resources are.
“You are not so much looking for the next small pool, you are looking to be able to repeat your success in your resource play, honing your skills, learning from your mistakes, relentlessly reducing the cost of your drilling activities — whether that is learning the best well-completion approach, the right kind frack job to apply, using pad drilling to reduce costs.”
They have also moved away from natural gas and into niches that are attractive to a discriminating investment community.
“Just a small number of companies can draw investor support, and at the same time the kind of investing activities and opportunities that draw attention are expensive,” Mr. Leach said.
Those that are still in business are predominantly focused on oil and natural gas liquids that get higher market prices, and a few gas producers have cut costs to the point they can make money even at Canadian prices — the world’s lowest, Mr. Leach said.
Some are attracting investors by paying high dividends. Others are bypassing the market altogether and staying private.
But there is power in numbers, and while the trend toward larger companies may secure investment in big projects, the depletion of enterprising juniors makes Canada poorer in other ways.