‘IT’S BEEN ONE BODY BLOW AFTER ANOTHER’

TORON TO • Western Canadian oil and gas executives travelled en masse to the country’s financial centre to drum up more investor interest in their business Tuesday, but the industry continues to be hurt by a lack of enthusiasm in the sector and concerns about future returns.

“The investors need to see something positive because it’s been one body blow after another,” said Brian Schmidt, president and CEO of Tamarack Valley Energy Ltd. on the sidelines of the annual investor symposium organized by the Canadian Association of Petroleum Producers. “The issue isn’t the performance of the company, it’s how do you get someone interested in your stock."

Oil and gas companies continue to face a range of obstacles in attracting new investors, including a lack of new pipeline infrastructure, competition from the United States, low commodity prices and investor demands for better environmental performance.

“I’m not going to sugar coat it, it’s been pretty challenging,” said Jackie Forrest, vice-president of research at ARC Energy Research Institute, who also called the level of investment in the Canadian energy sector “depressing.”

Forrest spoke at the symposium in Toronto sponsored by The Bank of Nova Scotia, whose loan book is the most exposed to the energy industry among the country’s big banks. Investment in the domestic energy sector is trending toward being 30 per cent lower this year than it was last year.

Canadian energy producers are struggling to show investors they can generate returns at flat commodity prices and survive a regime that has imposed carbon taxes and increasingly stringent environmental regulations.

Schmidt said investor sentiment toward the Canadian energy industry had been particularly negative in the United States. “Last year, I couldn’t even get meetings,” he said. “Now, I can get meetings but they’re still not going to buy my stock.”

The industry needs new pipelines, a lifting of the regulatory burden and a new approach from both the federal and provincial governments toward encouraging the growth of their industry before sentiment turns, a number of industry executives said at the event.

“The sentiment in the industry is very poor right now,” said Myles Bosman, vice-president, exploration and chief operating officer at Birchcliff Energy Ltd.

To illustrate the problem, Bosman noted his company’s share price is currently trading at a multiple of four times its cash flow, whereas it has historically traded at eight times its cash flow.

In dollar terms, the company’s shares traded at $3.80 per share on Tuesday. Prior to the oil price crash of 2014, Birchcliff shares traded in the $13 and $14 per share range.

B.c.-focused Painted Pony Energy Ltd. president and CEO Pat Ward said he paid more in carbon taxes in 2018 than he did in royalties, which is an indication of the additional costs the Canadian industry faces in comparison with the U.S. industry.

Share prices and trading volumes in Canadian oil and gas names have fallen to a level where even some midsized companies “are now beginning to slip below liquidity thresholds for some larger funds,” said Tudor, Pickering, Holt and Co. analyst Jordan Mcniven.

Mcniven said that oil and gas commodity prices have become more volatile driving away major funds who are looking to invest in companies with sizable trading volume and liquidity.

The need for size and scale would likely not cause smaller companies to merge with each other, but it could lead renewed investor interest among larger funds, he said.

Eric Nuttall, a partner with Ninepoint Partners and a fund manager attending the conference, recently wrote a letter to 13 mid-sized Canadian oil and gas companies asking them to use their money to buy back their own shares rather than drill up more hydrocarbons.

If those companies were not willing to buy their own shares at historically low valuations “then why the (expletive) should I?” Nuttall asked them.

Many Canadian companies have established, or expanded, share buyback programs including Canadian Natural Resources Ltd., which established an automatic share repurchase program on Monday.

Still they face challenges in bringing in new investors. ARC Resources Ltd. president and CEO Myron Stadnick said the North American energy sector is “bifurcated” between companies with assets in the U.S., which investors prize, and in Canada, where investors are cautious.

He does expect sentiment to turn in the long run.

“I think that the long-term investors see that certain companies are going to be fine,” he said.