National Post (National Edition)
Rough patch
WITH EQUITY MARKETS VIRTUALLY CLOSED TO THE OILPATCH, SECTOR EYES M&AS TO GET OUT OF SLUMP
For Canadian oil and gas companies looking to raise money, there really is only one option available and that's to take on debt.
“Everything that we're seeing is indicating that it's very difficult for oil and gas companies to raise money these days, particularly the smaller companies in the space,” said Janel Young, a partner with Stikeman Elliott in Calgary.
Smaller oil and gas producers have struggled to successfully raise money in the capital markets in recent years but, in 2020, “the one-two punch of the oil price war followed by the pandemic was certainly not helpful,” she said.
In the oil and gas industry, where stock valuations plummeted following the COVID-19 pandemic and the Saudi-Russian oil price war in the first half of 2020, the vast majority of all financing activity was in the debt market. The S&P/TSX Capped Energy Index was down 37 per cent for the year.
“What we saw is that there were a few senior issuers that succeeded in raising some money but it was all debt issuances in the public markets. There was no equity on offer and there was nothing in that space among the junior companies,” Young said, referring to Alberta Securities Commission data from November.
Oil and gas prices have improved sharply since the beginning of the COVID-19 pandemic, when oil prices crashed. As commodity prices have rebounded, so have the energy companies' valuations. But most large-cap energy companies, and all smalland mid-sized producers, are still trading well below their pre-coronavirus levels.
Bay Street executives believe that 2021 will follow some of the same dealmaking trends as 2020. Companies don't want to issue shares at depressed valuations, so few equity financings are expected. And with capital markets either fully or partially closed to small- and midsized oil and gas companies, many will be forced to merge out of necessity.
Financial Post data shows that of the $25.8 billion in capital raised by Canadian energy companies last year, just under 4 per cent, or $980 million, was raised in the equity markets. The remaining $24.8 billion came from debt markets.
And in contrast to past years when small- and midsized oil and gas companies were attempting to raise money for drilling campaigns, the data shows that almost exclusively large energy companies were responsible for raising that $24.8 billion in 27 different corporate debt deals in 2020, which is a 35 per cent increase over the $18.3 billion the companies raised in 2019.
The biggest debt deals in the oilpatch last year included TC Energy raising $3.7 billion in two separate transactions at the beginning of April, followed by a $1.6 billion debt financing by MEG Energy Corp. and a $1.5 billion financing by Canadian Natural Resources Ltd.
“During the pandemic, investor interest was focused on the highest quality credits so a number of the large cap energy clients were able to secure liquidity facilities from the banking sector,” said Kent Ferguson, co-head of global energy at RBC Capital Markets, which was the most active bank in the Canadian energy sector last year.
Ferguson said the capital raised by large pipeline companies shows a bifurcation in the energy sector, where only the best producers can access financing but there are “vast amounts of capital for stable, infrastructure-like assets.”
In addition to TC Energy, other midstream companies including Enbridge Inc., Pembina Pipeline Corp., AltaGas Ltd. Inter Pipeline Ltd. and even smaller players such as NorthRiver Midstream Inc. had a relatively easy time accessing the debt markets.
Meanwhile, there were only a handful of mid-sized energy companies that were able to tap the debt markets, including Baytex Energy Corp.'s $655-million financing in Feb. 2020 before the COVID-19 pandemic, and only one sizable oilfield services company financing by Tervita Corp., which raised $644 million in November.
In several cases, difficulties in accessing capital led smaller oil and gas players to sell to larger, better capitalized competitors. Painted Pony Energy Ltd., for example, cited its inability to access the capital markets when it announced its sale to Canadian Natural for $461 million on Aug. 10.
“It was more difficult for them to access the market, particularly the smaller ones. It led them to think about whether it made sense for them to combine with another company,” said Mike Boyd, managing director and head of global mergers and acquisitions with CIBC World Markets, which was the second most active bank in the energy financing space in 2020.
“I think an overall driver was the recognition that scale was important, particularly in an environment where reducing costs was critical,” Boyd said, noting that Cenovus Energy Inc. $3.8-billion deal for Husky Energy Inc. was also intended to reduce costs and scale up to attract additional investors.
At the time that deal was announced, Cenovus CEO Alex Pourbaix said “tires have been kicked” on a deal between the two companies for a few years. According to Stikeman Elliott's Young, similar conversations are happening in the industry now.
“I think that consolidation is going to continue to be necessary,” she said. “We're hearing a lot more tire-kicking than is being reflected in publicly announced deals, so I would expect there will be more to come.”