Energy issues confined to elite
Investors hungrily picked up share offerings of Canadian oil and gas companies in the first three months of the year, but the record-setting quarter hardly signals rising appetite for the troubled sector in the capital markets.
As many as 16 oil and gas equity financing deals raised more than $8 billion in the first three months of 2016 — a quarterly record for the sector since at least 1993, according to FP Infomart data.
The offerings nearly doubled the $4.6 billion raised through 11 transactions a year earlier. Indeed, the equity issued this year is close to the $8.6 billion raised all of last year.
But the numbers mask the reality that only a select group of dividendpaying infrastructure companies, or top-tier firms with strong growth opportunities and stellar management teams, were able to entice public markets.
Midstream players less impacted by volatile oil prices such as TransCanada Corp., Enbridge Inc. and Pembina Pipeline Corp. accounted for 85 per cent of the equity raised.
TransCanada closed a $4.4-billion share sale Friday to finance a portion of its proposed transformative acquisition of Columbia Pipeline Group Inc. Pembina plans to use the $345 million it raised to acquire natural gas assets.
“People talk about a record quarter in the energy space, but for those three deals, it would have been a very tepid quarter for energy deals,” said Ross Bentley, partner at Blake, Cassels & Graydon LLP, who was involved in the TransCanada and Pembina offerings.
“It’s an indication that the market has the capacity to do large deals for quality issuers,” Calgary-based Bentley added. “If you go beyond that in traditional exploration and production companies, it is a much more mixed message there.”
U.S. crude prices rose 4.3 per cent during the quarter, erasing a deep slump in the first month of the year, to reach US$39.7 per barrel, lifting share prices of even the weaker companies.
But the S&P/TSX Capped Energy index rose 6.62 per cent in the first quarter, handily beating the U.S. S&P 500 Energy Sector Index’s 3.11 per cent jump in the period.
The surge encouraged some of the more stable companies to tap markets and reduce their debt pile.
“The stars have aligned … and equity window has opened in the last four to five weeks,” said John Mercury, Calgary-based head of private equity at law firm Bennet Jones LLP.
“The equity markets were tight or closed for some period of time, so it created a backlog of demand.”
The equity deals are dilutive for existing shareholders, but they don’t seem to mind, perhaps hoping that the transactions position the companies well for an upturn in oil prices.
Indeed, most of the companies have been rewarded with a shareprice surge above their recent issue price.
There is increased focus on repairing balance sheets in the producer community, especially since the Canadian oil and gas sector lost $230 billion in market cap from June 2014 to February 2016, according to S&P Capital IQ data.
Debt-to-cash-flow ratios above four times are typically seen as cause for concern among Canadian oil and gas companies.
Stubbornly low oil prices have left many companies overlevered and under pressure from senior lenders and other creditors to address the issue.
“Naturally, there is pressure to pay down debt,” Mercury said.
Seven Generations Ltd., which raised $300 million in February, said it will use the funds to reduce its indebtedness.
Energy investment broker Peters & Co. estimates Seven Generations’ debt-to-cash-flow ratio will decline to 2.7 by 2017, one of the lowest ratios in its coverage universe.
Raging River Exploration Inc., which raised $108.1 million in March, said the net proceeds will initially be “used to repay a portion of outstanding indebtedness.”