Canadian oil companies have raised $500-million selling shares in the past week.TODD KOROL/Reuters
Canadian oil companies have raised $500-million selling shares in the past week, a sign that investors are willing to wager on a handful of producers that are successfully navigating the collapse in oil prices.
Advantage Oil & Gas Ltd. is the latest exploration and production firm to go to market, raising $101-million in a bought deal. It joins Raging River Exploration Inc. and Seven Generations Energy Ltd. in issuing stock as oil prices remain depressed.
The three have outperformed the broader market as crude prices slumped – rewarded for efficient operations and conservative debt levels. Advantage shares are up more than 10 per cent in the past year, compared with a drop of about a third in the S&P/TSX energy group.
Companies are using proceeds from the stock issues to shore up their balance sheets and help fund capital spending, rather than to finance major acquisitions – at least, so far. It's an exclusive club. Investors, burned by 10 months of worsening industry conditions, will likely not give many players such a warm reception.
"Those are all companies that have a little bit of cachet. They're companies that the equity markets are clearly open for," said Mason Granger, energy portfolio manager at Sentry Investments in Toronto.
The Advantage deal, at $7.45 a share, sold out along with a 15-per-cent overallotment option, a source familiar with the issue said. Raging River's $99.5-million bought deal was said to be several times oversubscribed. Seven Generations upsized its offering last week by $40-million to $300-million on strong demand.
Equity issues had stalled in recent months as crude prices sank below $30 (U.S.) a barrel, putting more financial strain on an already-hurting industry. Rather than issuing shares, numerous exploration and production companies have sought to cope by slashing capital spending, laying off staff, cutting dividends and putting assets on the auction block.
The slowdown has also hit investment dealers with large energy franchises, especially the boutique shops, as fees dwindled. However, the recent financings have been led, or co-led, by Peters & Co. Ltd. and FirstEnergy Capital Corp., showing the benefit of their long-time relationships within the mid-sized Calgary-based energy sector.
In the first quarter of 2015, Encana Corp. and Cenovus Energy Inc. were among oil-patch companies that raised a record amount of money from share issues to repair finances that had begun to show the strains of weakening crude markets. But the business dropped off as the rout persisted.
Now, investors are starting to sense that the worst of the market turmoil has subsided and are eager to deploy capital into companies seen as best positioned to benefit from strengthening energy prices, said Robert Mark, a director of research at Montreal-based MacDougall MacDougall & MacTier Inc.
"The way I read it is investors are starting to get itchy," he said. "There's an appetite for taking some calculated risks in the patch, and so one company does a deal and then all of a sudden that gives some confidence to others to do the same."
The window for financings opened first in the United States. In January, shale producer Pioneer Natural Resources, active in the Permian zone of West Texas, issued $1.4-billion (U.S.) in shares. This week, Oklahoma City-based Devon Energy Corp. said it would use proceeds from a $1.5-billion upsized offering to pay down debt as it lays off 1,000 workers and cuts its spending and dividend.
The appetite for new issues will extend only so far, and some heavily indebted producers will remain on no-buy lists. For instance, limited access to capital was among the factors that drove Calgary-based Argent Energy Trust to seek creditor protection this week.
"I think more people are confident they've seen the bottom, or, if not, close to the bottom," said Laura Lau, senior portfolio manager at Brompton Funds in Toronto. "And then, if you're going to pick your horses, you typically pick the horses that you think are going to survive."