Norm Betts
A surge in the market's appetite for risk has brought capital coursing back into Canada's junior oil and gas sector, as investors engage in a furious chase for new prospects.
In the past three months, shares have roared to life for a broad array of energy companies. Small companies chasing new overseas finds in Namibia, Poland, Colombia, Trinidad, Australia and the Falkland Islands have suddenly caught fire. Others pursuing riskier new oil plays in Alberta have profited from the same trend, as have the industry's service companies.
After a year of stability in both the economy and crude prices, a new sense of confidence has loosened investors' grip on storehouses of sidelined cash, which they are now pouring into a substantial variety of names.
The effect has been remarkable. Since Sept. 1, Precision Drilling is up over 40 per cent. UNX Energy has shot up nearly 70 per cent and, though it has yet to produce a drop of petroleum from its holdings off the Namibian coast, now sports a market cap of over $400-million.
Shares in Primary Petroleum which is chasing a new crude play that straddles the Alberta-Montana border, have soared nearly 85 per cent.
At one point in 2010, Primary Petroleum was worth $3-million. Then the institutional investors started calling chief executive officer Mike Marrandino, begging him to tell them about his company. None seemed to mind that Primary produces exactly 10 barrels of oil equivalent per day - nor that people like Mr. Marrandino are typically the ones doing the begging for such meetings. What they're after is the land he's amassed in a hot new play that has also attracted interest from majors like Murphy Oil Corp. and Royal Dutch Shell PLC.
In the past year, he has flown to Toronto, New York and Boston to tell that story. Since May, he has completed 46 trips to talk to investors. Normally, he would do just over 20 a year.
"And I've slowed it down. I could be constantly on the road just presenting the company," he said. "I've been involved in the capital markets for 30 years, and I've never seen such an interest level from the financial community. There's an insatiable appetite."
Primary Petroleum is now worth over $100-million.
Why?
Analysts and portfolio managers point to a confluence of factors. Chief among them is a quest for greater returns that has coincided with a surge of confidence in energy - particularly oil, which has shown remarkable stability for well over a year.
Eric Nuttall, a portfolio manager with Sprott Asset Management, points to the S&P capped total energy return index, which was down 35.8 per cent in 2008 before climbing 41.5 per cent in 2009.
"I'm curious if it's that in 2009, we had a very good year in the energy sector, and it's helping to abate some of the awful memories of 2008," he said. "People's appetite for high impact exploration is the highest it's been in probably three-odd years."
Another factor: that index has only returned 4 per cent. That has made it difficult to find returns in large-cap names like Suncor Energy which is actually down nearly 3 per cent in 2010, and driven investors to smaller names, where one good drill result can produce a 50- to 100-per-cent return overnight.
"There's a huge amount of optionality to what we're doing," said Wolf Regener, chief executive officer of BNK Petroleum which is chasing new natural gas fields in Europe. "If one of these plays works, that's a huge impact to the bottom line of our company."
It hasn't hurt that most popular new plays are oil plays, and crude is up more than $15 (U.S.) a barrel in recent months from a near-term low of $70 in late August. Investors have also seen strong returns from investments in companies exploring in Colombia, and are hoping to repeat that success elsewhere. And substantial growth in Alberta land sales has boosted the prospects for those service companies who will soon be called upon to drill newly acquired ground.
Underlying it all, however, has been an undercurrent of stability that has encouraged people to reach out of more-protected financial havens.
"The market didn't go down when the European debt crisis happened, which was an indication to a number of the technical analysts that this market is a little more safe," said Aaron Bunting, a junior portfolio manager with Calgary-based Canoe Financial LP.
"Then there's the valuation gap. There was a premium a year ago to the large caps. But now, when it's safe, you can say, 'Why would I buy Suncor at 10 times [earnings]when I can buy another company at four times?' "