North Americans' new-found fervour for energy stocks is reinvigorating a beaten-up sector, helping Canadian companies to raise desperately needed capital that was scarce at the start of the year.
Demand has reached such heights that TransCanada Corp. looks likely to set a new national record for its $4.2-billion share sale announced late Thursday.
The deal was heavily oversubscribed, according to multiple sources, which means its overallotment option should be exercised to raise the total value to $4.4-billion. TransCanada will use the proceeds to help fund its takeover of U.S.-based Columbia Pipeline Group Inc.
Barrick Gold Corp. currently holds the record for the largest in Canadian history, for its $4.3-billion offering in 2009 to help unwind its hedge book.
The TransCanada deal, and a flurry of others, wouldn't be possible if it weren't for resurgent demand from investors ranging from institutions to retail investors. Energy, suddenly, is back in favour, buoyed by rising oil prices and an easing U.S. dollar, which fell once it became clear that interest rates will not rise as quickly as previously expected.
"I've gone from being the guy who's shuffled off into the corner, who nobody pays attention to, to having our sales force actually take an interest in hearing about energy and what my thoughts are," said Mason Granger, a fund manager who specializes in oil and gas at Sentry Investments.
Not all energy companies can raise funds because investor sentiment is sometimes still tepid and a recovery is still seen as fragile. But those with trusted management teams and leaders – such as Mike Rose at Tourmaline Oil Corp. and Grant Fagerheim at Whitecap Resources Ltd. – have been able to tap investors for fresh funds. Adding in Tourmaline's $244-million offering this week, oil and gas companies have raised $1.2-billion in the past two months.
Pipeline companies have it even better. On top of TransCanada's blockbuster offering, Enbridge Inc. raised $2.3-billion in February, and Pembina Pipeline Corp. raised $300-million on Thursday evening. All three deals saw more demand than shares available.
It is a sudden reversal after the year started on such shaky ground because of concerns about China's economy. "It feels so much better today than it did a couple months ago. January was very difficult," Benoit Lauze, head of equity capital markets at CIBC World Markets, said of the appetite for new issues.
Enbridge's offering did wonders for confidence. By setting out to raise $2-billion, the underwriters behind the deal put themselves on the line when markets were still shaky, but investors who bought in were quickly rewarded. Those who bought at the $40.70 new issue price are up 22 per cent on their investment.
"The Enbridge deal was many times covered, so certainly it helps," Mr. Lauze said. "It was basically a sign that there's a lot more conviction in the market."
The appetite helped give underwriters the courage to back TransCanada's $4.2-billion deal this week. Once again, investors stepped up to the plate – even U.S. buyers who historically haven't been major fans of the company. Eighty per cent of the offering was sold to institutions, according to someone familiar with the order book, and 40 per cent of this chunk was placed with U.S. institutional investors.
The massive deal extends a string of billion-dollar bought deals by Canadian dealers. Last year, Canada had 11 of them, which was abnormally high. Already 2016 has four more – for Enbridge, Algonquin Power and Utilities Corp., Franco-Nevada Corp. and now TransCanada.
RBC Dominion Securities and TD Securities are co-leading the offering, which pays underwriters 3.25 per cent. If the deal size isn't increased, the investment banks will make a tidy $137-million collectively.
Notably, Canadian dealers did not advise on the merger. Wells Fargo Securities served as TransCanada's sole financial adviser, while Goldman Sachs and Lazard advised Columbia. However, Canadian law firms provided legal advice, with Blake Cassels & Graydon LLP working alongside Osler Hoskin & Harcourt LLP – as well as with Mayer Brown LLP.