Encana Said to Seek at Least C$700 Million in Royalty IPO

Encana Corp. (ECA)’s sale of shares in a royalty unit as early as next month is poised to be the largest initial public offering in the Canadian oil and natural gas industry since 2010.

The PrairieSky Royalty sale by Encana, Canada’s largest gas producer, marks the first of a potential wave of IPOs by the nation’s petroleum companies in 2014. Encana is seeking to raise at least C$700 million ($637 million) from its PrairieSky sale, said two people familiar with the plans who asked not to be identified because the discussions aren’t public.

Forecasts for a rebound in first-time share sales come as secondary offerings surge, buoyed by rising fuel and share prices. More receptive equity markets would allow private investors such as Warburg Pincus LLC, Riverstone Holdings LLC and NGP Capital Management LLC, to capture profits through IPOs after making a push into Calgary’s financing market in 2006.

The IPO pipeline is expected to be “quite robust,” Adam Waterous, Bank of Nova Scotia’s head of global investment banking, said in an April 11 phone interview from Calgary, crediting “supportive” equity markets. “That’s the fuel that you need to complete M&A transactions and increase the likelihood of IPOs.”

An IPO of about C$700 million for PrairieSky would be the biggest initial share sale since oil-sands developer MEG Energy Corp. raised the same amount in its July 2010 sale, according to data compiled by Bloomberg. Encana, which said in a filing this week that it will initially hold a majority of PrairieSky shares, didn’t disclose how much it’s seeking to raise.

Drilling Levies

Encana declined to comment on possible size of the PrairieSky IPO, Jay Averill, a company spokesman, said in an e-mail. The success of the IPO will be determined by market demand, Averill said.

PrairieSky will hold about 5.2 million acres (2.1 million hectares) of oil and gas properties in central and southern Alberta and pay dividends. Royalty properties generate revenue through levies paid by other producers drilling on the land.

Canadian-listed IPOs in the industry have slumped since 2011, a year when companies raised $780 million from 13 sales, according to Bloomberg data.

PrairieSky will be the first oil-and-gas IPO since Cardinal Energy Ltd. (CJ) raised C$225 million in its December stock sale to develop assets it purchased from Penn West Petroleum Ltd. Cardinal, focused on delivering dividends along with production growth, was one of two Canadian IPOs for the sector last year.

Canada Outperforms

“That market was dead,” Shane Fildes, head of Bank of Montreal’s global energy group, said in an April 9 interview. There’s “no question” there will be additional energy IPOs this year, he said, as larger companies including Penn West, Encana and Talisman Energy Inc. sell assets, creating opportunities for more deals like Cardinal’s.

Cardinal has surged 51 percent since its initial share price of C$10.50.

Canada’s S&P/TSX Energy Index is up 13 percent this year, compared with a 12 percent rise for the S&P Oil & Gas Exploration and Production Select Industry Index in the U.S. Oil and gas prices have risen more in Canada than the U.S as the decline in the value of Canada’s dollar relative to the U.S. currency makes exporting Canadian fuels more profitable.

The price of spot gas traded at Canada’s AECO hub is up 20 percent this year, compared with an 11 percent gain in gas futures traded on the New York Mercantile Exchange. Spot prices of Canadian heavy oil have risen 12 percent this year, while U.S. benchmark crude increased 6 percent.

Secondary Offerings

Canadian producers have in turn raised more equity in secondary offerings. Issuance rose to $2.73 billion for the first three months of the year, more than six times the same period of 2013. Baytex Energy Corp.’s C$1.5 billion bought deal in February was the largest bought deal among energy producers in Canadian history, said Bank of Nova Scotia’s Waterous.

“You’re seeing increased confidence leading to increased deal flow and increased access to capital,” Drew MacIntyre, head of global energy and power group at Toronto-Dominion Bank, said in an April 2 interview.

Canadian Natural Resources Ltd. (CNQ) is also considering the sale of a royalty unit this year, as it packages lands it agreed to acquire from Devon Energy Corp. with similar properties of its own, Steve Laut, president of Canadian Natural, said on a conference call last month.

Seven operators in the Montney shale, a formation soaked in gas liquids that straddles British Columbia and Alberta, are weighing public sales after exhausting private-equity money, according to a person familiar with the confidential talks who asked not to be identified. That’s in addition to a potential IPO by Seven Generations Energy Ltd., also a Montney producer, the person said.

No Stampede

Closely held Seven Generations said this month it was shifting its ownership to the public market and examining “potential liquidity alternatives.” The company is expected to pursue an IPO this year, the Globe and Mail reported in March, not identifying its sources. Pat Carlson, CEO, didn’t return phone and e-mail messages.

Strong equity markets are making the IPO option competitive for private equity owners compared with selling their companies to peers, as “a number” of investments are ripe for exiting, Derek Neldner, head of Canadian energy at Royal Bank of Canada, said in an April 9 interview.

“We’re not going to suddenly have a stampede to the market, but I think we’ll see a handful of IPO opportunities through the course of the year,” Neldner said.

To contact the reporters on this story: Rebecca Penty in Calgary at rpenty@bloomberg.net; Doug Alexander in Toronto at dalexander3@bloomberg.net

To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net; David Scanlan at dscanlan@bloomberg.net Jacqueline Thorpe

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