Oil Share Sales Surge as Keystone Worry Fades

Stock sales in Canada’s oil industry are off to their best start in three years as higher commodity prices and rising cash flow push the Keystone XL pipeline to the background of investor concerns.

Oil and natural gas companies raised $2.73 billion in equity in the first three months of the year, more than six times the same period of 2013, according to data compiled by Bloomberg. The financings were all secondary offerings and represent the most since the $3.37 billion to start 2011.

The outlook for energy brightened after Canadian gas prices rose to a 14-year high in February, during the coldest U.S. temperatures for that month in four years. U.S. President Barack Obama’s deliberations on whether to approve the $5.4 billion Keystone XL pipeline also are becoming less pressing as trains carry more oil, lifting heavy crude prices. A weaker Canadian dollar also promises to translate into fatter profits.

“There’s a general sense in the market that Canada’s not hostage to Keystone XL anymore,” said Mason Granger, a portfolio manager at Sentry Investments Inc. in Toronto, referring to the pipeline that would link oil-sands output from Alberta with U.S. Gulf Coast refineries. “We’re having some pretty good performance out of the stocks so far this year.”


Among the 17 Canadian oil and gas equity deals this year the two largest, C$1.5 billion ($1.37 billion) in subscription receipts issued by Baytex Energy Corp. and C$500 million in subscription receipts issued by Whitecap Resources Inc., were to finance acquisitions. Buyers of subscription receipts have the right to exchange them for common shares upon the closing of each deal.

Royal Bank of Canada was the leading adviser in the first quarter on energy equity issues, followed by Bank of Nova Scotia and Peters & Co., according to data compiled by Bloomberg.

The glut of energy assets for sale in Western Canada, producing the equivalent of at least 150,000 barrels of oil a day and worth as much as C$10 billion, will probably mean more deal-driven financing, said Jim Davidson, executive chairman of FirstEnergy Capital Corp., a Calgary investment bank. U.S. investors who were focused on domestic shale drilling are returning to undervalued Canadian energy stocks, he said.

“There is demand and we will see equity issues continue throughout the balance of this year,” Davidson said. “The space needs capital and it needs capital to be raised at appropriate valuations and that is happening.”

Canadians Rise

Canada’s S&P/TSX Energy Index has risen 11 percent this year, outpacing a 5.8 percent gain for the S&P Oil & Gas Exploration and Production Select Industry Index. The Canadian dollar has declined 2.8 percent against the U.S. dollar this year.

Canadian Natural Resources Ltd., the nation’s largest heavy oil producer, is forecast to generate the highest per-share cash flow among Canadian peers for the next 12 months, $8.12, according to data compiled by Bloomberg. That’s a 26 percent rise over the trailing 12 months.

“The mood is shifting,” said David Neuhauser, a portfolio manager at Livermore Partners Inc. in Northbrook, Illinois. He pointed to a “sea change” in the industry’s profitability that’s drawing investors to energy stocks. “It’s not going to go gangbusters or anything but you can make money and you can find value.”

Since Canadian producers sell most of their oil and gas to the U.S., a lower value for the loonie relative to the U.S. dollar means they’re paid more for their product.

Loonie Lift

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, rose 0.5 percent to C$1.0923 per U.S. dollar in Toronto today. One loonie buys 91.55 U.S. cents.

Gas prices also are buoying producers. Spot prices of the heating- and power-plant fuel at Canada’s AECO hub in Alberta in the first quarter averaged C$5.3013 per gigajoule, a Canadian measurement for gas. That’s 75 percent more than the same period last year, as frigid temperatures increased demand across North America and lifted futures contract prices.

In Toronto, Canada’s largest city by population, temperatures averaged about 3 degrees Celsius (37 degrees Fahrenheit) below normal between November and the end of March, according to data from Environment Canada.

Investors will need a few more months of strong gas prices to be convinced about sustained higher cash flows from gas, said Sadiq Lalani, chief financial officer of Calgary-based Kelt Exploration Ltd. Even with equity issuance rising, investors are being choosy about what they will fund, he said. Kelt raised equity funds this year after an asset purchase and almost doubled its drilling program for 2014.


“I don’t think this is like 2008 where you can raise money without a use of proceeds,” Lalani said. “It’s still fairly selective and it’s project-driven.”

Rising rail shipments of crude are helping Canadian producers skirt transportation bottlenecks amid delays for new pipelines, including TransCanada Corp.’s Keystone XL, and leading to higher prices of the nation’s heavy crude relative to the U.S. benchmark.

Canadian crude oil exports by rail reached about 160,000 barrels a day by the end of 2013, more than double a year earlier, according to National Energy Board figures. The discount for Western Canadian Select narrowed to $18.55 today from $42 a barrel in November.

‘National Interest’

TransCanada sought U.S. approval for Keystone XL in 2008 and is awaiting a ruling from Obama, who rejected the company’s first application in 2012 over environmental concerns regarding its path through Nebraska. The U.S. State Department on Jan. 31 began a 90-day review of whether the revised pipeline proposal is in the national interest and will make a recommendation to Obama.

Matt Lehrich, a White House spokesman, referred questions about the Keystone XL decision to comments made in February by Jay Carney, the press secretary, when Carney declined to provide a timeline for a decision and said the process is with the State Department.

TransCanada Chief Executive Officer Russ Girling told analysts in February that by any criteria being used, “Keystone will be determined to be in the national interest of the United States,” according to a transcript of the remarks. TransCanada cannot predict when a decision will be made on Keystone XL, Davis Sheremata, a spokesman, said in an e-mail yesterday.

With oil and gas stocks outperforming U.S. peers and optimism around rail transport and alternative pipeline proposals, such as TransCanada’s Energy East line to Canada’s Atlantic Coast, investors may boost flows into energy funds, Sentry’s Granger said.

“I still think there’s bifurcation between really good teams and everybody else,” Granger said. “I don’t think we’re in a raging bull market in energy.”

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