Rush of Share Sales Evidence Canada's Oil Patch Starting to Thawby
Energy firms raised C$3 billion in equity sales last month
Funds will help companies weather low prices, make acquistions
Stock sales by Canadian energy companies jumped to a 17-month high in February, signaling investors are beginning to find value in the country’s beaten-down oil patch.
Energy firms raised C$3 billion ($2.24 billion) last month, led by a C$2.3 billion bought deal by Enbridge Inc. that closed Tuesday. That was the highest monthly total since September 2014, when C$6.4 billion was raised, according to data compiled by Bloomberg.
“The companies we’ve seen raise equity as it becomes available are probably some of the stronger pedigree of names in the space,” Sandro Morassutti, managing director of equity capital markets at CIBC Capital Markets said by phone. West Texas Intermediate, the North American crude benchmark, climbed about 13 percent in February to about $34 a barrel, giving some of the healthier energy firms confidence to issue equity, he said.
The share sales mark a reprieve from the bad news that has buffeted the industry since the oil downturn began in 2014 as billions of dollars of investment has been scratched and more than 40,000 jobs lost in the country. They also mirror equity raises elsewhere. The $6.8 billion raised in the U.S. last month was the highest since February 2015 and $739 million raised in Western Europe was the highest since June 2014, according to the data.
There were 12 share sales in Canada in February, including issues from Seven Generations Energy Ltd., Raging River Exploration Inc., and Whitecap Resources Inc. Tidewater Midstream and Infrastructure Ltd. also said this week it was aiming to raise C$70 million while Madalena Energy Inc. said Tuesday it plans to raise C$27 million in an equity offering.
“It’s too early to call this a recovery but the positive momentum we’ve seen both in the underlying WTI pricing and in terms of that being reflected in our clients’ individual share prices has certainly helped provide a window for issuers to come to market,” Morassutti said.
The cash will help companies shore up their balance sheets or ready them for acquisitions, he said, predicting other firms to follow suit. “With very few exceptions, most of the offerings have traded up since they issued equity,” he said, noting the order book is filled with strong institutional names wanting to buy. “We’re seeing fairly broad-based support.”
The Enbridge’s equity raise last month was the largest in Canada since PrairieSky Royalty Ltd.’s C$2.56 billion secondary share offering in September 2014.
“It’s stunning,” said Eric Nuttall, a Toronto-based fund manager focused on energy at Sprott Asset Management LP. “I haven’t seen an opportunity like this in 13 years.”
Nuttall said he didn’t participate in any share sales in February, preferring to buy directly on the open market, but he has been buying. His energy fund is fully invested, in part, because he believes oil will rally to $50 a barrel by the end of the year, he said. He wasn’t surprised the share sales have been well-received.
"It’s just a combination of a sector that has underperformed massively for the past year due to macroeconomic concerns and a current oversupply in oil combined with a ton of money on the sidelines who recognize an opportunity, they have just been disagreeing on timing," Nuttall said.
The names he holds, including Whiting Petroleum Corp., Continental Resources Inc. and Baytex Energy Corp., have declined by more than 84 percent on average since the last time oil traded at $50 a barrel, he said.
"There’s a broad-based recognition that current oil prices are not sustainable and that we need a price in the $50s," Nuttall said. "It’s just a question of timing. The only person who can call a bottom is a historian."
It’s not the first time investors have tried to call a bottom for the oil prices, said Martin Pelletier, managing director and portfolio manager at TriVest Wealth Counsel in Calgary.
There was a flurry of equity issues last March when roughly C$2.8 billion was issued in share sales by energy firms. While it didn’t prove to be a bottom, companies that did issue equity last year are better off for it, he said.
“They’re all higher quality names that have been able to get the capital and rightly so,” he said. “Some of the boutique banks have been really aggressive doing these bought deals so they want to make sure they’re not getting stuck with these shares.”
A better sign of a bottom is when some lesser quality names are able raise cash through issuance. He isn’t convinced the market is there yet.
"My concern is the last time it hit the market with a round of financing, it wasn’t the bottom," he said. "Oil could easily go back to $25 or $26 dollars and there’s 10 to 15 percent downside in these names."