Starved for Capital, Canada Oil Patch Pauses on ExplorationBy
Stingy debt, equity markets trimming ranks of junior producers
Higher well costs also curtailing search for new resources
If you think it’s hard for tech startups to get funding, try being an oil driller in Canada.
The oil price crash caused the big Canadian banks that had traditionally financed junior explorers -- startups looking to identify and begin development on untapped deposits -- to pull back. Similarly, appetite for energy shares waned, diminishing explorers’ ability to turn to equity markets for funding.
The dearth of fresh capital has trimmed the ranks of junior explorers dramatically, bringing the search for oil and gas in Canada nearly to a standstill. Their extinction could have far-reaching effects, making it harder for the industry to ramp up production when prices rebound by depriving large producers of the buyout targets they typically rely on to replenish reserves.
“We need a mechanism that’s going to be able to inject capital into the market,” said Perry Anderson, chief executive officer of Enercore Energy Capital Corp., a boutique capital advisory firm that’s seeking to attract international capital to Canada’s junior energy companies. “If you don’t have a facility or ecosystem that’s funding a lot of this stuff, that brings the full-circle business model to a bit of a halt.”
Through the first eight months of this year, Canadian oil and gas explorers announced 73 primary or secondary share offerings of $100 million or less, for combined total proceeds of about $535 million. That’s down 39 percent from roughly $881 million raised during the same period last year, and less than half of the $1.34 billion generated in the first eight months of 2012, when oil averaged over $95 a barrel.
Debt markets have been anemic, too. Canadian explorers with a market value of less than C$500 million raised C$610 million through 10 bond and loan deals this year through August, according to data compiled by Bloomberg. That’s down 47 percent from the C$1.16 billion over the first eight months of last year, and less than a third of the C$2.12 billion raised by that point in 2015. By contrast, Canadian corporate bond sales in general increased 11 percent this year through August, to C$70.3 billion.
As a result, there were only 25 publicly listed Canadian companies producing 500 to 10,000 barrels of oil equivalent a day at the end of the second quarter, according to Calgary-based Iradesso Communications. That’s down from 42 at the end of the third quarter of 2014.
What little exploration still is being done has moved to private equity, but even those firms are favoring assets already in production, said Ken Lin, an analyst at Paradigm Capital Inc. in Calgary. With oil prices so low, firms are averse to taking on the added risk of an oil play not panning out, he said.
“Companies are more focused on development and exploitation than anything else,” Lin said. “They’re not incentivized to do exploration, and given that we’re in a mature basin, there’s very little of that happening.”
The increased cost to complete a well is also reducing prospects for smaller explorers, he said. Wells now are drilled in multiple stages and over longer lengths while using greater quantities of fracking materials. The result is that a single well can cost anywhere from C$3 million to C$10 million, compared with C$1 million not so long ago, Lin said.
If a junior company does manage to get off the ground, it will now have to grow much larger before it can consider an initial public offering or before it can attract the interest of a larger producer or other potential buyer, Lin said. Juniors used to be able to sell to an oil trust or go public once they’d reached 1,000 to 2,000 barrels a day of production, but that figure is now up to around 10,000 barrels, he said.
The lack of available funding for juniors prompted Anderson to start Enercore earlier this year. The firm seeks to help Canada’s junior explorers generate debt or equity funding from a network of investors and family offices that Anderson built up during his career in private equity in Europe, as well as from a similar stable of U.S. contacts from Enercore’s partner in Houston. The firm, which is targeting deals of around C$100 million, also has a representative in Calgary who serves as the point of contact with the junior companies.
Canada’s junior explorers are attractive because of the nation’s political and economic stability and because they give British and American investors a chance to diversify the currency of their holdings into loonies, he said.
“Prices have been beaten up pretty badly, so there’s a buying opportunity,” Anderson said in an interview from London, where he spends about half of his time. “The entry point is pretty favorable.”
However, a catalyst for reigniting broader interest in the sector from both equity investors and debt providers may prove elusive. The only real antidote to the lack of funding would be increased oil and gas prices, said Paradigm’s Lin. With the U.S. shale juggernaut flooding the market as quickly as OPEC nations can reduce production, that scenario may be a long way off.
While crude is on a rebound, rising above $52 a barrel in New York this week, it’s still down about 3 percent for the year and trading at less than half the $107 mark it reached in 2014.
“A higher commodity price solves a lot of issues,” Lin said. “If we have a $45 to $55 range-bound oil price, then we’ll continue to be in the same environment in terms of capital raised.”
— With assistance by Scott Deveau, Allison McNeely, and Claire Boston