Athabasca price slide puts chill into IPOs

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Canada's hot IPO market has gone stone cold after Athabasca Oil Sands Corp. stumbled in its high-profile debut, and the fallout from the botched deal could include more foreign takeovers of domestic energy companies.

At a time when many U.S. initial public offerings are soaring, shares in Athabasca dropped sharply in the wake of the company's launch on the Toronto Stock Exchange.

Calgary-based Athabasca sold $1.35-billion worth of stock last week at $18 a share - double the original size and the largest IPO seen in North America this year - then saw the value of the shares slide 20 per cent in its first five days of trading.

The much-hyped deal's poor performance has soured investors on new domestic stock offerings, according to investment bankers.

Electronic book publisher Lulu Ltd. postponed a $70-million IPO Thursday, citing "current market conditions." Tepid interest in the deal shows investors are still leery of unproven companies and IPOs that fail to deliver, said sources working with the company, founded by software pioneer Robert Young of Red Hat Inc. fame.

In Calgary, some companies are now in a holding pattern. At least two oil sands plays - MEG Energy and Laricina Energy - had planned to go public in the wake of the Athabasca offering, according to money managers and energy investment bankers. These energy companies could become takeover targets if the IPO market is closed.

MEG Energy and Laricina require billions of dollars to develop projects.

They now must contend with cooler interest from domestic investors.

This cooler interest comes at a time when deep-pocketed foreign buyers, such as state-owned Asian firms, are offering premium prices for the oil trapped in northern Alberta.

Sinopec, China's largest refiner, paid $4.65-billion (U.S.) this week to purchase a 9-per-cent stake in the massive Syncrude project, which holds 10 billion barrels of oil. Energy analysts said Sinopec paid $500-million more than the stake was expected to fetch.

"The oil sands are still viewed by foreign companies as a politically stable, attractive option to secure oil resources," said Chris Felton at Macquarie Group in a report. The Calgary-based energy analyst predicted takeover activity will pick up in the sector, because "with oil sands leases essentially all locked up, new entrants in the play will have to pay for access."

Potential buyers include existing participants: China National Offshore Oil Corp. already owns a 15-per-cent stake in MEG Energy, and private equity firm Warburg Pincus LLC is also a major shareholder. Laricina's management team previously built Deer Creek Energy Ltd., then sold the Calgary company five years ago to France's Total SA for $1.35-billion (Canadian).

Foreign energy companies pitched takeovers at both MEG Energy and Laricina over the past year, according to a number of sources at investment banking firms.

Laricina chief financial officer Karen Lillejord confirmed yesterday that an IPO is under consideration, explaining "we have always anticipated that some day, we will be public."

However, Laricina can tap numerous other pools of cash, such as private placements of stock, and Ms. Lillejord said the company is confident it can raise the capital needed to develop reserves that hold more than 4 billion barrels of oil without requiring an IPO in the immediate future. She declined to comment on takeover scenarios.

MEG Energy executives played down takeover talk, pointing out the firm raised $1-billion in private stock sales over the past year, and boosted credit lines by $300-million to $1-billion. "We have the luxury of being well-situated and well-financed. We are fortunate, as we have the option of tapping private or public markets, as needed, at the appropriate time," MEG spokesman Dale Hohm said.

Energy experts pointed out that going public is not the only way energy companies can raise money, while staying independent. "Private oil companies have other financing options, some cheaper and quicker than an IPO. They can do a reverse takeover, for example, and then sell shares," said Alan Tambosso, president of Calgary-based M&A specialist Sayer Energy Advisors.

Why did Athabasca perform so poorly at a time when oil prices are rising and the likes of Sinopec are snapping up Alberta firms? Mr. Tambosso pins part of the slide on insider selling after the IPO. Many long-time Athabasca backers, including shareholders at investment banks, bought stock for less than $2 a share, and put downward pressure on price by cashing in.

"If you bought into Athabasca for $1, and lived with that holding through the past two harrowing years, you really don't care if you come out at $18 or $16, you just want to cash out," Mr. Tambosso said.

Rival dealers say Athabasca's underwriters, led by Morgan Stanley and GMP Securities, placed too much Athabasca stock with hedge funds that were looking for quick profits. Several recent U.S. IPOs spiked 30 per cent during their first day of trading. When Athabasca shares failed to show this sort of pop on the TSX, the hedge funds headed for the exits, driving down the price of the stock.

The group selling Athabasca stock featured only one Canadian bank-owned dealer, leading to relatively few sales to buy-and-hold individual investors, core clients of the country's big banks.