After months of sitting still, Bay Street deal makers are busy again, thanks to resurgent demand for Canadian energy.
Western Canadian oil and gas companies have shaken the financial industry out of the doldrums. For months, investors had no appetite for new stock, which hurt underwriting fees. But oil prices have shot up, despite the turmoil in Europe and signs of a slowing economy in China: The benchmark for North American oil is up nearly 30 per cent since its early October low.
That has led to a flurry of deals that some financiers believe will continue to the end of the year.
Recent deals include Vermilion Energy Inc. 's $250-million common share offering on Tuesday and Pengrowth Energy Corp. 's $300-million stock sale a day earlier. If offerings of this size continue to sell, that could awaken the sleepy initial public offering market, sending bankers off to the races.
At this point, though, that is still wishful thinking. Many of the energy companies that have raised money are well-known names, so it is hard to gauge if less venerable firms could come to market. There is also the lingering question of whether this rally is sustainable. Both energy companies and oil itself have been on a big run over the past month, but so were metals earlier this year. Then, after trading around $4.50 (U.S.) a pound in July, copper lost a third of its value in just three months.
Yet the dominant message in Calgary and on Bay Street is that energy has more solid support. "Oil's pretty fundamental to global growth," said portfolio manager John Stephenson, making the rally "certainly more sustainable than the metals side of the story."
On the macro side, Mr. Stephenson said there has been "a slow drumbeat of data points" that suggest oil has good reason to be trading at $97 a barrel. Examples include a recent report from the International Energy Agency that estimates it will take $38-trillion in investments over the next 25 years to keep supply level with demand. And if companies can't keep up those investments, curtailed supply will push prices higher.
Plus, of late the Federal Reserve has assured investors there is growth in the U.S., albeit very slow growth, and the Chinese economy continues to expand, although at a slower clip. Europe is also starting to get its act together.
"You can make a fundamental case that in that $80-to-$90 range, oil is completely supported, without putting any kind of positive spin on it," said Jennifer Stevenson, portfolio manager at DundeeWealth Inc.
In part, oil has rallied so quickly because it plummeted just as fast. "When the sky was falling, everyone was avoiding risk," said Michael Dunn, energy analyst at FirstEnergy Capital Corp., referring to August and September when European fears took the market by storm. "In the past three or four years, we've certainly seen what that can do to the oil price," he said.
As aversion to risk grew during that period, hedge funds unwound their commodity bets, pushing oil prices all the way down to $76 a barrel from $114 in April.
Now the rebounding energy sector is propping up the total Canadian market. Since hitting a floor on Oct. 4, the S&P/TSX composite index is up 12 per cent, and the TSX's energy subindex, which makes up more than a quarter of the broader index, is up 20 per cent over the past month.
Natural gas companies have been particularly hot. Examples include Progress Energy Resources Corp. and Celtic Exploration Ltd., which are up 13 and 2 per cent, respectively, in one month's time.
Their rally is particularly surprising because oversupply south of the border has suppressed natural gas prices. However, analyst Kyle Preston at National Bank Financial Inc. said the prospects for shipping liquefied natural gas from Kitimat, B.C., to Asia has piqued interest in the sector. Not only was the port approved by regulators in mid-October, but Sinopec's recent purchase of Daylight Energy Ltd. at a premium of more than 100 per cent proved clearly that there is pent-up demand in China for Canadian natural gas.
Ms. Stevenson cautions, however, that while Canadian companies may eventually be able to export their vast natural gas resources, they won't be able to do so until 2015 or later. The world could change significantly before then.