Any doubts about a rebound in oil-patch deals were put to rest on Wednesday by Encana Corp. and its decision to expand the PrairieSky Royalty Ltd. initial public offering.
The business – a pay-to-play service for other energy companies to drill on its vast Alberta acreage – attracted such investor interest that Encana boosted the IPO value by as much as $600-million to $1.46-billion.
That's a result of upping the number of shares on offer as well as the likely price for each, after testing the waters with potential buyers of the stock. Encana still intends to hold on to a majority stake.
The deal, slated to close by month-end, is now expected to rank among Canada's largest IPOs and could be the most valuable in the 14 years since Sun Life Financial went public – not bad for a company that will have a skeleton staff and virtually no capital spending of its own.
The ballooning offering is just the latest in a flurry of activity, including a few billion-dollar-plus asset acquisitions and a bunch of equity financings.
It's quite a contract from less than a year ago when the market had nearly ground to a halt, prompting contraction in some energy-focused investment dealers and pushing others out of the market altogether. In the first quarter of 2013, the industry managed $750-million in M&A business, according to Sayer Energy Advisors. This year, the figure leapt to $8.6-billion.
So what's changed? Adam Waterous has some thoughts.
The global head of investment banking for Bank of Nova Scotia and veteran energy deal-maker believes it's a combination of closer ideas between buyers and vendors about the prices of assets as well as a renewed willingness among investors to bet on the players wanting to do deals.
That pairing is even more important than the strong commodity prices the industry has enjoyed this year, Mr. Waterous said.
"It's sort of like, you need fuel and you need oxygen to have a fire. The fuel is consensus between buyers and sellers and the oxygen is supportive capital markets," he said in an interview.
"If you have those, you can have a roaring fire."
Investors began fleeing the industry in April, 2011, pulling the TSX capped energy index down 35 per cent in two years as concerns grew about troubles expanding oil-export capacity, volatile heavy-crude discounts and depressed natural gas prices. Some big names, such as Talisman Energy Inc. and Encana, struggled with high debt levels before embarking on the restructurings that are now starting to pay off.
This year, though, the energy group is up 15 per cent. Chalk that up to companies extracting better returns on capital – in fact, emphasizing that more than just adding production or spending money in larger numbers of operating regions. There is also strong interest in firms that offer dividends along with potential share-price gains.
Of course, a winter of spiking natural gas prices didn't hurt matters for energy shares either.
It's not all rosy. The deal flow in the oil sands has yet to thaw from the chill that descended following Ottawa's more stringent Investment Canada rules imposed in late 2012, which effectively barred foreign state-controlled companies from buying control of assets.
"The oil sands have different characteristics than many other areas and one of which is that they are highly capital-intensive, which restricts the number of companies that can invest," Mr. Waterous said. "Many of those that would have been operators, the foreign national companies, are now restricted in doing so, so that's why the oil sands have been under pressure and had fewer transactions."
However, the brisk pace set for the other types of transactions through the first part of this year, should last at least through rest of this year, he said.
In the first quarter, the industry raised $6-billion of capital, according to the Sayer figures. Compare that with $15.9-billion in all of 2013. Nearly half that volume was done in the fourth quarter.
The PrairieSky IPO, and another under way by Journey Energy Inc., a junior producer, underscore Mr. Waterous's point that there seems to be enough oxygen around to keep the blaze going awhile.
Jeffrey Jones