Strong energy sector in Calgary sets stage for action

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CEOs in downtown Calgary have reason to exhale.

Energy stocks flew out of the gate this year and have notched a 12-per-cent gain, double that of the broader Canadian market. The rally is on the wings of the strongest natural gas prices in years and relative stability in heavy-oil price spreads a year after the "bitumen bubble" scare.

It's a remarkable a turnaround from 2013, when the TSX capped energy index shed 2.4 per cent.

Check out the year-to-date gains at some of best-known producers: Encana Corp., which is in restructuring mode, is up 26 per cent. Canadian Natural Resources Ltd., which has bought more than $3-billion of gas assets, has jumped 22 per cent. Canadian Oil Sands Ltd., the largest owner of the Syncrude Canada Ltd. project, is up 16 per cent.

With the herd running at a healthy clip again, the weaker members are going to fall behind and become potential prey. Corporate underperformance has already attracted a handful of activist investors looking to shake up boards of directors and management teams as a way to wring value.

Most recently, Gasfrac Energy Services Inc., which has a unique method of deep rock fracturing with liquid petroleum gas, has found itself in the sights of a hedge fund pushing for strategic change. New York-based Nanes Balkany Partners LLC acquired a 5-per-cent interest in Gasfrac, which said Tuesday it had postponed its annual meeting following talks with shareholders.

The situation follows an unsuccessful coup attempt by FrontFour Capital Group LLC at Renegade Petroleum Ltd., the junior oil company, and renowned corporate crusader Carl Icahn's accumulation of a shares and board seats at Talisman Energy Inc., which was already restructuring. It shows that energy is not immune from a big expansion of shareholder activism at companies across the economy.

There will be more of such activity in the Canadian oil patch, but don't expect a gusher. Its active merger and acquisition (M&A) market often solves problems before managers get too comfortable and entrenched, said Shane Fildes, global head of BMO Nesbitt Burns' energy group. And asset and corporate deals have picked up along with the stock prices.

Talisman is in a bit of an unusual position among Calgary-based energy concerns, with widespread holdings that it is seeking to winnow down. Would-be suitors for the company as a whole have had trouble getting their heads around all of its various properties, with numerous partners and contractual obligations.

"It's got assets that are very far-flung from a geographic perspective, so finding an M&A solution for that is very difficult," Mr. Fildes said.

And don't forget: Mr. Icahn's involvement with Talisman has been anything but the classic interpretation of shareholder activism, with trading of nasty public statements preceding a proxy fight. Instead, the company granted him board seats relatively quickly and the two sides agreed to work together in peace and harmony to improve the lot of shareholders.

The energy industry in Calgary has a few wrinkles that make it tough for all but niche activists, or large players with associates that have deep technical knowledge. Some of them are related to the increasingly tricky nature of the business and the difficulties gleaning information about various wells amid rules that allow confidentiality for long periods, he said.

A major change in 2014 versus 2013 is the taps on capital available to the sector have opened again, as shown by a steady flow of equity financings. That's sure to fuel more deal activity before many investors start to get antsy and demand changes to governance, said Martin Pelletier, managing director and portfolio manager at TriVest Wealth Counsel.

"The recovering sector may be the catalyst, for companies that were looking to sell in the first place, for those deals to get done now because there's more capital floating around," he said.