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Painted Pony to buy IPO candidate Unconventional Gas

A oil pump jack ear Dorothy, Alberta.

© Todd Korol / Reuters/REUTERS

A Montney natural-gas producer tipped as a potential candidate for an initial public offering has agreed to sell itself instead.

Calgary-based Unconventional Gas Resources (UGR), backed by private-equity firms ARC Financial Corp. and Houston-based EnCap Investments LP, was among several producers in the British Columbia exploration zone said to be on track for a public stock sale.

Instead, it is being acquired by Painted Pony Petroleum Ltd. for $229.6-million in shares, plus the assumption of $47-million in UGR debt.

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The reversal highlights souring prospects for new energy listings as oil prices languish under $50 (U.S.) a barrel. West Texas intermediate crude has skidded around 10 per cent from just shy of $54 last week, weighing on energy shares already pressured by rising protectionist sentiment under U.S. President Donald Trump.

It has dampened enthusiasm for new companies untested in public markets. This week, STEP Energy Services Ltd. cut the price range and ultimately shelved a planned offering until markets improve. STEP is also backed by ARC.

"It looks like the window might have closed," said Laura Lau, portfolio manager at Brompton Funds in Toronto, who noted UGR was founded in 2007. "That's 10 years. Private equity is not that patient, so I think that they're getting to the end of that period and they needed a liquidity event."

Under the deal, Painted Pony is also issuing 18 million shares at $5.60 (Canadian) apiece in a bought deal for proceeds of $100.9-million to fund drilling and pay down debt.

The share sale is led by Cormark Securities Inc. and TD Securities Inc. A source said the offering was oversubscribed. The stock fell nearly 6 per cent in Thursday trading on the Toronto Stock Exchange before paring losses to close at $5.79, down 4.77 per cent.

The company is adding production of 8,500 barrels of oil equivalent a day, plus a 29-per-cent increase in proved reserves from lands adjacent to its existing operations. It's also picking up new pipeline and processing capacity in a region where both are in short supply.

Indeed, transportation constraints in northeastern B.C. had been among the reasons cited as potentially delaying public share offerings. Alberta wholesale natural-gas prices have also slumped, forcing companies to revise growth plans.

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Prior to the deal, Painted Pony had slashed its budget and production forecasts for 2017 and 2018. However, it now expects to spend $348-million this year, versus an earlier estimate of $288-million, with production increasing 12 per cent to a forecast 48,400 boe/d, from 43,000 boe/d previously. The deal is expected to close in May.

The dim prospects for energy IPOs stand in sharp contrast to appetite for new issues from fast-growing retailers. Parka maker Canada Goose became the latest to list in a $340-million IPO that started trading Thursday.

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About the Author

Jeff Lewis is a reporter specializing in energy coverage for The Globe and Mail’s Report on Business, based in Calgary. Previously, he was a reporter with the Financial Post, writing news and features about Canada’s oil industry. His work has taken him to Norway and the Canadian Arctic. More

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