Seven Generations Energy Ltd.’s Kakwa River Project is pictured. Oil’s downturn has captivated U.S. investors from Blackstone Group LP to Apollo Global Management LLC, which envision a potential windfall from distressed debt of energy companies beaten down by the collapse in crude prices.
Bruce Edgelow has read all the newspaper headlines about investors fleeing Alberta's oil patch. The provincial government's energy banker doesn't have a problem attracting cash – it's finding a place for it all to go.
"Our phone has been ringing off the wall in the last three or four weeks with people wanting to come chat to us about our companies," Mr. Edgelow, vice-president of energy at ATB Corporate Financial Services, the lending arm of Alberta Treasury Branches, said by telephone earlier this week. "Companies like Apollo and others, are those type of companies. They've got lots of capital behind them, and they are quite interested."
The downturn has captivated U.S. investors from Blackstone Group LP to Apollo Global Management LLC, which envision a potential windfall from distressed debt of energy companies beaten down by the collapse in crude prices. They're being joined by Canadian-based asset managers such as Aston Hill Financial Inc. and CI Investments Inc. in a scramble for distressed securities they expect will post outsized returns as the price of crude claws back from a five-year low.
"We all think that oil is going to bounce back and there's opportunity to make equity-like returns," said Steve Vannatta, a fund manager in Toronto at Aston Hill, who favours debt of MEG Energy Corp. and Seven Generations Energy Ltd. in the $7-billion of fixed-income and equity his firm oversees. "There's definitely interest in looking at these balance sheets. We see a recovery in the back half of the year as we start to see signs of a rollover in U.S. production."
Betting on a rebound in oil started to seem less contrarian Tuesday as crude advanced for a fourth day – but then crude prices reversed course on Wednesday, losing more than 8 per cent.
West Texas Intermediate benchmark crude prices may average about $62 (U.S.) a barrel, and Brent $65, in 2015, based on data from the Bloomberg Intelligence investment survey. That assumes a recovery from current U.S. prices of $48.45 and Brent at $54.61.
"You invest in a downturn and you've got a lot more upside facing you, versus investing when all boats float," Alberta's Mr. Edgelow said.
Canada, the world's fifth-largest oil producer, also has a debt market more exposed to energy than either Europe or the United States. Almost one-third of Canada's high-yield bonds are from energy explorers, according to Merrill Lynch data. Speculative-grade debt of energy companies posted losses of 14 per cent in the second half of last year even as Merrill Lynch's Canada Broad Market Index gained 4 per cent.
The downturn has caught companies with viable projects as well as those that were carrying unsustainable debt loads, said Geof Marshall, who oversees about $9-billion of high-yield bonds at CI Investments.
"There's been enough baby thrown out with the bathwater that there are still pockets of value out there," Mr. Marshall said by phone. "It can be a good time to buy distressed energy names if you think oil is oversold and, due to the decline rates, has to go higher from here."
Leon Black's Apollo is the biggest investor in the debt of Calgary-based Lightstream Resources Ltd., according to data compiled by Bloomberg. The company, which produces light oil from the Bakken region in Saskatchewan and Cardium fields in Alberta, suspended its dividend Jan. 19 and said low oil prices could threaten one of the terms of a $1.15-billion (Canadian) credit facility before the end of the year.
The Apollo Energy Opportunity Fund LP was set up to invest in "less liquid or illiquid credit products in energy industries," according to documents filed with the U.S. Securities and Exchange Commission in Washington.
Bud Perrone, a spokesman for Apollo with Rubenstein Communications Inc., declined to comment on the firm's position in Lightstream and potential Canadian investments in the new fund.
Steve Schwarzman, Blackstone's chief executive officer, told investors last week that the timing for energy investments "couldn't be better." The biggest alternative-asset manager in the U.S. is seeking more than $1-billion (U.S.) to buy bonds of troubled energy producers and to provide rescue financing, a person with knowledge of the plans said last week.