A combination of new risks is putting a damper on what was expected to be a busy year for initial public offerings in Canada's energy sector.
Private-equity backers have waited for an end to the lengthy downturn in the industry to start taking exploration and production companies public. Indeed, gains in oil prices in the last four months of 2016 appeared to fuel a rebound.
But widespread fears over a potential U.S. border-adjustment tax, which could hurt exports, and insufficient pipeline capacity to get natural gas out of the country's hottest exploration regions have pressured the Canadian energy sector, prompting private-equity backers to rethink the timing of IPOs.
Since the start of 2017, the thorny issues have weighed on some of the most successful public companies operating in regions such as the Montney and Deep Basin in Alberta and British Columbia. Shares in Peyto Exploration & Development Corp., Tourmaline Oil Corp. and Birchcliff Energy Ltd. have all fallen despite strong operational performance.
The weaker market for some of the best names makes it all the more difficult to woo investors to IPOs for companies operating in the same areas, said Derek Wheatley, co-head of the Canadian division of investment bank Tudor, Pickering, Holt & Co.
The overall sentiment toward the industry has darkened since the end of last year, he said.
"I don't know if it's any one thing – the bigger issue is, the chance of things getting better are low and the chance of things getting worse is possible. So if you had to choose, you just choose against Canadian energy," Mr. Wheatley said.
"Sure, it's the border tax. Sure, it's policy on NAFTA – it could be any number of things. But I think that the possibility is that you're not going to be surprised to the positive."
Several companies have been tipped as IPO candidates, many of which gave presentations to investors at a conference in Toronto hosted by Royal Bank of Canada in January. Some include: Canadian International Oil Corp., Canbriam Energy Inc., Modern Resources Inc., Jupiter Resources Inc., Saguaro Resources Ltd., Unconventional Gas Resources, Velvet Energy Ltd., Westbrick Energy Ltd. and Teine Energy Ltd.
At least one, Teine, had considered an IPO before the downturn in 2014, when such firms as Journey Energy Inc., Northern Blizzard Resources Inc. and Seven Generations Energy Ltd. went public. Following the $932-million Seven Gen deal, crude oil prices began their descent, eventually falling below $27 (U.S.) a barrel.
Following an agreement late last year among Organization of Petroleum Exporting Countries members and allies to limit production, oil has recovered to above $50. Meanwhile, Alberta wholesale natural gas prices have nearly doubled from a year ago, though they have recently softened.
But uncertain U.S. trade policies under President Donald Trump have pressured the sector anew: The S&P/TSX energy subindex has skidded about 12 per cent since the beginning of the year.
"I think it's fair to say that any of those companies that thought they were going to go public are probably putting it on hold," said Mason Granger, portfolio manager at Sentry Investments in Toronto.
"We don't have a ton of clarity on this border-adjustment tax, so we're sitting here watching our stocks go down 2 and 3 per cent a day," he said. "It's tough watching that, and I think in the kind of environment where energy is plunging, which it has been, it's not the right time to go public. We need to have that stuff behind us."
One exception has been niche players in oil and gas services. STEP Energy Services Ltd. has filed paperwork ahead of a planned offering this year in which it aims to raise roughly $200-million (Canadian). The company is backed by ARC Financial Corp.
Source Energy Services Ltd., a TriWest Capital Partners company which produces sand used for hydraulic fracturing, has hired Bank of Nova Scotia, Morgan Stanley and Bank of Montreal to lead a stock sale that could be worth as much as $250-million.
The service providers have benefited from improving margins as crude prices have stabilized. It makes them more attractive candidates for public share sales than their oil-producer clients, many of which lack the scale needed to attract attention from U.S. and institutional funds, investment bankers and industry executives said.
It's not clear when trade and pipeline issues might be resolved, but the potential IPO candidates would not have all been floated at once, Mr. Wheatley said. There are other options as well, including consolidation among them, he said.