Encana Corp. is raising more than $1-billion (U.S.) in a marketed share issue, a departure from priced bought deals that are more often used to raise money in the oil patch.
Encana plans to use half the proceeds from the sale of 107 million shares to help fund its 2017 capital spending, much of which will be in the Permian shale oil play in Texas. The rest will be used to reduce debt, which has hovered slightly above industry norms.
Chief executive Doug Suttles has fielded questions from analysts in recent months about the company's $5.7-billion debt. Earlier this year, Moody's cut the company's debt rating to junk, citing high leverage and expected declines in production. Mr. Suttles has referred to several "levers" available to the company to deal with the situation, including more asset sales and equity issues, and said that the options are dependent on commodity prices.
The shares are being sold for $9.35 apiece. The underwriters, led by Credit Suisse Securities (Canada) Inc. and JPMorgan, priced the stock late Monday, a few hours after Encana announced the financing. The price is based on the results of the quick marketing efforts by the syndicate, which has the option of selling an additional 16 million shares in an overallotment option.
The stock closed at $9.86 on the New York Stock Exchange on Monday. Marketed deals are priced based on demand and often sell at a discount to the market. Encana's Toronto-listed shares closed at $13.03 (Canadian).
Unlike a bought deal, underwriters do not risk their own capital by buying the shares for resale to investors.
There is some risk in earmarking an equity financing for increasing capital spending as crude prices remain uncertain due to a global oversupply, and forecasters have recently said it could be well into 2017 before supply and demand come back into balance.
Indeed, Crescent Point Energy Corp. shares tumbled earlier this month after the company issued $650-million of stock, partly to boost drilling. They remain well below the issue price.
An investment banker who is not in the syndicate speculated that Credit Suisse and JPMorgan had likely guaranteed Encana a minimum price on the shares they are selling.
However, the investment banks are not taking on the risks associated with a bought deal, so the fees will likely be less than the standard 4-per-cent fee on a bought-deal equity underwriting.
This deal was widely expected, as Encana had talked about lowering debt levels and rivals including Suncor Energy Inc. have done successful equity offerings in recent months.
Encana was offered bought-deal financings by Canadian investment banks in recent months, but opted to try to tap more U.S. investors by going with a marketed deal, which gives more opportunity to market the company's equity offering.
Encana has also raised money this year by selling assets. Earlier this year, the company said it would use a portion of proceeds from asset sales to increase 2016 spending by $200-million (U.S.), from a previous range of $900-million to $1-billion.
In June, it struck a deal to sell oil and natural gas assets in northwestern Alberta to Birchcliff Energy Ltd. for $625-million (Canadian). It previously sold its properties in Colorado to a group backed by the Canada Pension Plan Investment Board.
It's been a year of monster equity offerings in the energy sector. Besides Suncor's $2.8-billion issue, TransCanada raised a Canadian record $4.42-billion and Enbridge Inc. sold $2.3-billion of shares.
With a report from Jeff Lewis in Calgary