Big players in the Canadian energy sector have pumped out a slew of stock sales to pay down debt and fund new production projects. While oil executives pitch these deals as paving the way for growth, investors have yet to be rewarded for their faith.
Canada's largest oil producers have done 13 public equity sales of $300-million or more in the past 18 months, and on average these stocks have dropped approximately 12 per cent from when they were announced. Investors keep stepping up to buy the new issues in expectation of a rebound in commodity prices after crude oil fell from $100 (U.S.) early in 2015 to about $44.50 today.
The oil patch has dominated the market for new stock issues. Bloomberg data show that energy companies, including utilities, accounted for half of all Canadian stock sales by value so far this year, with energy producers raising at least $12-billion (Canadian) in large equity offerings since the start of 2015.
Calgary-based Encana Corp. is the latest oil company to tap investors, raising $1-billion (U.S.) late Monday, with half the cash earmarked for paying down the company's $5.7-billion debt and the remainder pledged to expand production. This includes a significant investment in the Permian basin in Texas, where Encana dropped more than $6-billion on an acquisition in 2014, just ahead of a slump in oil prices.
This is the second large equity offering from Encana in as many years, and buyers of last year's offering are underwater on the investment. The company sold shares Monday for $9.35 each; in March, 2015, the company raised $1.44-billion (Canadian) by selling shares at $14.60 each. Encana shares closed Tuesday down 7 per cent at $9.11 (U.S.) or $12.04 (Canadian).
While selling shares allowed Encana to expand its oil fields without borrowing more money, analysts said the equity offering comes at a cost to shareholders. Robert Mark, director of research at wealth manager MacDougall MacDougall & MacTier Inc., said: "It's great for the company – you can go out and get this capital, but it's lousy for the shareholders. You're diluting them just to do your capital program."
The Encana share sale on Monday was also a sign that it is difficult for energy companies to raise money by selling assets during a downturn, an option many energy company CEOs raised earlier this year when they talked about raising cash to fund growth projects. Michael Dunn, an analyst at First Energy Capital, said Tuesday: "Going forward, we don't really see any non-core asset sales that would move the needle in terms of proceeds."
Investors who bought Encana at its recent lows, rather than through its stock sales, have done well, as Mr. Dunn said: "With the share price up 228 per cent relative to its low in late February, this likely looked like an opportune time to issue equity."
Oil and gas companies tend to be serial issuers of equity, tapping markets frequently to fund growth, and poor performance from recent underwritings has fund managers openly grumbling.
Some investors point to Crescent Point Energy Corp., which sold $650-million (Canadian) of stock earlier this month and has subsequently seen its share price fall by 12 per cent. Crescent Point had also previously cut its dividend, and completed a previous equity offering last year. Ryan Bushell, a vice-president and portfolio manager at Leon Frazer & Associates, said the most recent Crescent Point share sale was "ill-timed" and "frustrating for the market."
Disappointing performance from oil and gas stocks has some fund managers opting to avoid exposure to those companies and their management teams, and simply buy the underlying commodity to play a potential rebound in the Canadian energy sector.
"As an investor, I'd rather just buy oil," said Martin Pelletier, a Calgary-based portfolio manager at TriVest Wealth Counsel, who has sold off much of his energy exposure. "If I'm going to come back in [to the market], I'm going to do it on oil rather than a producer."
The fact that shareholders keep stepping up for oil and gas stock offerings has some asset managers shaking their heads.
"If energy investors cared about returns on capital, they wouldn't invest in energy," said Darcy Morris, co-founder of Ewing Morris & Co. Investment Partners. "In aggregate, the industry tends to destroy shareholder value."
The oil sands giant was the first company to raise big money in the oil downturn, and investors were caught off guard.
Saddled with debt, Encana followed Cenovus's lead and successfully raised equity a few weeks later. It followed with another share offering on Monday.
After surviving the 2015 storm, Suncor took advantage of better oil prices to raise fresh funds in June.