Canadian energy companies issued a record $5.5-billion of stock in the first quarter as they scrambled to get debt levels in check in the face of the oil-price collapse.
Cenovus Energy Inc., Encana Corp. and Peyto Exploration & Development Corp. were among numerous producers to issue shares in the past three months as crude slumped to six-year lows.
The biggest deals were done to bolster corporate balance sheets and to protect dividends, while a few smaller, nimble players issued equity to buy up cut-rate assets put on the market by rivals under financial strain.
It was a surprisingly rich gusher of deals for the worst energy downturn in years, beating the sector's previous high of $3.8-billion in the second quarter of 2014, according to data provided by Sayer Energy Advisors. That period included the $1.7-billion initial public offering of PrairieSky Royalty Ltd., the richest Canadian IPO in 14 years.
Cenovus issued $1.5-billion of shares and Encana $1.4-billion, both in bought deals led by the Royal Bank of Canada, as they dealt with pressure on their finances, the latter following $9-billion worth of U.S. acquisitions last year.
They tapped into a strong appetite for new shares, especially among U.S. investors, said Chris Cox, analyst at Raymond James. Independent oil producers in the United States also racked up a record value in equity deals, issuing $10.8-billion (U.S.) in shares in the quarter, the Financial Times reported.
"Canadian companies increasingly compete for capital with the U.S. companies now, which is a dynamic we didn't really see five or 10 years ago. There was a greater rush to get ahead of the tape, so to speak, on those deals," Mr. Cox said.
He said he expects companies to keep raising equity throughout the year, but not at the brisk pace of the first quarter.
Oil prices had skidded to around $50 (U.S.) a barrel by the start of this year, hit by a combination of surging U.S. shale oil production, refusal by members of the Organization of the Petroleum Exporting Countries to reduce their own output and weakening demand in major consuming nations.
This led some investment-industry professionals to predict a dismal 2015, assuming an accompanying slowdown in raising capital following a bumper year in 2014.
Indeed, throughout the quarter, crude weakened further, forcing Canadian producers to slash spending on everything from drilling to acquisitions, and in some cases, dividends.
But some companies, such as ARC Resources Ltd. and Whitecap Resources Ltd. tapped the market for expansion capital to take advantage of deep discounts in the acquisition and drilling markets. Others, such as Baytex Energy Corp., issued stock to pay down debt.
Now, forecasters expect crude markets to remain weak in the upcoming quarter. In a report on Monday, Barclays said it expects oil to bottom out as some temporary supporting factors, including cold Eastern U.S. temperatures, refinery strikes and OPEC disruptions, fade away. This will bring a massive inventory build in the United States into sharper focus, pressuring markets, the bank said.
In April, Canadian oil and gas producers will begin releasing first-quarter results that will show huge skids in revenue and cash flow, reflecting crude prices that are half of what they were a year earlier. Natural-gas markets were also sharply weaker this winter.
All of it is likely to combine to kibosh the frenzied equity-financing activity, said Martin Pelletier, portfolio manager and co-founder of Trivest Wealth Counsel.
"We're getting close to the end of the quarter and the bad news will be out soon. Why would they want to issue equity after the first-quarter results come out? So I think the window's closing," Mr. Pelletier said. "There was a window of opportunity and guys jumped at it."
One potential factor that could lead to more equity issues would be an increase in merger and acquisition activity, as some debt-heavy companies find themselves unable to develop their properties, Mr. Cox said.