A growing list of Canadian energy companies owned by private equity funds are considering going public in coming months on the back of rising energy prices and surging investor interest in oil and gas stocks.
However, IPOs are not the only option on the table for these energy companies, as oil patch professionals say the same mid-sized oil companies working on public offerings are also quietly being shopped to strategic buyers such as the largest domestic and foreign energy companies.
Oil and gas producers said to be candidates for a public offering or corporate sale in the next six to 18 months include Canbriam Energy Inc., Velvet Energy Ltd., Black Swan Energy Ltd., Canadian International Oil Corp. and Unconventional Gas Resources, according to investment bankers, PE fund managers and industry executives. Most of these companies are currently producing significant amounts of energy in the Montney zone that spans northern Alberta and B.C., an area known for large reserves of light oil and natural gas and relatively low operating costs.
All of the businesses are currently owned by PE firms that typically seek to cash in their holdings over time. The backers include private equity fund Warburg Pincus, which has previously cashed in several Canadian holdings, Calgary-based ARC Financial Corp. and domestic PE players such as the Ontario Teachers' Pension Plan and Canada Pension Plan Investment Board.
"The tone of the market in Alberta has improved, due to both commodity prices and greater certainty on government policy, and we are seeing pre-IPO activity," said Sarah Gingrich, a Calgary-based partner with law firm Fasken Martineau DuMoulin LLP. While she could not comment on specific transactions, Ms. Gingrich said: "There are dual track processes playing out, where private equity stakeholders are exploring both IPOs and sales to strategic buyers."
However, the Fasken lawyer cautioned that the upbeat tone could change quickly, halting deal making and potential IPOs, in the face of negative developments such as a sharp drop in commodity prices, further government policy changes or a return to the equity market volatility that marked the first two months of the year.
For PE funds, outright sale of an oil and gas investment is often preferable to going public, as a takeover guarantees a price for 100 per cent of a business, while only a portion of a company is typically sold in an IPO.
A number of these so-called "dual track processes" have seen private companies snapped up by strategic buyers shortly before they were to debut through IPOs – one recent example is Shred-it International Inc., acquired in 2015 by a rival for $2.3-billion mere weeks before it was to begin trading.
Rising oil prices are a major factor in the decision to look at IPOs, as many established producers in the Montney region are profitable with oil prices above $50 (U.S.) a barrel, and crude prices have risen from $35 to more than $50 in recent weeks. Investors have stepped back into the sector as commodity prices rallied and there have been a number of successful stock sales in recent months by senior energy companies, including Suncor Energy Inc. and Encana Corp. While a number of those stock offerings initially performed poorly for investors, the recent increase in oil and gas prices has translated into a rally for energy stocks.
The most likely companies to go public are those with significant production, as investors favour scale and are unlikely to reward companies pumping fewer than 10,000 oil-equivalent barrels a day, a Calgary investment banker said.
The last significant IPO in the oil patch saw Seven Generations Energy Ltd. raise $932-million in a public float in October, 2014, just as oil markets began to soften. The stock has performed well since debuting on public markets.
Not every company considering an IPO is expected to follow through. Many PE funds acquired energy businesses when commodity prices were far higher than they are today – oil was at $100 in the spring of 2014 – and several investment bankers said one remaining deterrent to deal making is the fact that some private equity investments are underwater – worth less than what the fund paid for the business.
Pipeline constraints in the Montney region are also seen as a potential obstacle to ramping up production at established companies. In addition, Alberta wholesale and British Columbia natural gas prices have in recent years traded at a wide discount to the U.S.-based Henry Hub benchmark, hurting producer margins. Both factors could limit appetite for a public offering among funds that made investments before the oil-price crash.
IPO CANDIDATES IN THE OIL PATCH
Cambriam Energy Inc.
Producing 30,000 barrels of oil daily in northeastern B.C.'s Montney region. Owned by a private equity group that includes Warburg Pincus, Ontario Teachers' Pension Plan
Velvet Energy Ltd.
Properties in west-central Alberta's Deep Basin are producing 14,000 barrels of oil a day. Backers are Warburg Pincus and ZAM Ventures, a fund run by the Ziff family
Black Swan Energy Ltd.
Properties are in B.C.'s Montney region; it also operates gas processing plants. Owners include Canada Pension Plan Investment Board and, again, Warburg Pincus
Canadian International Oil Corp.
Owns Alberta oil fields in the Deep Basin. Backers include Riverstone Holdings, one of the largest U.S. energy-focused private equity funds