These are eerily quiet days for oil and gas financing, mergers and acquisitions, and it's taking its toll on the shops that underwrite equity offerings and provide advice on deals.
Sure, times are tough throughout the market, but the Calgary-based energy sector is being hit by a combination of global malaise and homegrown worries about commodity pricing and oil transport infrastructure that have kept a lid on stock prices for companies big and small.
With no end in sight to factors keeping investors on the sidelines, firms have been quietly ratcheting down head counts in research, trading and investment banking. Some, such as Stonecap Securities Inc., have closed offices. There is even word of growing friction between dealers and a burgeoning private equity presence in Canadian energy as the financing market shrinks and some producers start avoiding brokered deals.
For a sector accustomed to raising around $1-billion a month in equity, conditions are positively miserly. In the first three months of the year, the industry raised about $900-million, according to Sayer Energy Advisors. That trend extended into the second quarter, with $660-million raised in April and May.
There's an accompanying drought in energy M&A, where transactions totalled $600-million in the first quarter, according to the Sayer stats. In previous years, the industry did that much worth of deals monthly. Consider 2012, when Chinese state-owned CNOOC Ltd. launched its $15.1-billion (U.S.) bid for Nexen Inc. and Malaysia's Petronas agreed to buy Progress Energy Resources for $5.3-billion. Of course, foreign state-owned enterprises have cut back on Canadian energy shopping after Ottawa imposed new restrictions on acquisitions of controlling stakes in the oil sands, but the junior oil sector that normally does brisk business has also slowed.
"Somebody referred to it as the summer doldrums coming early. June, July and August are typically very slow months for financing," Sayer president Alan Tambosso said. "We're going to be eight months into the year and still well behind. We'd have to have a spectacular finish to the last quarter for this to be anything other than a horrible year. We can't predict anything changing the global or national economy of that scale."
It all translates into a big drop in fees for a part of the finance business that had already been shrinking. The number of dealers covering Canadian oil and gas fell to 54 in 2012 from 61 in 2011, Sayer said. Active dealers, or those that complete more than $5-million of issues per year, included 26 Canadian independents, 22 foreign-based firms and six Canadian bank-owned shops.
Since then, one of the big foreign players, Switzerland's UBS, downsized and last month cut two Calgary-based energy analysts. Stonecap closed its Calgary office in April. Other firms are opting to leave positions vacant when staff exit rather than refilling them.
"Over all, the sell-side is the worst I've seen it in four market cycles," said veteran Bay Street headhunter Joe Kan. "Every down cycle sees its share of layoffs and low – or no – bonuses. But this is the first time I've seen dealers have to close satellite offices and sublet out office space to help make ends meet. Furthermore, firms are taking full advantage of natural attrition to reduce head count."
The situation has pushed at least some from the finance sector into corporate jobs in the oil business, which provide more stability, Mr. Kan said.
"And in terms of more-experienced professionals, they're working just as hard as they were a couple [of] years ago, but making half as much. That makes for some grumpy people – me included," he said.
There have been some smaller energy stock issues in recent weeks that have generated fees. Bonterra Energy Corp. issued $24-million in a bought deal led by FirstEnergy Capital Corp. Pine Cliff Energy Ltd. did a $25-million offering, led by Paradigm Capital Inc. Surge Energy Inc did a $225-million issue led by Macquarie Capital Markets Canada Ltd, but also announced plans to transform into a dividend vehicle.
This is unlikely the start of a major positive trend that could turn things around this year, even as the industry bets on approvals of major pipelines such Keystone XL, Mr. Tambosso said.
"We can't see anything of that magnitude that would cause that dramatic of a shift overnight."
(Jeffrey Jones is a Globe and Mail Business Reporter.)
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