Gear Energy files for basic public listing, will not IPO

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For the past few months there have been a lot of eyes on Gear Energy, the heavy oil project backed by Don Gray and former ARC Resources veterans. After management announced in August that they were looking to go public, one question was on everyone's lips: Would it be through a traditional IPO?

That question's been answered, but probably not to everyone's satisfaction – especially not to private backers who are looking to exit their positions. Gear just filed a prospectus, but it's a "non-offering" document, which means the company won't raise money while going public. It's simply looking to list its shares on the Toronto Stock Exchange, effectively moving them from the private grey market onto a public exchange.

Such a tactic isn't unheard of, but it's certainly rare. The last major energy company to do it was Griffiths Energy – now Caracal Energy Inc. – which decided to simply list its shares in London after the company restructured following bribery charges. Postmedia did the same thing in 2011, after it signed an agreement while coming out of bankruptcy that stipulated its shares would have to be listed by a certain date. As that date approached, there wasn't much investor interest, so the shares were simply listed.

Gear taking this route raises questions about the level of demand from institutional portfolio managers for a regular IPO. The last thing Gear would want is to launch an offering and then struggle to raise money. However, chief executive officer Ingram Gillmore said he can't discuss the motives because there are strict rules that prohibit companies from marketing themselves once a prospectus has been filed.

Despite the speculation, Gear isn't necessarily in a tough spot. This tactic has worked for others, such as Caracal, whose shares are up 34 per cent since they started trading on the London Stock Exchange.

There are additional ways for Gear to fund its capital expenditures. The company recently increased its credit facility to $75-million and still has about $20-million left to draw on. These funds also aren't incredibly expensive, with borrowing costs in the first quarter of 2013 amounting to only 3.7 per cent. Gear isn't heavily indebted, either. Its leverage amounts to just 1.1 times its cash flow at the end of 2012.

The junior producer's biggest asset is located in Wildmere, Alberta, about 200 kilometres southeast of Edmonton, and its cash flow from operations amount to $9.6-million in the second quarter. The company currently has about 54 million shares outstanding, and they've been trading around $2.75 in private markets.

Three years ago, Gear raised $90-million in a private placement by selling shares at $3.75 each.