Paul Charron looked set to start his third energy company. A year ago, he was scouting for assets in Canada's downtrodden oil patch, backed by $465-million from two major U.S. private-equity firms.
He didn't land any, despite bidding on a trio of oil properties. Mr. Charron's CanEra Resources Inc. III has since been wound up, and he has moved on to run another private energy company.
It marked an unusual turn for the Calgary executive, who had built and sold two previous companies named CanEra. Each was backed by Riverstone Holdings LLC and NGP Energy Capital Management.
The decision to wind up the company was amicable, Mr. Charron says. But it comes as big investors think twice about pumping fresh funds into Canada's energy sector, where weak prices have been exacerbated by long-standing pipeline constraints.
Private-equity firms had been among the biggest funders of small oil and gas firms shunned by public markets, and they had been widely expected go on spending sprees as oil prices languished and companies put assets on the block. Now, even that well is running dry.
Enthusiasm for the sector has waned as investors flock to regions that offer bigger returns more quickly, such as the Permian shale in Texas. This year, private-equity firms have struck one deal in Canada's oil and gas industry worth $216.8-million (U.S.), a fraction of the 22 deals worth $8.6-billion notched in the United States, according to Thomson Reuters data.
There is also scant appetite for initial public offerings in energy as oil prices hover around $50 a barrel, limiting options as the industry downturn approaches its fourth year. Last year, New York-based KKR & Co. closed its Calgary office just two years after opening it.
"I think part of the challenge here is there are a lot of private equity-backed companies that are looking for liquidity," Mr. Charron said in an interview.
With CanEra, NGP "felt they were having more success in the Permian in the U.S., so they actually weren't looking to invest in Canada at that time, unless they could get a real steal of a deal," he said.
NGP declined comment on its Canadian holdings. Earlier this year, the Houston-based firm, along with Riverstone, sold its interest in Northern Blizzard Resources, which has since changed its name to Cona Resources.
NGP has also launched a $500-million (Canadian) lawsuit over the collapse of Mosaic Energy Ltd., a Calgary-based natural gas producer in which it held a major stake. Mosaic was carved up and sold to rivals after being forced into receivership. It owed banks about $142-million.
Mosaic was among nearly a dozen bets made by various private-equity firms on natural gas producers in the Montney region of British Columbia. Black Swan Energy, Canbriam Energy Inc. and Saguaro Resources Ltd. also count such investors among their backers.
To be sure, not all are struggling. This year, STEP Energy Services Ltd. and Source Energy Services floated shares despite shaky markets. And Vesta Energy Corp. tapped investors led by Riverstone and Calgary-based JOG Capital Corp.
Privately-owned Vesta is drilling for oil in a region of west-central Alberta said to rival some of the biggest U.S. shale zones. However, development has lagged owing to high costs and infrastructure constraints.
Similar concerns have dogged natural-gas producers. Many had hoped that a boom in liquefied natural gas exports (LNG) would stoke demand for drilling and services, lifting prices from an extended funk. Several had been tipped as possible IPO candidates. But those plans have largely been scrapped. Last month, state-run Petronas of Malaysia abandoned its $11.4-billion Pacific NorthWest LNG development, blaming a global glut of fuel and high costs.
The move was a blow for small and mid-sized producers already struggling to attract capital and could make it harder for private-equity firms to realize gains through a corporate sale, said Robert Mark, portfolio manager at Raymond James Ltd.
"There have been lots of assets on sale for the past three years but we have yet to see a proper rebound in commodity prices to allow for liquidity events," he said by e-mail. "Between the majors selling off oil sands and Petronas quitting LNG, the marketplace of buyers is shrinking and those that are buyers have lots of top-tier assets to choose from."
Despite challenges, Mr. Charron said now is actually a good time for private equity to put money to work. That's especially true as public markets remain effectively closed for many energy companies.
"If you look at some of the more recent equity issues, they haven't gone that well," he said.