It was the type of year when chief financial officers needed to search hard and use every tool available to fortify their companies’ balance sheets.
With crude oil shedding 45 percent of their value in 2015, Canadian oil and gas producers glumly took an axe to their costs.
“The industry adopted a really pragmatic and very nimble approach,” says Trevor Gardner, an investment banker with RBC Capital Markets. “They saw their business models changing coupled with to reconsider their financial position on a very frequent basis all year round.”
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Cenovus Energy Inc. was initially one of the big players to maneuver early, raising $1.5 billion via a syndicate of underwriters led by Royal Bank of Canada and TD Securities.
“Cenovus took the initiative to gain access to equity capital markets at the start of the energy market sell-off, which appears like a really astute move with the advantage of hindsight,” says Sante Corona, head of equity capital markets at TD.
Encana Corp.’s $1.4 billion bought deal offering led by RBC, Credit Suisse and Bank of Nova Scotia, followed within weeks, suggesting that well-run companies could still access markets in the depressed environment.
“Through the first part of the year, we had a large amount of equity financing in which a large amount of it was to shore up balance sheets,” says Mike Freeborn of energy investment banking at CIBC Capital Markets. “They were glad they did as the year ended up even worse than anyone expected.”
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As oil prices briefly rallied up to US$66 by June, the first half saw a respectable $6.6 billion of equity capital raised in the energy space, before oil’s inexorable decline within the other half led to just over $2 billion in equity deals.
In a bid to enhance growth and dividends, Enbridge Inc. proceeded having a stock-and-debt decrease of their Canadian liquids pipeline business and renewable assets valued at $30.4 billion to subsidiary Enbridge Income Fund Holdings Inc., which makes it the biggest 2015 deal with a Canadian target, according to CIBC. Subsequently, EIFH issued a $700 million equity issuance included in the transaction, and also the fund is planning similar offerings annually till 2018.
In the relentless hunt to secure liquidity, companies also sought to jettison non-core assets. In June, Cenovus Energy Inc. hived off its royalty lands to Ontario Teachers’ Pension Plan for $3.3 billion.
Canadian Natural Resources Ltd. also struck a cash-share deal for its royalty land with Prairie Sky Royalty Ltd. There’s scope for smaller royalty deals, because they are seen as defensive investments, says Kent Ferguson of RBC. “The transactions that were done were at very compelling multiples for that vendors, and incredibly readily financed by the buyers. We would expect that trend royalty sales and financing to become possible in 2016.”
Suncor Energy Inc. also moved swiftly and aggressively to acquire Canadian Oil Sands Ltd. having a hostile $4.3 billion bid, benefiting from affordable prices. The COS management finally acquiesced to a slightly improved Suncor offer in January.
John Armstrong, head of Canadian M&A at BMO Capital Markets, believes more top tier assets may be coming to the marketplace as companies hunker down for the prolonged downturn, with deep-pocketed players waiting to pounce.
“In the power space, we believe there’s a wall of money from private equity finance and pension funds seeking to look for a home, which we estimate, from the dry-powder perspective, to become US$175 billion whenever we consider private equity and pension funds chasing energy opportunities,” Armstrong says.
yhussain@nationalpost.com
Twitter.com/YAD_FPEnergy
