There's been a flurry of equity offerings in recent weeks as the oilpatch looks for ways to cope with low oil prices.
Over the past month alone, Encana Corp. (TSX:ECA), Cenovus Energy Inc. (TSX:CVE) and Baytex Energy Corp. (TSX:BTE) have collectively announced about $3.3 billion in "bought deals." All three have said they'd use the funds for debt repayment.
In a bought deal, banks normally team up to buy a block of shares from a company, which they are then responsible for selling to investors. The banks usually snap up those shares at a discount, since they're are on the hook if the offering is a dud. The hefty sums earned in commissions help offset the risks the banks take on.
"They have to be reasonably sure that the deal can get done," said Les Stelmach, portfolio manager at Franklin Bissett Investment Management.
The fact that the stock has been moving reasonably well sends an encouraging signal.
"Given the weakness in commodity prices, I suppose that's reassuring that people are interested and they want to put money to work in the sector."
Encana and Cenovus' deals have closed, with Baytex's expected to wrap up early next month.
"The view they're expressing is that this is the floor. This is the lowest it's going to go," said John Stephenson, president and CEO of Stephenson & Co.
Stephenson doesn't necessarily share that world view — he thinks it will likely get worse in the oilpatch before it gets better.
"If you want to have energy in your portfolio, you can get these same companies still on sale — maybe even at a better discount — in four months time and you'll have had four months less heartache."
Sonny Mottahed, CEO and managing partner at Black Spruce Merchant Capital, said "best in class" companies can pull off deals like these in a downturn.
"These businesses have so much underlying value that, unless you have a true doomsday scenario of what the world looks like, it's probably a decent entry point, particularly for institutions," he said.
Bought deals may cause some existing shareholders to grumble about their holdings being diluted.
"When you issue a whole bunch of shares at low prices, you're not doing your long-term shareholders a big favour," said Stelmach.
He expects there's a "big debate" in downtown Calgary boardrooms about whether issuing equity is the best way to go, or if other measures — like a dividend cut, capital spending reduction or asset sales — are better. Many firms have been taking a combination of those steps.
Aston Hill Financial portfolio manager John Kim agrees that some existing shareholders might not be "entirely happy" when equity is issued.
"But you accept the fact that it had to be done for the long-term health of the company. You just accept it," Kim said.
Portfolio managers at Aston Hill have snapped up Encana, Baytex and Cenovus lately, said Kim. He expects more oilpatch names will tap the markets — opportunities that he'll weigh on a "case-by-case" basis.
"I do think that we'll probably hit bottom in oil some time this year. It just really comes down to what is the turnaround? Do we get a snap back like we did in 2009 in terms of the oil price or is it a much more muted, gradual recovery in the oil price," he said.
"So that's where we're being fairly selective and going back into the energy market in a much more measured way versus saying 'this is the bottom' and kind of piling in."
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