Canadian exploration suffers as independents struggle to find financing
Friday, Oct 06, 2017
Smaller Canadian independent energy companies are having trouble obtaining financing and, as a result, exploration is on a downward trend in the country.

Considerable reductions in capital for exploration and the number of smaller explorers are raising questions about the Canadian oil and gas industry’s ability to ramp up production when oil prices rebound.

According to Bloomberg, Canadian oil and gas explorers suffered a 39% drop in the amount of capital raised during the first eight months of 2017 compared to the same period a year earlier.

Canadian oil and gas explorers, predominantly small independents, announced 73 primary or secondary share offerings of US$100 million or less for total proceeds of US$535 million. By comparison, a total of US$881 million was raised during the same period of 2016, but even this amount was less than half of the US$1.34 billion generated in the first eight months of 2012, when oil prices averaged more than US$95 per barrel.

“We need a mechanism that’s going to be able to inject capital into the market,” capital advisory firm Enercore Energy Capital’s CEO, Perry Anderson, said. “If you don’t have a facility or ecosystem that’s funding a lot of this stuff, that brings the full-circle business model to a bit of a halt,” he added.

Traditionally, large Canadian producers depend on smaller explorers to help them identify new projects in which to invest. Historically, a common business model in Canada has seen small firms lead the way before large producers acquire either the assets or the entire company involved.

However, such takeovers have been limited in recent years, and many smaller independents have ceased operations owing to financial difficulties that were exacerbated when financial institutions reduced credit or called in loans in the wake of the global energy downturn. Citing its own data, Bloomberg reported that debt markets were also weak in the first eight months of 2017. Canadian explorers with a market value of less than C$500 million (US$401 million) raised C$610 million (US$489 million) through 10 bond and loan deals between January and August this year.

This total represented a 47% drop from the C$1.16 billion (US$929.71 million) raised during the first eight months of 2016 – and was less than a third of the C$2.12 billion (US$1.70 billion ) raised in the same period in 2015.

As a result, according to Calgary-based Iradesso Communications, there were only 25 publicly listed Canadian companies producing 500-10,000 boepd at the end of the second quarter of 2017 – down from 42 at the end of the third quarter of 2014.

On the other hand, Canadian corporate bond sales in general climbed by 11% this year up to August, to C$70.3 billion (US$56.3 billion). A Paradigm Capital partner and equity research analyst, Ken Lin, told Bloomberg that the limited amount of exploration still under way was being funded through private equity firms, but that they were favouring projects already in production. With oil prices low, he added, private equity firms are risk-averse when it comes to small independents’ oil projects.

“Companies are more focused on development and exploitation than anything else,” Lin said. “They’re not incentivised to do exploration, and given that we’re in a mature basin, there’s very little of that happening.”
Lin also contended that smaller explorers were finding it increasingly difficult to complete a well, as multi-stage drilling methods over longer periods require additional hydraulic fracturing materials and capital. Not too long ago, he said, one well cost C$1 million (US$801,500), but it can now cost C$3-10 million (US$2.4-8.0 million).

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