Alberta's junior oilpatch explosion
Startup rate 'bewildering'
Claudia Cattaneo, Calgary Bureau Chief
Financial Post
Tuesday, March 04, 2003
CALGARY - High oil and gas prices, enthusiastic investor backing, and lacklustre growth prospects for senior oilpatch players have resulted in an "explosion" of junior oil and gas startups that has analysts scrambling to keep up.
"All I know is I am a junior and small cap analyst and it's bewildering to me the rate at which new names are being created, old names are being recreated, and management teams that kind of checked out for the last cycle -- 1997 to 2001 -- that are back again," said Andrew Boland, research director at Peters & Co. in Calgary. "I think we had a veritable explosion in the last 18 months."
The explosion comes on the heels of sector consolidation until a year ago that decimated junior and intermediate ranks and left the Canadian oil industry with only a handful of senior firms, with the rest of Western Canada's oil and gas assets owned predominatly by U.S. players.
Now, by some estimates, there are 150 publicly traded small, micro and junior oil and gas companies in the sector. Many more are private firms that are planning to become public to take advantage of favourable market conditions.
"There has been an ever increasing number that went public and the momentum really picked up in 2002 and it's continuing on," said Tom Budd, president of Griffiths McBurney & Partners.
There are two major financing sources, he said. Financial institutions that benefitted from the last consolidation phase and are familiar with management groups starting up new oil and gas ventures, and high net worth individuals.
Investors who were previously reluctant to back startups are now supporting them because they see the oil and gas sector in general as one of the few bright lights at the Toronto Stock Exchange. Within the sector, juniors have been the best performers, Mr. Budd said.
"Having a diversified portfolio of juniors would have generated returns in the 40% to 50% levels last year," he said. "The returns are there."
George Gosbee, chief executive of Tristone Capital Inc., said junior companies enjoyed a boost last fall, when investors realized larger companies were not going to grow as much as anticipated.
Ed Peplinski, analyst at Polar Securities Inc., a Calgary limited partnership fund that invests in juniors, said a lot of money was made in Western Canada in the energy business over the last four years and is being re-invested in juniors because it's comfortable with the sector.
"They are trying to be in the part of the value-creation curve with the highest slope," he said. "It goes up at a very steep angle at the smaller production stage."
Jamie Blair, a former executive with Husky Energy Inc. who started up ExAlta Energy last year, said market support for junior firms has been "excellent" from high net worth individuals who see the opportunity to earn a multiple of their investments while backing experienced management teams with big stakes in the company.
Recently launched juniors include: Atlas Energy, Brooklyn Energy, Case Resources, Cequel Energy, Crescent Point Energy, Defiant Energy, DT Energy, E3 Energy, Great Northern Exploration, High Point Resources, Impact Energy, Progress Energy, Storm Energy, Tempest Energy, Viracocha Energy.
Mr. Boland said demand is so high many of the hotter names are trading at higher valuations than senior companies.
With senior companies focused on large and expensive ventures in Canada's frontiers, or international plays, and the transformation of many firms into royalty trusts, junior companies have plenty of opportunity to grow in Western Canada from assets that would be too small for larger companies, he said.
Current junior market conditions are similar to 1993, which became known as the "five alive" period -- there was so much demand for junior names all it took for a management team to start up and raise $5-million was to be alive.
Now, Mr. Boland said startups are typically raising between $10-million and $20-million -- partly because of inflation, partly because "the requirements in the basin to make a splash are a little bigger."
ccattaneo@nationalpost.com
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