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‘The interest in Canada has picked up a lot,’ said Brian Schmidt, CEO of Calgary-based Tamarack Valley Energy
By Chris Varcoe
It’s taken a decade for Canada’s oil and gas sector to return to this point, but 32 petroleum producers in the country recently hit a noteworthy milestone.
New data from analyst Jeremy McCrea at BMO Capital Markets shows that for the first time since 2016, there were 32 oil and gas producers on the Toronto Stock Exchange with a market capitalization exceeding $1 billion at the end of May.
That’s double the number seen in 2020 during the pandemic, although still down from 39 reported in 2013.
Of the current group, 13 companies had a market cap above $5 billion, with 19 oil and gas producers between $1 billion and $5 billion.
The increase in the valuation of the intermediate and large producers — led by Canadian Natural Resources, with a market capitalization of nearly $117 billion on Thursday — reflects several industry trends.
These include rising oil prices this spring that pushed up energy share prices, growing interest from international investors in the Canadian industry as the U.S. shale sector matures, and a wave of mergers and acquisitions (M&A) that has seen far fewer — but substantially larger — businesses emerge.
“You go through these decade-long cycles. You’ve got a boom, you’ve got a bust, you consolidate. And then you kind of reform again, and we’re in that consolidation phase here right now,” McCrea said in an interview.
“If you lose a name, there are more names who are coming up behind here, who have that liquidity and size that are still going to be attractive for institutional investors.”
The number of publicly traded petroleum producers in the country has dropped from 228 a decade ago to 119 today, although there are some signs of more players joining the junior oil and gas producer space, he added.
Consolidation has swept through the industry over the past two years, with companies such as MEG Energy, Veren, NuVista Energy and, most recently, ARC Resources being acquired.
The Middle East conflict pushed oil prices over US$100 a barrel in April, although they have since dropped off to levels not seen since early March — closing at $71.92 a barrel on Thursday — as the Strait of Hormuz is seeing increased movement of tanker traffic.
Despite dropping more than nine per cent in the past two weeks, the S&P/TSX Capped Energy Index has risen 25 per cent this year.
More investors from the United States and internationally are paying attention to the Canadian energy sector, say analysts and executives. Oil producers have also been able to grow output, hitting record levels in the country, as more pipeline capacity has become available.
For producers, there has been a change in investor sentiment.
Brian Schmidt, CEO of Calgary-based Tamarack Valley Energy — its share price has climbed 56 per cent this year and market capitalization is nearing $6 billion — said he’s seeing more interest from investors in the United States.
He estimates 75 to 80 per cent of the company’s shareholder base is from south of the border, much higher than levels seen shortly after the pandemic.
“Compared to the way the (Western Canadian Sedimentary) basin looked 10 years ago, these are great companies,” he said, noting producers have reduced their debt levels, and most are buying back shares and growing output.
“The interest in Canada has picked up a lot. It’s quite astounding, actually.”
Changing views expressed by the federal government toward the oil and gas industry, along with the promotion of the sector by Alberta, are also helping, he said.
Meanwhile, larger companies with a bigger market capitalization can attract more institutional investors, noted Kelt Exploration CEO David Wilson.
“Liquidity is . . . important to an investor, so the bigger your market cap, the broader your investment base can be,” he said.
“You have had a bump up in commodity prices, and investors are starting to get more and more aligned with the idea that we do need oil and gas, and it’s going to be a big part of the world to go forward.”
More companies are becoming large enough to meet the investment thresholds for some institutional funds.
Laura Lau, chief investment officer with Brompton Group, said oil and gas producers need to have a market cap above $2 billion, and pay dividends, for her funds to consider buying a position.
“The problem with Canadian energy before this is that there are only so many investable companies,” Lau said.
“I think the breadth of the market is finally expanding, that Canada is back.”
Eric Nuttall, a senior portfolio manager with Ninepoint Partners, said he typically looks for public companies that have a stock market value that exceeds $3 billion or $4 billion, to meet his investment threshold.
And while it’s good to see more companies with a market cap above $1 billion, the overall industry has watched a number of firms disappear through M&A deals in recent years.
“I think everyone is desperate for new names to invest in, because we’ve lost some of our favourite companies,” he said.
“Consolidation leads clearly to fewer names, and if this trend continues, then we’re going to be left with nothing but a handful of companies to invest in.”
Chris Varcoe is a Calgary Herald columnist.
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