2021 Top Operators Report: Tough debt and equity markets mean living within means

Editor’s note: Last year, when assembling the 2020 Top Operators Report, the COVID-19 pandemic had shuttered the global economy. Oil demand had been reduced by over 20 million bbls/d and prices were at lows not seen in decades.

The mood of the Canadian industry was grim. After five years of being rocked by wild price volatility the pandemic hit like a knockout punch.

The 2021 Top Operators Report looks back at how Canada’s oil and gas leaders pivoted to meet the challenges of 2020, and how they are positioning their organizations for future success.

Once again, we have tapped into the experience of professional services firm KPMG in Canada to provide insight into what strategies operators could pursue to thrive in the current environment.

The report also features a broad swath of the insights and opinions from industry leaders gleaned from Daily Oil Bulletin coverage, along with commentary from data providers Evaluate Energy and CanOils.

Download the report here.

New capital, the lifeblood of Canada’s oil and gas industry prior to the market crash of late 2014, remains scarce as the industry recovers from the pandemic.

Equity financings have declined from a total of $11.9 billion in 2016 to just $722 million in 2020. Debt financings totalled nearly $9.8 billion in 2020 as existing debt was refinanced or rolled over.

“Clearly things remain tough for debt and equity,” said Grant Brown, managing director and partner, KPMG Corporate Finance Inc. “Volatility and export access remain challenges, and ESG is becoming more of a focus. Most debt deals have been refinancing or extending out maturities. Large entities are tapping the bond market. There have been very limited equity issuances.”

Brown said with low interest rates there is some temptation for operators to borrow in debt markets. But conservatism is the word on both sides of debt transactions.

“Lenders and bond markets are focused on not allowing operators to extend debt too far,” said Brown.

ESG concerns are also impacting capital markets, he added, as investors sort out what ESG means to company valuations and what impact the ongoing energy transition will have on their investments in the near- and longer-term.

“Some operators view it as an opportunity,” said Brown. “The world is becoming more carbon-focused. They are asking what can they do in the transition to take advantage of new opportunities. But it’s important to understand the energy transition is going to take a long time.”

There are a lot of nuances within debt and equity financing deals, said Bemal Mehta, Managing Director, Energy Intelligence for geoLOGIC systems ltd. and JWN Energy. Canada’s largest operators dominated debt financings, with many deals pushing due dates out into the latter half of the decade.

“Short-term, the cost of capital is very low, but as due dates push out it rises substantially. This tells us that lenders are confident the post-pandemic recovery is sustainable, at least in the shorter-term, and lenders believe current broader economic conditions and central bank policies will remain stable. Longer-term, there are a number of concerns — inflation, oil and gas demand in relation to the energy transition, export constraints — that all impact the cost of capital.”

Equity markets have been a challenge for oil and gas operators the last five years, said Mehta. Interestingly, there continues to be some equity available, however, for Canadian operators focused on international exploration.

“Half of the top 10 equity financings in 2020 were for companies focused internationally. These operators are spread around the world, from Latin America to Africa to Europe. Canadian exploration expertise continues to remain in demand globally and there appears to be some appetite for investment risk outside our borders.”

With limited access to capital, some companies are turning to alternative finance mechanisms like royalty spin-offs or the sale of infrastructure assets to pay down debt or fund capital projects, said Brown. These types of deals come with immediate gain at the risk of long-term pain.

“Selling royalties can be a source of non-dilutive capital for debt reduction or growth while maintaining operational control. But you are selling a share of future revenue and its value can be won or lost based on future prices.”

Brown said the same holds true for selling infrastructure, a method of alternative financing common among gas producers at low points in pricing cycles.

“Selling infrastructure assets is another non-dilutive source of capital. The disadvantage long-term is if you are in a take-or-pay arrangement it can increase operating costs.”

Download the report here.

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