Subscription deals feeling the love in the oil patch

WHEN ENCANA CORP. ANNOUNCED its $1.3-billion share offering last week­­ with half the money earmarked for 2017 spending, it joined the likes of Suncor, Crescent Point Energy and Cenovus as part of the gush of share issuances coming out of the oil patch. While the number of oil and gas company offerings has made headlines, one element seems to have flown beneath the radar: the number of them using subscription receipts to finance strategic acquisitions.

A so-called “subscription offering” is a structure under which the buyer issues receipts that convert to shares when the deal closes through a bought-deal agreement signed at the same time as the announcement of the acquisition.

If the deal doesn’t close, the cash is returned to bank or syndicate. “Capital markets currently want to support growing companies, not just companies looking to raise equity to pay down debt,” says
Noralee Bradley, a partner in the corporate group at Osler Hoskin & Harcourt LLP in Calgary. “So the subscription receipts provide a very targeted financing option that allows investors to invest, but in a growth story.”

Subscription offerings have been getting quite a workout in the oil patch over the past four months. Parkland Fuel Corp. closed a $231-million subscription deal September 7 to buy the majority of the Canadian assets of CST Brands Inc. from Alimentation Couche-Tard Inc. Inter Pipeline closed a $600-million offering August 17 to help pay for the $1.35-billion acquisition of Canadian Natural Gas’s liquids mid-stream business.

Tierra Energy did the same August 8, raising US$173.5 million for the acquisition of PetroLatina Energy Ltd. Seven Generations Energy closed a $748-million subscription deal July 26 to help buy $1.9 billion in assets from Paramount Resources Ltd.

Why is the structure suddenly so popular in the sector? With the decline in value of oil and gas reserves, all but the largest energy companies — the Suncors, Encanas, Cenovuses — are probably finding markets less than enthusiastic about lending them money for a recapitalization so that they can go out and find a deal. A share offering tied to a specific acquisition and the promise the money will be returned if the deal falls apart goes a long way to reassuring the investment banks underwriting the deal.

Plus, oil prices are also still hovering below US$50 a barrel, which means stock prices in the oil patch have not yet caught up with the larger market. Target companies skittish about opening themselves up for due diligence usually “require that purchasers have financing commitments in place before signing definitive agreements,” says
David Massé, a partner at Stikeman Elliott LLP in Montréal.

That explains the oil patch, but not why there have been almost no subscription deals in the rest of Canada in recent months. Massé says there have been, but with two exceptions. They’ve been very small ­­–– under $150-million. Pressed as to why the structure’s not being used more widely, he says, “I’m not sure I have the answer to that, but the premise is not wrong.  There haven’t been the big offerings in the rest of Canada, especially over the last four months.”

He’s not alone in wondering why. Theories abound. With Canadian stock prices fairly high outside of most resource stocks, institutional buyers may not be particularly receptive to offerings in other sectors, making bought deals a tough sell, says a lawyer who asked not to be named. On the other side of the equation, some issuers may want to hold off financing acquisitions until the prices go higher still, to limit the impact of dilution.

Frank Deluca, a partner in the securities group at Cassels Brock & Blackwell LLP in Toronto, believes the flurry of subscription deals out of Alberta is being driven by institutional investors who remained underweight in the oil and gas sector for a while and are moving back in. “You couldn’t finance anything a couple of years ago. There hadn’t been offerings. That’s why there are a lot of offerings right now.” In other sectors and in other parts of the country, he says, “there just isn’t a big pent-up demand because those markets have been functioning and doing well over the last couple of years. So there isn’t a backlog.”

Strategic acquisitions are being done outside the oil patch, he adds, but they’re not being structured as subscription offerings because private equity is a huge source of funds for many corporations looking to make a purchase. And private equity “only goes equity on potential exits.”

Jeff Barnes, a partner in of the securities, capital markets and public companies practice group at Borden Ladner Gervais LLP in Toronto, says he is astonished by “how long and slow” the resource bounce-back is taking, adding that he’s “never seen anything like it in nearly 40 years of doing this work.”

Barnes says the spate of offerings, while good news for the oil patch, is not necessarily great news for law firms. “There’s not that much legal work involved in these types of offerings. You’ve already got your prospectus out, the disclosure’s all essentially up to date because of the quarterly filings — so the only real issue to talk about is use of funds.”