Funds flowing again for juniors

The numbers signal a pause in the financial crisis that has limited funds available for smaller companies and they also provide a cash injection directly into the heart of the city’s oilpatch, says Peter Knapp, manager of Iradesso Communications, which manages the website tasked with collecting the financial information.

“It’s like a stimulus package for the junior oil and gas sector in Calgary,” he said. “It’s nice to see that money come off the sidelines. It makes a big difference.”

According to Iradesso, nine junior financings worth $488 million have been completed since the last week of April, more than the preceding three months of 2009 combined.

Last Thursday was a bellwether day, with five companies scoring private placements worth a combined $161 million.

Knapp believes improving commodity prices were the catalyst for the deals.

The deals come as oil prices flirt with six-month highs near $60 US per barrel, up more than 75 per cent from mid-winter lows below $35 US. In addition, natural gas has bounced from multi-year lows of about $3.50 and back above $4.

“The market started looking quite good and suddenly you’ve seen all these deals,” Knapp said.

According to a new report by Deloitte, the global cash crunch is the No. 1 “reality check” facing oil and gas companies.

“The global financial crisis is now taking a toll on companies of all sizes,” wrote report authors Dick Cooper and Geoffrey Cann. “Tighter credit markets are impelling smaller operators to defer expansion or capital projects, limit development and even sell off assets.”

Gary Leach, president of the Small Explorers and Producers Association of Canada, described the market thaw as “encouraging” for his stable of member companies. Despite a tough outlook for natural gas prices, Leach said recent cash injection is one sign the outlook for a rebound is growing brighter.

“It’s certainly noteworthy that these deals are getting done at this time. The good news is that there’s market support. As soon as there’s a thaw or an increased appetite for risk, juniors will be the prime candidates to benefit.”

The financing trend continued Monday with Savanna Energy Services announcing a $110-million bought deal placement of common shares. Analysts said the deal is significant because the contract driller faces no immediate liquidity threats that would crimp or curtail its outstanding borrowing lines. Next to junior exploration and production companies, the service sector has been particularly vulnerable in the face of the some of the lowest drilling levels in a decade.

Chad Friess, a research analyst with UBS Securities in Calgary, noted demand for Savanna’s shallow coiled-tubing rigs has dried up as producers focus on deep shale gas plays. Despite the prospect of a “long summer” for the company, he commended its efforts to strengthen its financial position.

“With the prospect of further weakness in the summer drilling market, Savanna has chosen to proactively reinforce its balance sheet.”

Other shreds of positive news suggest the light may be at the end of the tunnel for smaller producers.

Calgary-based Peters and Co. said last week in a research note the implied discounts slapped to its universe of oil stocks are narrowing as oil and natural gas spot prices improve.

Currently, large capitalization producers are trading at a discount of about nine per cent to net asset value, compared with 11 per cent for intermediates and 17 per cent for juniors. Those numbers are down from 10 per cent for large caps, 12 per cent for intermediates and 23 per cent for juniors week-over-week.

According to ATB Financial, improved valuations are borne out in the number and value of mergers and acquisitions during the first quarter. ATB’s energy division reported the value of proven reserves in the ground has jumped to $24.74 per barrel since March 31, the highest selling price since the second quarter of last year.