Canada Energy IPOs Tough Sell Even As Institutions Return To Sector

Institutional investors are returning to the Canadian oil and gas sector with gusto after shunning the industry over ESG concerns in recent years, but the appetite for new energy listings remains limited due to wider market volatility.

French oil major TotalEnergies will be the first major test of energy investor interest for new listings. Last month, it unveiled plans to spin off its Canadian oil sands assets into a new publicly traded company, which surprised many industry watchers.

The next day, Teck Resources said it was also considering a spin-off of its Fort Hills oil sands project, in which it is a part-owner with TotalEnergies and Suncor Energy.[nL1N3101NT]

The success of any initial public offerings (IPOs) over the next year would depend on whether oil price volatility calms down after turbulence in 2022 following Russia's invasion of Ukraine and on worries about global recession, investment bankers and analysts said.

"The energy sector has performed quite well and valuations remain attractive ... but everyone is braced for more volatility and will likely remain cautious until it ends," said Jeremy McCrea, an analyst at brokerage Raymond James.

McCrea expects the recent trend of takeovers of private Canadian oil companies by larger companies to continue rather than the IPO route.

The last time a new Canadian energy listing appeared on the TSX was in January when Calgary-based Kiwetinohk Energy Corp shares started trading. Kiwetinohk shares have climbed about 14% since their debut as oil and gas stocks rallied.

HESITANT BUYERS

Scott Barron, head of Calgary Investment Banking at TD Securities, said confidential work has been done this year on several IPOs which have not come to market.

"We have seen very, very few (IPOs) in Canada and the U.S. and that's a symptom of the fact investors lost a lot of money after the IPO boom of the last couple of years. They are really hesitant to go back into new issues," Barron said, referring to IPOs in sectors across North America.

Despite the caution around IPOs, energy and power companies had the greatest share of issuance in the first nine months of 2022, with C$3 billion worth of secondary offering according to data from Refinitv.

Institutional ownership in the Canadian mid-cap explorer and producer sector has rebounded to 37.3% in the second quarter of 2022, up from 28.9% in the fourth quarter of 2020, according to Thomson One data. The sector includes Canada's largest gas producer Tourmaline Oil Corp and Advantage Energy Ltd,

Capital investment in the energy sector took a dive after oil prices crashed in 2014/15, and as climate change concerns prompted some long-term investors like Caisse de d?p?t et placement du Qu?bec (CDPQ) to divest fossil fuel holdings.

Now, energy stocks have become a refuge for investors facing a sell-off in high growth sectors.

In the last year the TSX Capped Energy Index has given investors a 53.25% return, while the broader TSX composite index has slumped by 11%. Nearly half of the 30 top-performing stocks on the TSX over last three years are from the energy sector, according to data released by the TSX in September this year.

Some energy investors welcomed the idea of more Canadian oil and gas listings. Rafi Tahmazian, senior portfolio manager at Canoe Financial, said TotalEnergies' spin-off may take time to appreciate in value but he expected it to perform well.

"I've seen massive consolidation in my sector, I want more things to invest in and more variety," Tahmazian said.