Small, private Canadian oil firms go public to access cheaper equity financing

Of more than 50 Canadian oil and natural gas companies that started as private firms since the beginning of 2000, seven have gone public within the last year in a move toward accessing cheaper equity financing in the capital market.

March 28, 2003

3 min read

By OGJ editors
HOUSTON, Mar. 28 -- Of more than 50 Canadian oil and natural gas companies that started as private firms since the beginning of 2000, seven have gone public within the last year in a move toward accessing cheaper equity financing in the capital market.

This trend is popular with management teams having successful previous track records with public companies, said Frank J.D. Sayer of Calgary-based Sayer Securities Ltd. He also believes that additional companies might be contemplating the same move.

In 2002, Viracocha Energy Inc. (run by the former management team of Bellator Exploration Inc.) and Great Northern Exploration Ltd. (previously the Ionic Energy Inc. management team) tapped into public market benefits. More recently, others such as Midnight Oil & Gas Ltd. (managed by former Ulster Petroleums Ltd. executives), Ranchgate Oil & Gas Ltd., and DT Energy Ltd. also have made the move, he noted.

On Mar. 3, Rise Energy Ltd., a small public company, and DT Energy announced a letter of intent to merge. The transaction probably will be a reverse takeover of Rise by DT Energy, Sayer said. A reverse merger is a means in which a private company goes public through a transaction with an existing public company.

Share financings
"One of the main reasons private companies are going public is the lower cost of equity capital in the public market, with subsequent share financings at higher prices if the company is successful," Sayer said.

"Another reason for going public is that public companies have the advantage of being able to use their shares as a form of currency in acquisitions, whereas private companies find it next to impossible to do this," Sayer said.

For instance, Viracocha used its shares as partial payment for an acquisition in November 2002 by paying $15 million in cash, 5.5 million of its class 'A' common shares worth $7.2 million at the time, and 500,000 share purchase warrants.

Private vs. public
Private companies can build reserves and production without pressure from analysts and investors for short-term results. "As a private company, shareholders are likely to be more patient, looking more for annual growth, compared to the typical quarter-over-quarter results demanded from public companies," he said.

However, compensation incentives such as employee stock options are more difficult to structure in a private company. "Private companies typically value their shares for option plans only once a year, reducing the effectiveness compared to public companies, where shares are priced by the market on a daily basis," Sayer said.

Moreover, stock prices for small capitalization public oil companies are performing well right now. "With recent high oil and gas prices, the stock market's demand for junior oil companies run by recognized management teams appears to be strong," Sayer said.

"The recent trend suggests that more may be contemplating making the switch. However the number of public companies of the right size and with the proper assets for a reverse takeover is limited," he said.