Low energy stock prices hold down Canadian treasury financings

Treasury financings completed by Canadian oil and natural gas exploration and production companies the first 6 months of this year declined by more than $2 billion (Can.), or 65%, vs. the first 6 months of 1999, reports Calgary-based research firm Sayer Securities Inc. Lower-than-usual share prices for energy companies and the risk of further diluting companies' market values are keeping the energy industry from doing more equity financings, says the analyst.


Treasury financings completed by Canadian oil and natural gas exploration and production companies the first 6 months of this year declined by more than $2 billion (Can.), or 65%, vs. the first 6 months of 1999.

From January through June of this year, reports Calgary-based research firm Sayer Securities Inc., treasury financings totaled $1.15 billion in 148 transactions, vs. a total of $3.32 billion for 146 transactions posted in first half 1999.

Lower-than-usual share prices for energy companies and the risk of further diluting companies' market values are keeping the energy industry from doing more equity financings, says the analyst.

"The industry has also been reluctant to conduct financings when cash flows are so high from production and equity prices are depressed," said Sayer in a recent report. "At some point, the expectations of the stock market and oil companies will meet in the middle."

Sayer also pointed out that the Canadian oil and gas industry hasn't been able to attract investors and new capital, despite strong commodity prices for oil and gas and increased stock market activity. While the Toronto Stock Exchange's (TSE) 300 Index has increased 45.4% over the past year, closing the end of June at 10,195, the TSE Oil & Gas Producers Index is up only 21.5% compared to June 1999, closing the month of June at 6,382.

Sayer added that activity in all three financing categories fell for the first half of 2000, despite the continued rally of the oil and gas commodity markets.

Debt issues totaled $719.6 million, with five transactions by large companies accounting for 98% of the total. And the dollar value of new debt financings decreased 72%, or by $1.8 billion, compared to the first half of 1999.

Rising interest rates are one reason the value of debt issued has decreased, says Sayer. Since January 2000 the prime interest rate has increased by one percentage point to close June at 7.50%, while the prime rate ended the first half of last year at 6.25%.

The total value of activity for royalty trusts also slipped from $204 million the first half of 1999 to $122.7 million in 2000.

Despite the decrease in financings, market fundamentals remain bullish, fueled by the increasing prices for oil and gas, Sayer says. The value of secondary issues totaled $1.83 billion in spite of the low level of treasury financings, indicating that financial institutions are showing an interest in certain large exploration and production companies. Sayer cited as an example Canadian Occidental Petroleum Ltd., which recently completed a share buy-back and secondary issue of its shares of $1.2 billion in April.

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