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Canada enters the spin cycle Following Encana’s successful PrairieSky Royalty spinoff, Canadian Natural Resources looks at whether it could do something similar By GARY PARK For Petroleum News
Leading producers in Canada’s oil patch are being drawn to spinoffs in their efforts to raise cash for ongoing operations and to develop a leaner profile.
Natural gas operator Encana has made the biggest splash by launching PrairieSky Royalty in the fourth biggest initial public offering in Canadian history and the largest IPO in 14 years, raking in $1.46 billion in the process.
It sold the shares for $28 each, easily beating its original projection of $23-$26.50 and will retain 60 percent of the new company, less than the 75 percent initially planned, by increasing the offering to 52 million shares from the planned 32.5 million. PrairieSky is now trading on the Toronto Stock Exchange at above $39.
Enticed by the results, Canadian Natural Resources (also known as CNQ) is weighing its own PrairieSky-style spinoff.
The share price for PrairieSky is seen in the investment community as proof that investors are targeting companies that are expected to yield cash.
Encana could raise even more money with the bank running the transaction holding options to buy and sell 7.8 million more shares, raising the deal value to $1.67 billion.
Within the oil patch, the results make PrairieSky more valuable than Athabasca Oil Corp.’s $1.35 billion IPO in 2010.
Encana made the spinoff move as part of its strategy to concentrate on fewer assets in North America.
No government royalties PrairieSky consists of mineral fee title land covering 5.2 million acres in southern Alberta.
Encana does not pay government royalties from resources extracted on the property because they are part of an 1880s land grant from the Canadian government to Canadian Pacific Railway, which once owned PanCanadian Energy, one of Encana’s predecessors.
This arrangement will allow PrairieSky to collect royalties and fees from other energy companies operating on the land, and distribute a large portion of those returns to its shareholders.
“The offering was significantly oversubscribed, with essentially no price sensitivity in the range,” said Sante Corona, the executive in charge of IPOs at TD Securities - the joint underwriter with CIBC World Markets - after a 15-day road show.
“There was significant demand to support the upsize,” Corona said.
Dean Orrico, chief investment officer at Middlefield Capital, noted that PrairieSky is debt-free, offers a healthy yield and has growth potential because a large portion of its land is unleased.
The only concern is whether some investors will flip their PrairieSky shares, eroding the gains, although analysts are confident the underwriters will have pushed as much as possible into the hands of long-term investors who are likely to sit tight.
CNQ evaluating options CNQ President Steve Laut told a company investor open house in mid-June that “we’re in the process of understanding exactly what we have and we’re going to evaluate all the options, including the PrairieSky option, which obviously looks attractive.”
“Whichever creates the most value for shareholders, that’s the one we’ll choose,” he said.
Early this year CNQ increased its landholdings similar to those of PrairieSky when it acquired Devon Energy’s Canadian conventional oil and gas operations in a $3.1 billion deal.
Chris Feltin, an analyst with Macquarie Capital Markets, said assets that could be candidates for spinoffs could be worth $2 billion to $2.5 billion.
Laut said CNQ has yet to decide whether to retain part of its royalty lands or unload the whole package.
Even without the royalty stream, CNQ’s other operations are generating sufficient free cash flow that it can contemplate share buybacks, dividend hikes and acquisitions.
Feltin said the message from the market, based on the PrairieSky valuation, is that royalty income lands are an attractive investment vehicle, suggesting that an outright sale would probably realize a lower multiple than an outright sale.
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