CALGARY — Craig Kolochuk has for the past 20 years contributed to building up small oil and gas companies, including WestFire Energy Ltd. and Midway Energy Ltd., and was once a vice-president at Cardinal Energy Ltd., which has grown into a TSX-listed intermediate with a market cap now of nearly $600 million.
But the mounting challenges in the junior energy sector have led Kolochuk to take his skills to a new industry — cannabis — and ambitiously rebrand Calgary-based oil producer Relentless Resources Ltd. into marijuana-focused SugarBud Craft Growers Corp. this year.
“The junior sector, for all intents and purposes, is really dead,” he said.
Kolochuk, who was president of Relentless and is now chief executive of SugarBud, said he and the company came to a “crossroads” earlier this year. Its survival required a transition out of an oil and gas sector where small companies are being completely frozen out of the public capital markets and debt financing from banks is increasingly difficult to secure.
Other oil and gas entrepreneurs have also been exiting the industry to look for more lucrative opportunities elsewhere, causing the number of junior energy companies to plummet in recent years.
There were 94 energy companies in 2006 with a market capitalization of between $50 million and $500 million, according to a recent National Bank Financial report. Today, there are only 27 companies in that category.
Similarly, TMX Group Ltd. data show that there were 403 publicly listed oil and gas companies in 2008 on either the Toronto Stock Exchange or the TSX Venture, but that number has fallen by more than half to 201 today.
The dramatic reduction in the number of energy companies is partly because of bankruptcies and mergers, but more recently it’s also because of business transformations in the junior and startup space such as the one Kolochuk undertook at Relentless to create SugarBud.
“If Relentless, in its old form, didn’t do this, it would probably be a penny and looking at being delisted, probably losing their line (of credit) from the bank and probably selling assets in a distressed situation,” Kolochuk said.
Since the transformation, the company’s fortunes have dramatically turned. Its stock price has jumped 125 per cent to 18 cents per share on the TSX-V from eight cents. And though it was previously unable to raise any capital from investors or bankers, SugarBud in early September announced $17 million in new funding.
The company continues to trade on the TSX-V exchange as Relentless until it completes the change-of-business process, at which point its ticker will switch to SUGR and its transformation will be complete.
Several other oil and gas producers have also made transitions.
For example, Calgary-based Iron Bridge Resources Inc. announced earlier this year that it was launching a cryptocurrency mining subsidiary called Iron Chain Technology Corp. and the company’s shares subsequently rose 35 per cent. The company has since agreed to a takeover offer by private-equity-backed Velvet Energy Ltd.
Another energy player, Calgary-based natural gas producer Synstream Energy Corp. has announced its intention to explore a potential change of business, but the company hasn’t said what type of business yet.
And Rainmaker Resources Ltd., which supplied frack sand to oil and gas producers, agreed in 2017 to a reverse takeover by medical cannabis supplier Indiva Corp. A handful of startup mining companies have announced similar moves this year to enter the cannabis business, including Icon Exploration Inc. and Canadian Mining Corp.
Brady Fletcher, managing director of the TSX Venture, said there have been 12 reverse takeovers or “change of business” processes on the public exchanges this year, led by distressed oil and gas and mining companies trying to transition into other industries, including cannabis and high tech.
But the ever decreasing number of oil and gas juniors is considered a sign of bigger problems facing the Canadian energy sector, said Gary Leach, president of the Explorers and Producers Association of Canada, which represents small- and mid-sized oil and gas companies.
In years long past, Leach said, Calgary prided itself on being home to more publicly listed oil and gas companies than anywhere else in the world, but “that tide has left for a number of reasons,” including poor access to capital and a lack of access to markets through new export pipelines.
“The most common thing I hear from our member companies is that capital markets have frozen out the Canadian upstream sector, particularly the juniors and intermediates,” Leach said.
The most common thing I hear from our member companies is that capital markets have frozen out the Canadian upstream sector, particularly the juniors and intermediatesGary Leach, president, Explorers and Producers Association of Canada
This is a concern since oil and gas extraction has become increasingly capital intensive in recent years, as companies have moved en masse into shale and unconventional oil plays and as drilling and fracking costs have risen.
For a small company or startup, Leach said, “the amount of capital they need is many multiples of what it was a decade or so ago.”
Indeed, the rise of unconventional resources has caused “an enormous sea change for small capitalization companies,” Matco Investments Ltd. vice-chairman Michael Tims said.
“When I started in the business, we used to jokingly say we could start a company with a roll of maps, a box of pencils and $5 million,” said the former long-time head of Calgary-based, oil and gas-focused investment bank Peters & Co. “Now, obviously, you need a lot more capital — a nine-figure number generally — to get critical mass.”
But as the energy industry has become more capital intensive, the investment industry has become less willing to fund smaller companies as there are fewer active money managers.
“A much larger proportion of the investment capital is either indexed or in exchange-traded funds, so the bulk of the money in those funds goes into the top 10 companies in the sector,” Tims said. “And then there’s a number of other managers who, while they may be active managers, choose the larger-cap companies as well.”
Matco Investments has stakes in a number of small-cap energy players, but Tims said, “in terms of the value of the positions, (we) would be much more weighted to the larger-cap companies.”
SugarBud’s Kolochuk said he ran into this exact problem in late 2017 and earlier this year as he attempted to raise money to drill more wells and grow production at Relentless. Neither investors nor bankers were willing to provide capital.
”The whole purpose of doing the recapitalization was because this junior oil and gas company was stuck and they didn’t have access to capital,” he said. “The capital pool has been virtually zero, so there’s no way as Relentless we would have gotten the $17 million. It’s night and day as far as access to capital.”
Kolochuk said his company has been the “guinea pig,” but he expects others to follow suit since morale in the sector where he spent his career “is terrible.”
If we don’t do something as far as pipelines go in the next six months, the energy sector is going to be very stagnant here for the next, well, I don’t know, five to 10 yearsCriag Kolochuk, who is in the process of tranforming his energy junior into a cannabis operation
He said many former energy sector colleagues have been “sitting on the sidelines, some for as long as a year,” and are now looking at a career change.
“You had a very hard-working, ambitious, entrepreneurial type of environment here and everyone is deflated,” he said. “Our skillset is very transferable. We know how to protect a balance sheet. We know how to look at opportunities.”
Kolochuk said new pipelines and liquefied natural gas (LNG) projects are critical to restoring confidence in the energy sector and to ensuring that private equity, which is an increasingly important source of funding for juniors, is willing to invest in the industry.
“If we don’t do something as far as pipelines go in the next six months, the energy sector is going to be very stagnant here for the next, well, I don’t know, five to 10 years,” he said.
In SugarBud’s case, Kolochuk said the transition to cannabis was made easier because the banks viewed its oil and gas assets as collateral.
“After talking to various bankers and potential financial backers, they really liked the hybrid model,” Kolochuk said. “They like that we’re the only pre-licensed (cannabis) applicant that is cash-flow positive.”
The company is currently building a 30,000-square-foot greenhouse in Stavely, Alta., and expects to start generating cash from marijuana sales in the second quarter of next year.
The difference between approaching bankers as Relentless Resources and approaching them as SugarBud, Kolochuk said, is “night and day.”
Meanwhile, other startup and micro-cap oil and gas companies continue to find themselves cut off from the public markets, while private-equity firms have become more selective about which companies they’ll invest in, Matco’s Tims said.
Even mid-sized intermediate oil and gas producers have struggled to access the capital they need to grow, said Raymond James analyst Jeremy McCrea, and stock valuations have been hurt as a result.
You had a very hard-working, ambitious, entrepreneurial type of environment here and everyone is deflatedCraig Kolochuk, describing the mood in the junior oil and gas industry
To compensate, he said, established oil and gas companies have turned their focus to cutting costs rather than growth. “It’s making sure that each well that they drill is going to be a good well that’s not going to put the company at risk.”
But in order to gain the attention of money managers, or to gain more presence on energy stock indexes, McCrea said he expects more mergers and acquisitions.
EPAC’s Leach said desperate times could also lead more startup oil and gas companies to transition out of the sector.
“If the industry you’re in is not attracting capital, maybe one of the most valuable things that a company still owns is a public listing,” he said.
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