By Deborah Yedlin, Calgary HeraldMarch 31, 2010 7:38 AM
The Athabasca oil extraction plant in Canada
The Athabasca oil extraction plant in Canada Photograph by: Bloomberg News, Bloomberg News
The Athabasca Oil Sands initial public off ering, apart from being the largest such transaction in the oilpatch since Sun Co. spun out Suncor in the early 1990s, is going to be seen as historic for other reasons.
Not only does it involve a major shareholder in the form of a national oil company, sovereign wealth funds were expected to be among those bellying up to the bar for a slice of the deal.
It's not unusual for sovereign funds to come into situations and buy up equity stakes -- as the China National Petroleum Co. did when it purchased the 60 per cent stake in two oilsands projects owned by Athabasca or when China Investment Corp. put $1.74 billion into Teck in return for a seven per cent stake in the company last year. But in both these examples, the investments were made in circumstances not involving the company going public; it's rare they are part of an IPO.
In this case, the road show for the Athabasca deal blanketed the globe -- visiting accounts in China, Singapore and other places where lead underwriter Morgan Stanley has strong relationships.
These are all institutions of size and for many of them, buying the whole deal on their own, initially expected to be $750 million, would have been easily done. But of course, the investment world doesn't quite work that way.
The underwriters and the company decide the optimal size of the deal and, if it is oversubscribed, it's not automatically increased to meet demand. Instead, in a share issue where demand exceeds supply, it usually sets the stock up for a strong performance when it starts trading after the deal officially closes.
In the face of strong demand from the sovereign funds -- undoubtedly some with strong ties to CNPC -- the underwriters for Athabasca were apparently faced with an unusual situation.
The solution that many expected to see when the books were closed by the underwriters Wednesday in terms of how the deal was finally allocated was that, not only would it be bigger than expected but also comprised of not one investor book, but two.
The first, presumably the $750-million tranche, would include the conventional accounts such as pension and mutual fund investors, existing shareholders of Athabasca and those lucky enough to get on the so-called president's list. The other book was expected to include the sovereign-fund investors who are expected to buy the stock and park it.
The implication of this is that the actual amount of the shares being traded in the market will be lower than what has in fact been issued.
Do the math and if there is a scarcity factor, that's good for the share price. Moreover, in the event an unwanted suitor comes knocking, it's that much harder for it to have success in the context of a hostile takeover bid.
There's always a fine line walked by companies and underwriters when it comes to determining the right size of an equity issue. And in Athabasca's case, with demand by investors exceeding the amount of money it wants to raise, this is likely to have been a tough balance to strike. That's because Athabasca is also thinking about how to minimize its future funding risk with respect to its projects; more money raised in the IPO obviously decreases that risk.
Also of note is the amount of interest the Athabasca deal generated on the part of investors -- particularly in light of the persistent negative messaging about the oilsands courtesy of non-governmental organizations intent on discrediting the industry with spurious claims.
What this suggests, yet again, is that the market is looking through the noise of the NGOs and recognizing that the oilsands resource is going to play a significant role in meeting the world's future energy needs.
The success of the Athabasca deal, which saw the shares priced at the upper end of the $16 to $18 per share range, has to be a positive signal for other privately held oilsands concerns that are also grappling with the issue of future funding risk. Going public, while subjecting the company to the tyranny of market expectations, also facilitates access to capital. And for oilsands players that also happen to be huge consumers of dollars, establishing access to capital is nothing to sneeze at.
So take heart. Anyone who missed out on getting a piece of the Athabasca Oil Sands IPO, the betting is there will be similar opportunities in the coming months.
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