Courtesy of Stikeman Elliott. View original article here.
ASC Acknowledges “Unprecedented Circumstances Continuing in Alberta’s Capital Markets”
In this year’s Oil and Gas Review, the Alberta Securities Commission highlights the continuing constraints facing reporting issuers and ongoing reporting concerns – the lack of public financing and its impact on reserve estimations taking centre stage.
- The Alberta Securities Commission (the “ASC”) released its annual Oil and Gas Review for 2019 (the “2019 Review”) on December 24, 2019.
- The 2019 Review highlights:
- The lack of detail and accuracy in reporting issuer (“RI”) disclosure of production;
- Incorrect or inadequate disclosure of type well/curves;
- Insufficient explanations for development deferrals in respect of undeveloped reserves; and
- Incorrect of inadequate annual reserve reconciliations.
- Distressingly, the 2019 Review also highlights the monumental collapse in public financing by RI’s between 2016 (~$12 billion from ~40 offerings) and 2019 (~$2 billion from ~7 offerings) and continuing reduction of RI’s principally regulated by the ASC (55% decline since 2012, from 302 to 137 RI’s).
Highlights of the Review
Juniors continue to bear the brunt of declines
A further 10 RI’s ceased to be regulated by the ASC between 2018 and 2019, reducing the total to 137. This increases the total decline since the high point of 302 RI’s in 2012 to almost 55%. The 10 RI’s that ceased reporting consisted of seven Juniors, being companies producing less than 10,000 BOE/day, and three Intermediates, being companies producing between 10,000 and 100,000 BOE/day. The number of senior issuers principally regulated by the ASC has remained relatively constant for the last several years, reflecting their enhanced ability to weather the prolonged downturn.
Consolidations down, receivership and cease-trade orders dominant
Bankruptcies, receiverships and CCAA proceedings and cease-trade orders were the leading reasons for change for Juniors, leading to the delisting of two and five Juniors, respectively. In contrast, only two Juniors were acquired or went private. These changes reflect a reversal from the consolidation-heavy activity in 2018, to 2017 trends, as well as a sizeable increase in cease-trade orders.
2019 additionally represents the first year since the ASC first started reporting this data in which no RI’s were delisted due to a change in industry or acquisition by company engaged in a different industry. The window of opportunity to exit oil and gas for the greener pastures of cannabis may have shut for the time being.
Additionally, initial RI issues remain mired in the range of 1-2 per year, reflecting ongoing market constraints and uncertainties.
Lack of capital: a staggering hurdle
The newest trend reported by the ASC in the 2019 Report is the massive reduction in public financings facing RI’s since 2016.
As the 2019 Review indicates in the chart below, capital raised through public markets has fallen from about $12 billion in 2016, raised through approximately 40 offerings, to a paltry figure of about $2 billion as of September 30, 2019, raised through approximately 7 offerings. Although an improvement over the non-existent public funds raised in 2018, the year-over-year reduction in the number of offerings represents an outsized decline in comparison to the decline in RI numbers, and a probable rise in private capital fundraising and capture of oil and gas RI’s.
The ASC recognizes the extreme difficulties facing RI’s in the current market and highlights the following four hurdles facing RI’s:
- Protracted development schedules for oil and gas reserves;
- Delays and cancellations of transportation and other infrastructure development;
- Reduced investor interest; and
- Scarce investment capital.
Areas of concern for the ASC
Reconciliations of summed gross proved plus probable reserves have resulted in aggregate increases for each RI group. Junior and Senior RI’s (companies producing greater than 100,000 BOE/day) saw increased reserve estimates due to an outsized improvement in extension and recovery techniques compared to 2018. Both Senior and Intermediate RI’s saw reduced reserve estimate increases due to a substantial reduction in acquisitions. Technical revisions represented an outsized reduction in reserve estimates for Junior RI’s when compared to 2018 and their Senior and Intermediate peers. In aggregate, economic factors remain largely unchanged.
The ASC additionally reiterated the following reporting obligations previously raised in 2017:
- Development timing for undeveloped reserves, with particular attention placed on proper disclosure of ownership and data in Form 51-101F1;
- Production estimate and reporting by product at first point of sale, with particular attention placed on clarifying when an RI is engaged directly or indirectly in oil and gas activities;
- Consistent use of type wells and type curves; and
- Reserve reconciliation methodology, with particular attention placed on funding availability impacts on disclosure schedules.
Focus area: development timing for undeveloped reserves
Regarding the development timing for undeveloped reserves, the ASC reiterated that the COGE Handbook requires that projects should be evaluated without considering the availability of funding, since value may be alternatively realized through sales or farm-outs. RI’s must also discuss their expectations as to the sources and costs of funding and the corresponding impact on reserves or future net revenue and disclose where the costs of funding could make development of a property uneconomic as well as its plans for the property.
Should a reserve be uneconomic due to funding concerns, the ASC additionally noted that this may not typically represent a justifiable reason to exceed the development timing guidance for proved and probable undeveloped reserves beyond two years, and the outer limitation period of five years. Examples of situations where the ASC may find it appropriate to exceed the development timing guidance was clarified as including circumstances such as ongoing resource play development, gas processing facilities and in situ, bitumen mining and offshore project, as further explained in section 188.8.131.52.1.8 of the COGE Handbook.
Where undeveloped reserves are otherwise uneconomic and development timing is extended beyond the guidelines, the ASC stresses that support documentation should be provided to demonstrate that an evaluation was prepared in accordance with the COGE Handbook and is eligible for disclosure.
The 2019 Review reflects in stark terms the extreme capital constraints that faced RI’s in 2019, while continuing to provide issuers with clarity and technical advice in response to ongoing disclosure issues in the oil and gas industry. While it is tempting to look for comfort from the relative deceleration in the reduction in the number of RI’s from the massive losses of 2015 and 2016 and the stabilization in the number of Junior and Intermediate issuers, the lack of a healthy M&A market paired with the other headwinds facing the oil and gas industry suggest the stability is an uneasy one, with many issuers left with no other option but to play a waiting game. It remains to be seen whether 2020 will reveal a catalyst for change from the depressed and depressing status quo.