Canada Connection: Calgary's oilpatch

The global turmoil in credit markets is not only creating havoc among large investors, it is now making it especially difficult for Canadian small-cap companies to raise new capital.
 
And that is nowhere more clear than in Calgary’s oilpatch, where many junior energy companies are financially stretched, says Scott Carscallen, a specialist in Canadian small caps at Toronto-based Howson Tattersall Investment Counsel Ltd.
 
Howson Tattersall manages the Saxon Mutual Funds group. The firm's parent company, Saxon Financial Inc. (TSE: SFI.TO) has more than C$13 billion under management.
 
After a recent summer tour in the Calgary oilpatch, Carscallen says it is no secret that many small-cap energy companies are stretched financially.
 
"They have exhausted their bank lines of credit as a result of over-aggressive spending and are experiencing production declines as they lack the necessary capital to support their exploration programs," he notes in his review of the small-cap oil industry in July.
 
As well, he says, the juniors are more heavily geared to natural gas production and have been hurt by the lower commodity price.
 
If that were not enough, the proposed new Canadian tax regime for income trusts, including oil and gas royalty trusts, "has lowered the market value of these juniors as many were looking to the larger royalty trusts to acquire them at premium valuations." 

(Income trusts in Canada became an attractive way for Canadian and U.S. investors to get higher returns because the tax liability flowed through to investors, lowering the higher taxes on the corporation while taxing individuals at a lower rate. However, the Canadian government has since moved to tax these income trusts at the same rate as corporations.)
 
Despite these setbacks, Carscallen still insists there are some interesting opportunities by looking for what he calls “quality names” that have strong balance sheets, a good inventory of low-to-medium risk projects and have low finding and production costs. As well, Carscallen says these quality companies trade close to their net asset value.
 
As far back as January, Carscallen said he and the firm were substantially adding to their energy weighting and would continue to do so. In all, the portfolio has 18 names in the energy sector to ensure diversification. 
 
Two of their favorites are Breaker Energy LTD (TSE: WAV.A.TO) and Burmis Energy Inc. (TSE: BME.TO).

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