A pump jack is seen in this file photo.© Todd Korol / Reuters/Reuters
PrairieSky Royalty Ltd., the fourth biggest initial public offering in Canadian history, apparently was not big enough for investors, as the stock surged more than 25 per cent at the opening of trading.
Even after an aggressive increase in size and price by parent company Encana Corp., the offering was said to be as much as 15 times oversubscribed (in other words, there were orders for 15 times as much stock as was available). Investors who got the shares at the $28 IPO price were able to sell them for more than $36 in early trading Thursday. The stock closed at $37.
The offering is the largest public debut in Canada since 2000, raising $1.5-billion, and the fourth largest Canadian IPO behind Manulife Financial Corp., Canadian National Railway Co. and Sun Life Financial Inc. The underwriters have the option to boost the sale to $1.7-billion, which is likely to happen given its popularity.
Encana originally set out to raise a smaller amount at a lower price, but the huge investor demand discovered on a 15-day road show led by the underwriting banks showed that the price could be bumped. PrairieSky holds about 5.2 million acres of land on which Encana had mineral rights, and the spinoff company will collect royalties from drillers working those properties.
"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. TD was the "lead left" underwriter for the offering, meaning it had the top position among banks backing the deal. Canadian Imperial Bank of Commerce was the other lead underwriter.
"There was significant demand to support the upsize," Mr. Corona said. "On the price range, we wanted to maximize the value to Encana while ensuring it had room to trade up."
Dean Orrico, the chief investment officer at Middlefield Capital Corp. in Toronto, said his firm would have purchased a larger stake if it was available. "It is a hot issue because...[of] its size. It is a tremendous asset," he said.
PrairieSky is debt-free, offers a healthy yield, and has growth potential, he noted. A significant portion of the company's land is unleased, meaning its revenue has room to grow. It also attracts the same type of investors who liked income trusts, even though it does not have the same tax advantage trusts offered, Mr. Orrico said.
For Encana, the offering puts a value on something that investors long knew was there, but perhaps didn't appreciate for its true worth.
Encana's predecessor company, PanCanadian Energy, was once a part of Canadian Pacific Railway. The railroad was given the mineral rights in the 1880s in exchange for building the railway across Canada.
TD started working on the idea late last summer with Encana's new top executive, Doug Suttles. Encana was no longer concentrating its own efforts on those gas-rich lands, having shifted strategy.
"The idea of a higher value for a royalty interest compared to a traditional working interest is well known," said Alec Clark, a Calgary-based managing director at TD. "They have always known these lands had good intrinsic value, and as they were undergoing further strategic changes with their new CEO we helped them think through the idea of unlocking the value."
The question now becomes whether PrairieSky shares can hold onto the gains. In some hot IPOs, the risk becomes that many investors will flip the stock, but the underwriters will have taken that into account and pushed as much as possible into the hands of long-term investors who are likely to sit tight.