Eight Canadian energy companies were booted out of the S&P/TSX Composite Index on Monday because their market capitalization has dropped below minimum requirements, the latest sign of difficulties facing the country’s oil and gas sector.
Analysts said the rebalancing of Canada‘s flagship index underlined the challenge to energy companies in attracting investment amid concerns about lack of new oil pipeline capacity and a glut of cheap North American natural gas.
Canada holds the world’s third-largest crude reserves but has seen capital investment and energy stocks plummet over the last five years.
The companies affected are:
- Birchcliff Energy <BIR.TO>
- Ensign Energy Services <ESI.TO>
- Kelt Exploration Ltd <KEL.TO>
- Nuvista Energy Ltd <NVA.TO>
- NexGen Energy Ltd <NXE.TO>
- Precision Drilling Corp <PD.TO>
- Peyto Exploration and Development Corp <PEY.TO>
- TORC Oil and Gas Ltd <TOG.TO>
Their exclusion means they will miss out on investment from index-tracking passive funds, said Jeremy McCrea, an analyst with Raymond James.
“To raise capital for any energy company here in the last few years has been extremely difficult and this is one more nail in the coffin in their ability to access equity,” he added.
The composite index is rebalanced quarterly. Companies are removed if their market capitalization based on float-adjusted shares falls below 0.025 per cent of the overall value of the index.
Firms have to wait a year to get back into the index and will only be admitted if their value is at least 0.04 per cent of the index. McCrea said that would be equivalent to just under $1 billion (US$754.26 million).
“It’s simply a matter of their stock prices having fallen to the point where their market capitalization is no longer eligible,” said S&P Global spokesman Ray McConville.
Energy makes up 17 per cent of the index, down from 25 per cent four years ago. McConville could not say whether so many energy firms had ever been removed in one hit before.
Travis McPherson, vice president of corporate development at NexGen Energy, said being removed from the index did not affect their business at all “other than the unfortunate short-term impact to the share price as a result of short-term investors pre-positioning ahead of any action.”
Birchcliff Energy investor relations manager Jesse Doenz said there will be “absolutely zero impact” on the company as a result of the rebalancing.
The other companies did not immediately respond to requests for comment.