Canaccord vice-chair quits, blames governments

Things are going right off the rails. Are we heading towards a future like Children of Men?

'2008 Looks Bleak'

Claudia Cattaneo And Jon Harding, Financial Post Published: Wednesday, December 12, 2007

CALGARY - Veteran energy investment banker Rick Grafton, one of the pioneers of Calgary's bustling financial community, has resigned as vice-chairman of Canaccord Adams Inc., blaming Alberta and federal government policies for drying up investment in the country's junior oil-and-gas sector.

Mr. Grafton, 54, helped build the city's competitive energy investment business, including Canaccord's global energy practice, but is walking away in frustration because he expects 2008 to be bleak for both energy brokers and oil and gas producers and service companies alike.

Investors are so turned off they won't even meet with anyone from the oilpatch, he said.

"It took us 30 years to build a worldwide institutional [investor] following in the Alberta energy business, one cold call at a time, and these governments have put a very serious dent in a very short period of time," Mr. Grafton said in an interview yesterday, a day after quitting his job.

Vancouver-based Canaccord is Canada's largest independent brokerage firm.

"It's time to go to the sidelines and map out a new plan, until the governments come to their senses, and I believe in the next two years they will. But 2008 looks very, very bleak," said Mr. Grafton, who plans to devote the next year to investing in Alberta oil companies active globally.

Mr. Grafton said Ottawa's decision last year to tax income trusts and Alberta's recent royalty review and subsequent increases to royalties have combined to destroy oil entrepreneurship in Canada.

"There is no reason to start an oil company because it would be nothing but 10 years of hard work, and you never know what decisions the government will make," Mr. Grafton said in a rare display of candor in a sector that tends to be guarded to avoid spooking investors.

"Now they have a [royalty] structure in place, that when you risk dollars, the risk is on the company and the upside is for the government."

Mark Maybank, president of Canaccord Capital Corp., Canaccord Adams' parent company, said Mr. Grafton "has been a phenomenal partner and a cornerstone of our success in Calgary. My only regret is that I'm not able to join him on the golf course in Phoenix."

Some of Mr. Grafton's industry counterparts agreed the business is in a free fall, particularly since Ed Stelmach, Alberta's Premier, announced in October a new framework for royalties that will take effect in 2009.

Jim Davidson, chief executive of FirstEnergy Capital Corp., one of the largest energy specialist dealers, said it has become difficult to raise money.

Unlike previous cycles, in which the sector's fortunes were tied to commodity prices, this time the big hit came from policy decisions, he said.

"In the provincial government's defence -- and they don't have a lot to be defended on here, frankly -- governments worldwide are grabbing more," he said. "It's not like this government is standing out alone and moving in a different way."

George Gosbee, chairman of Tristone Capital Inc., another top energy investment dealer in Calgary, said any remaining interest in Canadian energy has gravitated to Canadian-based companies active globally.

According to the brokerage, its own financings of international companies have more than tripled in value so far this year relative to 2006, while the value of financings for companies active in Canada is down 50%.

"The federal government decision, the provincial decision and our traditional cycle have aligned to make investors focus on the big exploration and production companies with opportunities elsewhere, and on international juniors," Mr. Gosbee said.

"You can see it in the share-price performance," said Mr. Gosbee, noting that juniors and intermediates with assets in Alberta are down collectively 19.6% since Sept. 17, the date of the royalty review panel report, while their U.S. counterparts have risen almost 17%.

Canaccord's Calgary office is headed by former oil and gas trust analyst Bruce Mc-Donald, managing director and global head of energy investment banking.