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FirstEnergy’s Jim Davidson on what’s ahead for the public markets

The Financier’s Almanac: Davidson discusses his expectations for the capital markets and financing trends through 2013

Feb 15, 2013

by Alberta Venture Staff

One of Calgary’s top investment bankers very nearly became a teacher. Jim Davidson, chairman and CEO of FirstEnergy, spent his undergraduate degree at the University of Waterloo studying with the intention of becoming a teacher before a guidance counsellor alerted him to a troubling demographic trend. He was born at the tail end of the baby boom, and primary school enrolment rates were declining in his home province of Ontario. There weren’t going to be many jobs available for teachers after he graduated, so Davidson quickly shifted his focus to include a minor in economics, which became the starting point for a distinguished career in finance.

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In 1993 Davidson co-founded FirstEnergy with W. Brett Wilson, Murray Edwards and Rick Grafton. The company has since participated in more than 1,158 equity financings that raised more than $91 billion and 300 acquisitions with a total value of more than $100 billion. Recently, FirstEnergy worked with Celtic Exploration ahead of its $2.6 billion sale to ExxonMobil, and Davidson says there will be many more deals like it this year. This month, he shares his views on financial trends in the energy industry for 2013.

On trends for small- to mid-cap energy companies through 2013

“There should be a lot of small- to mid-cap M&A transactions, because there are many exhausted management teams that have found the capital markets unwilling or unco-operative at this point in time. These companies therefore don’t have the opportunity to access those markets. And in some cases, there are boards of directors that are getting very uncomfortable with the growth prospects of the companies. So I think there will be a lot of transactions at the small end.”

On capital market trends and public financing

“There is a lot of pent-up demand for IPOs and there are a lot of private companies that had assumed by this point in time, in their modelling, that they were going to be public. And the markets haven’t been there to allow them to do that. So if the markets come back, as we hope they are going to in 2013, then the IPO activity will pick up quite a bit.
The market can calm down, but if the commodity prices fall away, that window closes. So we need to have an alignment of a number of disparate things coming together.”

On big changes in the capital markets

“In the old days, it used to be all commodity-price driven because they affect the economics of a particular project, which has an impact on the profitability of the particular company. But that isn’t the overriding concern at the moment. The overriding concern is what’s going on with the world – it’s a much broader concern than it would have been in years past.”

On trends for natural gas prices

“We have prices rising steadily into 2020 with the primary driver being power generation. Now that Obama has been voted in for a second term, he will continue to move away from coal and focus on lowering carbon emissions, and that lends itself toward supporting the growth of natural gas demands. The problem, from Canada’s standpoint, is that the U.S. is drilling up a lot of natural gas right at the moment. We have been the dominant exporter of natural gas to the U.S. since the 1970s. So, how much Canadian gas will be pushed out of the U.S. as a result of the U.S. domestic supply growth? That’s a concern, though we anticipate the price outlook gets better.”

On the U.S. becoming the world’s biggest oil producer by 2020

“Canada will have to act by exporting more oil and natural gas overseas. This has to happen. It is very unwise to have only one customer. Our customer seems to be doing pretty well on its own, so we are now forced to seek a new set of customers, which is what we should have been doing for the previous decades. That means more LNG plants for natural gas and that means more pipelines for oil – it has to happen. And when things have to happen, they usually do.”

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