The globe and mail
Andrew Willis, June 10, 2008 at 4:07 PM EDT

Believe it or not, one of North America’s hottest energy plays is the lower St. Lawrence river, where they are drilling for natural gas under picturesque Quebec towns, century farms and that big rock with a hole in it.

In three short months, the Quebec gas rush has turned a pair of unknown companies into 10-baggers – that’s the Street’s name for stocks that jump ten-fold, as Questerre Energy and Junex have done.

The speed of the ascent, and the sudden appearance of large dealers on financings that traditionally got done by boutique house, speaks to the increasingly competitive dynamics of this energy market.

This story opens on April Fool’s Day, when Denver-based Forest Oil announced promising results after a year-long drilling program in the St. Lawrence lowlands and Gaspe peninsula. What’s known as Utica shale rock formations turned out to be chock full of natural gas, conveniently located near existing pipelines.

Forest told the world that it planned a more ambitious drilling program. Smart investors started asking who else held drilling rights in the area. That’s when long-dormant Questerra and Junex, and another junior play named Gastem, all took flight.

Talisman Energy chimed in with its own endorsement of the Utica shale find, announcing a $130-million drilling program in Quebec in late May, and that set the stage for stock sales from the juniors that needed to fund drilling programs.

Here’s where the employee-owned boutiques are wondering what hit them.

This type of financing, relatively speculative share sales for small cap resource plays, is traditionally done by independent dealers. The global players and the bank-owned firms are supposed to stick to the blue chip plays.

But there’s no longer enough finance work coming from Canada’s blue chips companies to feed all the mouths at the big dealers. So the global houses and the bank-owned firms have gone down market when it comes to financing, ramping up coverage of small cap stock plays.

Gastem, a stock that’s up seven-fold since April, stuck with the playbook by raising $10.2-million in a private placement led by employee-owned brokerage house Fraser Mackenzie.

But when Questerre launched a pair of financings in early June and raised $75-million, mid-tier Dundee Securities got the nod as lead investment bank on the Canadian portion of the offering. Questerre sold 7.5 million shares in both Canada and Norway, where it has an investor following and an Oslo exchange listing.

And when Junex tapped the market the same day with a $20.4-million bought deal, it was led by Wall Street’s finest from Merrill Lynch.

“Full marks to these bigger banks for moving quickly on a new idea. That quick turnaround is not what we expect,” said a rueful senior executive at one boutique.

A familiar cycle will now play out in the St. Lawrence lowlands. Money raised in recent weeks will fund drilling programs over the next two years. As the Utica shale starts to look like Utica swiss cheese, this natural gas find will be scoped out and valued. Some of the juniors may actually develop a property. But the more likely outcome is a round of consolidation, with Forest Oil and Talisman leading the list of potential buyers.

If takeovers do kick off among the St. Lawrence lowland gas plays, look for the bank-owned dealers and global firms to be in the thick of the action, competing for M&A mandates that used to go to boutique houses.