An improving oil and gas industry has turned the market for energy initial public offerings upside down.
Oil-service providers are at the top of IPO rankings in 2017, elbowing aside exploration-and-production companies for the first time in at least a decade. Those companies had made up the majority of annual energy listings for the 10 years through 2016, according to data compiled by Bloomberg.
After seven quarters without an energy services IPO in the U.S., the amount of new stock sold in 2017 is already on par with the biggest of the last 10 years. Five companies have sold shares since January, raising a combined $1.36 billion. That’s more than the whole of 2013, when oil prices averaged about $98 a barrel, and equal to 2006 — before the global financial crisis — when oil traded around $66.25 a barrel on average.
In the same period, just two E&P companies have sold shares to raise a combined $564 million, as more of those companies get acquired instead of completing an IPO, the data show.
“The majority of the energy IPO backlog is anchored by oilfield services companies,” said Chuck Park, managing director and head of natural resources equity capital markets at Goldman Sachs Group Inc., adding that many of them “are showing significant growth over the next couple of years and beyond.”
A growing number of private energy services companies have been sitting on the sidelines, waiting for the industry to recover before venturing toward an exit.
Oil prices inching toward $50 a barrel and the highest U.S. rig count in two years have proved enough to spur the shaky revival. While prices pale in comparison to past highs, recovering oil and gas production has increased confidence among companies that provide services for the industry.
“The recovery in drill count has translated into more demand, which means more revenue growth,” Park said. That means companies that serve the oil and gas industry can also increase their prices, he said.
Solaris Oilfield Infrastructure Inc. is the latest to come to market, pricing shares at $12 last week to raise $121.2 million — albeit in a downsized offer below the marketed range. BJ Services Co., a fracking company created by Baker Hughes Inc., a fund managed by Goldman Sachs and private equity firm CSL Capital Management, is preparing an IPO that could raise as much as $300 million, people familiar with the matter said in March.
After 21 months without a listing, Mammoth Energy Services Inc. ended the drought in October with a $116 million IPO. Fracking company Keane Group Inc. followed with a $585 million offering in January, kicking off the five deals that have priced in 2017.
While activity is up, results have been mixed. Keane and ProPetro Holding Corp., which raised $350 million in March, are trading below their listing prices. Select Energy Services Inc., Solaris and NCS Multistage Holdings Inc. are trading above.
Keane and ProPetro are facing more short-term competition from its larger peers like Halliburton Co. and Weatherford International Plc, as bigger companies bring back capacity quicker than expected, Bloomberg Intelligence analyst Andrew Cosgrove wrote in a note.
The scattered reception may also be a harbinger that investors are becoming more selective about oilfield services companies, a catch-all term that covers everything from fracking and well completion to pressure pumping and water supply, according to Rob Thummel, a portfolio manager at Tortoise Capital Advisors, which oversees $17 billion in energy assets.
Stock buyers’ appetite could be limited to the best companies in any given sub-sector, Thummel said, which may restrict enthusiasm for the rest of the pipeline.
“Oilfield services is one of the most competitive sectors along the energy value chain,” Thummel said. IPO-bound companies are “going to have to tell the story and differentiate themselves.”
Acquisition Rush
Though IPO filings by E&P companies also bounced back last year, few made it to market as buyers swooped in. More than $50 billion of transactions for explorers and producers were announced in 2016, up from $31.7 billion in the previous year, according to data compiled by Bloomberg. A land rush is under way in the Permian region of West Texas and New Mexico, where major oil producers and private equity firms are amassing portfolios in one of the only places where drilling for crude is still a profitable enterprise.
Service companies, meanwhile, tend to specialize in niche tasks that offer potential suitors fewer opportunities for cost-savings or expansion.
While oil prices are well above their early-2016 lows, recent swings in crude have still left new issuers trying to thread the needle on when to push ahead with an IPO. Hydraulic-fracturing company Liberty Oilfield Services Inc., which was due to price its deal this month, twice delayed pricing as oil slipped toward $45 a barrel. This week, it’s back above $48.
That makes a sustained recovery in the industry harder to predict.
Investors are now closely watching OPEC’s May 25 meeting, where members of the Organization of Petroleum Exporting Countries are expected to extend output cuts until the end of the year. The group agreed in 2016 to curb its collective production to try to reduce bloated global stockpiles and re-balance the market. The world’s biggest independent oil trader poured doubt on the efforts this month, saying demand isn’t expanding as much as expected while U.S. shale output is growing faster than forecast.
“Volatility in commodity prices has a direct effect on IPO activity because investor sentiment can shift pretty dramatically in a short period of time,” Goldman Sachs’s Park said. “Just follow the oil price.”