Southern Delaware producer Centennial Resource Development Inc. could have gone the route of many of its peers by selling its assets to a publically traded company. Instead, Centennial has filed paperwork with the SEC that would make it the first U.S. upstream E&P to launch an IPO since June 2014.

From a strategic viewpoint, Centennial’s IPO makes sense given the success Permian Basin players have enjoyed in the equity markets to fund (and overfund) transactions.

The IPO could mark a turning point for E&Ps, even if the market only supports the best perceived assets for now. IPOs also provide private equity-backed companies an exit with better returns than selling to a larger E&P.

Centennial did not return a message seeking comment.

Bill Marko, managing director of Jefferies LLC, said a number of Permian operators have been able to raise equity through secondary offerings despite lower oil prices in the past year or so.

Centennial is the first of a handful of IPOs that will likely come out of the Permian, he said.

“I guess they’re the first guys to put their tails in the water since the price went back up,” Marko told Hart Energy. “It demonstrates that the Permian has the best economics of any of the basins so guys there will probably be the first ones to come back to the market.”

Centennial’s properties consist of large, contiguous acreage blocks in Reeves, Ward and Pecos counties inTexas, in an area about 45 miles long by 20 miles wide.

The company’s portfolio includes 61 operated producing horizontal wells, and it has established commercial production in the third Bone Spring Sandstone, Upper Wolfcamp A, Lower Wolfcamp B, Wolfcamp B and Wolfcamp C.

“We believe our acreage may be prospective for the second and third Bone Spring shales and Avalon Shale, where other operators have experienced drilling success near our acreage,” the company’s prospectus said.

The company added one horizontal rig in June after temporarily suspending drilling at the end of March.

In May and June 2016, Centennial closed acquisitions contiguous to its position. In the two deals, the company acquired about 2,400 net acres, most of it operated, adding 250 boe/d of production. This year, the company has spent about $44 million on acquisitions.

The company has a $65 million term loan and $77 million on its revolving credit facility. Its borrowing base is $140 million as of April.

“We intend to use a portion of the net proceeds from this offering to fully repay our $65 million term loan and the outstanding indebtedness under our revolving credit facility,” Centennial’s filings said. Credit Suisse Securities (USA) LLC and Barclays Capital Inc. are underwriters for the public offering.

Tim Perry, managing director for Credit Suisse USA, said Permian equities are down 8% from where they traded 2.5 years ago—roughly the same share price despite the harsh commodity environment.

“We haven’t seen any IPOs, as you may recall, I believe the last one was in the summer of 2014,” Perry said at a Society of Petroleum Engineers meeting June 22.

Eclipse Resources Corp. (NASDAQ: ECR), an Appalachian company, was the last U.S. E&P company to IPO.

“Here it is now two years later with prices half of what they were back then and we’re starting to see filings for IPOs,” he said.

In all of the Lower 48 plays, Centennial’s location amid the highly sought after Midland and Delaware basins should make a compelling case for investors.

While other areas have stuttered in their attempts to raise funds, Permian companies’ success in the equity markets has been impressive.

“Virtually all the transactions now are being funded by equity and, in fact, a lot of those transactions are being overfunded with equity,” Perry said.

Most recently, Pioneer Natural Resources (NYSE: PXD) offered 5.25 million shares for proceeds of $827 million to pay for an acquisition in the Midland Basin. WPX Energy Inc. (NYSE: WPX) priced 49.5 million shares for $485 million after a purchase in the Delaware Basin.

Because of the high demand for assets in the Permian, however, Perry said mergers have been less realistic than acquisitions.

“If the strip right now is $50, they’re trading significantly above strip. If you went and did an NAV of that company where Wall Street had that value, most companies many of them would be valued at $65 to $70 strip,” he said. “And that’s generally where the investment community is valuing these companies.”

Investors and producers alike believe technology improvements and multiple benches will support higher multiples and greater upside, Perry said.

“That whole issue of companies trading so much higher than the strip really makes it hard for corporate acquisitions to find NAV agreed deals,” he said. “That’s why we’re just seeing the corporate M&A activity slow and, frankly in our discussions, we expect it will continue to be moderate and not real high growth. We don’t see as fast a recovery as we’re seeing in A&D.”

Marko said a change in price dynamics and the multiples that Permian E&Ps command in the stock market give private companies an appetizing alternative to a divestiture.

“People are thinking about, ‘Do I IPO or do I sell?’” he said.

Not every management company wants to IPO and stick with one company. Some are true wildcatters who want to take the money and prove up another position.

“That’s part of the calculus as well. What’s the math tell me? The math right now is investors are bullish on really strong core oil stories. That would tend to carry the day,” Marko said.

But price stability is vitally important. Marko said there’s a 75% chance “we’re stable where we are and a 25% chance we’ll go backward as oil sands go back on and other disruptions come back on.”

Oil declines have been a tailwind for price as U.S. production is falling more rapidly than expected with about 100,000 barrels per day per month taking hold.

Marko said other hot plays, such as the Oklahoma Stack, will see companies go public as prices begin to creep toward $60, where most observers see oil plays as more economical.

“I think as we got into the $50s, and it’s been fairly stable, they’ll be thinking about it and certainly in the $60s,” Marko said.

Darren Barbee can be reached at dbarbee@hartenergy.com.