“Right now, the oil and gas IPO market is on hold until conditions improve,” says Larry Stevens, a partner at Houston-based Gardere Wynne Sewell LLP, in comments to Oil and Gas Investor. “There have been no E&P company IPOs since Midstates Petroleum in late April 2012.”
What’s with the slow rate of oil company IPOs? Stevens says there is no shortage of factors in play that are gumming up the works.
“You have weak commodity prices, gas storage is at or near capacity and there is a fear of worldwide recession,” he adds. “Plus, investment money is flowing out of the public energy company sector.”
Then there’s the 400-lb. gorilla in the room -- Facebook. “Facebook was big and emblematic of fear that shares will trade down after an IPO and that investors will lose money on the trade down,” Stevens says. “Look at the few energy company IPOs in 2012. All were priced at less than what company management had expected and all have traded down since the IPO and are selling at discounts up to as much as one third of the IPO price -- even for companies with solid reserves and excellent management teams.”
As Stevens notes, the Hindenburg-like performance from Facebook in its initial public offering this spring hasn’t helped oil and gas IPOs -- or many IPOs, for that matter.
While the focus here is always on oil and gas stocks, the Facebook case provides some clarity and direction on the IPO market in 2012.
Facebook’s IPO kicked on May 18, and, following Murphy’s Law, everything that could go wrong did go wrong.
Let’s review, point-by-point, and see how the overall IPO market might have been impacted as a result:
— Facebook’s trading exchange of choice, Nasdaq, suffered a crippling computer problem during the first few hours of IPO trading, leading to misdirected trades.
— Facebook’s underwriter, Morgan Stanley, faced immediate criticism -- and legal action -- on a trading price that many Wall Streeters deemed too pricey (a view that was subsequently validated).
— Facebook’s top brass was accused of leaking company earnings to select industry insiders before the IPO, and before the earnings were made public.
— As for the share price itself, Facebook saw its publicly traded value fall by 25% in less than 30 days.
Expectations can be high for any IPO, and Facebook was a high profile, textbook example of that. Analysts went overboard outing the stock, with Sterne Agee analyst Arvind Bhatia calling for a share price of $46. Morningstar’s Jim Krapfel implied that any price increase of less than 50% on the first day of trading would be “underwhelming”. Dun & Bradstreet’s Lee Simmons was more subdued, calling for a 20% share price increase the first day of Facebook’s trading.
All were off -- way off -- as Facebook shares bottomed out at $25 per share soon after the IPO on June 13. The stock is now trading at around $31 per share.
CNBC’s Jim “Mad Money” Cramer called Facebook’s IPO a “disaster”, and suggested the entire stock market was negatively affected.
“We know the Facebook deal was a fiasco of epic proportions -- an event that soured regular people on the stock market even worse than the flash crash and for good reason,” Cramer said. “But there’s a price for everything; even the most tarnished merchandise and the stock has come down.”
But not everyone agrees with the notion that Facebook sank all ships, so to speak, in the IPO market -- least of all energy specialists.
“Just like other industries, market volatility and commodity prices remain the primary drivers of energy IPO performance, says Rob Reedy, a managing partner with Houston-based legal firm Porter Hedges LLP. “Unrelated industry offerings like Facebook have little impact on the performance of energy IPOs except as they increase volatility in the markets as a whole.”
Recent history hasn’t been kind to oil and gas IPOs, either.
Recent history hasn’t been kind to oil and gas IPOs, either. Last year there were some oil and gas names that didn’t debut as strongly as expected, including American Midstream Partners, Bonanza Creek Energy, and Sanchez Energy Corp. Each has rough patches since going public.
Of course, long-term history has also been kind to some oil and gas initial public offerings. Take OAO Rosneft, the Russian energy giant. Rosneft raised over $10 billion in capital after its July 13, 2006 IPO. Then there’s Enel SpA, which raised $16 billion after its 1999 IPO.
But that’s just not happening as 2012 hits July, experts tell OGI.
“The U.S. IPO market has been down in 2012 and the oil and gas industry is no exception,” says Reedy. “Commodity prices for natural gas continue to adversely affect the market. That has been the consistent story for several months now.
“However, even in the last couple of months when IPO activity has been slow, there were two IPOs in the midstream sector and a third for a company that produces fracing sands used in recovering hydrocarbons from oil and natural gas wells,” he adds. “The bright spot -- if there is one -- is the MLP (master limited partnership) vehicle is still popular for IPOs (outside of the E&P industry).”
With energy company IPOs in slow-growth mode in early 2012, some analysts are more bullish for the remainder of 2012.
BDO USA surveyed 100 capital markets executives in its BDO Halftime Report, and found that 61% say that IPO activity will increase in the second half of the year, with 23% saying activity will be flat, and another 16% predicting a decrease. That’s ahead of overall expectations for IPO activity, as most managers surveyed by BDO say that growth will remain flat for the year.
The 42 IPOs that priced in the first quarter represented the most deals in Q1 since 2007 (45) and activity was up 31% year-over-year, says Wendy Hambleton, a partner in the Capital Markets Practice of BDO USA.
“IPO activity on U.S. exchanges increased steadily during the first quarter of the year and carried solid momentum through April before renewed concerns with the European debt crisis, negative U.S. economic data and the problematic Facebook IPO sent markets spiraling downward and brought new offerings to a halt,” she says. “Based on this survey, the capital markets community is clearly concerned that economic turmoil overseas will keep markets volatile, making for a challenging time to conduct initial offerings.”
According to BDO, 43% of the investment banking community see U.S. IPO proceeds rising during the remainder of the year -- especially energy industry IPOs.
Here’s an industry breakdown:
Industry Increase Flat Decrease
Technology 73% 18% 9%
Energy/Natural Resources 61% 23% 16%
Biotech 54% 36% 10%
Real Estate 38% 38% 24%
Media/Telecom 33% 41% 26%
Financial 27% 39% 34%
Manufacturing 25% 50% 25%
Retail 16% 43% 41%
Source: BDO Halftime Report
Of course, the direction of oil and gas industry IPOs depends significantly on the price of crude oil, which has trended downward for most of 2012.
“Broadly speaking, bullish commodity price outlooks support dis-integration activities while bearish forecasts generally motivate integrating transactions,” says Michael Peterson, managing director, energy research at MLV & Co., in comments to Oil and Gas Investor. “With sentiment for the crude prices solidly negative, and notwithstanding the recent rally in natural gas, the market outlook for energy commodities at this time is modestly bearish. Accordingly, IPO deal flow during the balance of 2012 is likely to remain below average, in our view.”
That seems to be the sentiment among energy industry insiders.
“Oil and gas has the second most companies in the IPO pipeline after technology so the outlook is strong,” adds Reedy. “It’s an industry that is providing solid returns and needs capital to fund the technology investment. However, filing one is only the first step and it remains to be seen how the market will react at pricing time.”
Surely, companies looking for capital want to test the IPO waters. After all, as Stevens puts it, the IPO market continues to be the cheapest source of growth money for private energy companies.
“But until commodity prices improve and the world economy shows more tangible signs of long-term recovery it is unlikely that there will be any additional energy company IPOs at least through the end of 2012,” Stevens says. “Those few energy companies that made it to the public market in 2012 count themselves very fortunate.”