First-half strength in the US equity market has laid the groundwork for 2013 to be potentially the most active year for initial public offerings (IPOs) since the financial crisis struck in 2008-2009. And the energy sector is getting its share of the action, recently accounting for 16% of IPO filings and 22% of follow-on or secondary equity issuance through mid-August, according to data from Dealogic and JP Morgan.

IPO equity issuance in energy continues to be weighted toward master limited partnerships (MLPs). Roughly a dozen MLPs have made their IPO debut so far this year, as compared to just a select few C-Corp issuers: Athlon Energy Inc. and Jones Energy Inc. in the E&P sector, and Franks International NV, a provider of engineered tubular services, on the oilfield service side. Likewise, the pipeline of yet-to-be launched IPOs is brimming with MLPs, in contrast to a single—though anticipated—offering by C-Corp Antero Resources Corp.

So how robust is the IPO market in energy? Is there a raft of initial offerings queued up to be launched in the final months of this year and into 2014?

“The pipeline is fairly strong,” says Yaw Asamoah-Duodu, a managing director in equity capital markets, covering energy, at JP Morgan. “I think it is going to continue to be dominated by midstream companies, particularly MLPs.

“That's been the trend for the last three years, and I don't see it changing. The midstream is where a lot of the capital is being spent to build infrastructure to serve these new shale discoveries, and companies undertaking infrastructure projects are likely to be out raising a lot of equity. So whether it is IPOs or secondaries, I think we will see a lot of activity there.”

In terms of so-called dropdowns of assets by parent companies to MLP subsidiaries—in some cases accompanied by equity issuance by the MLP—Asamoah-Duodu sees no reason for the trend to slow. “The reason why dropdowns work is because you give investors a clear line of sight on growth. There is little risk that the parent is not going to be able to drop those assets into the MLP. The market likes it, and investors are willing to pay for that growth because it is lower risk growth.”

Asamoah-Duodu also sees C-Corp activity picking up in the E&P sector, which saw only two energy IPOs in the earlier part of the year.

“The order of magnitude won't be similar to what you would expect to see on the midstream side, but we do expect to see a greater number of transactions coming to market in the latter half of this year and into the early part of 2014,” he says. “I would estimate there is a handful of transactions—maybe five—that will likely come to market in the upstream C-Corp market.”

Strong demand

One IPO that had investors scrambling to get shares earlier this year was Athlon Energy Inc.

Athlon Energy (NYSE: ATHL) took advantage of strong investor demand for Permian producers to price its IPO at $20 per share, seeing an immediate 30% lift in the stock price with its opening trade of $26 per share. The offering was priced at the high end of the $18- to $20-per-share range and raised an estimated $360 million, assuming exercise of the 15% overallotment option.

A receptive market for Permian-focused E&Ps was evident in the runup to the IPO. On the day prior to Athlon's launching of its IPO, Pioneer Natural Resources Corp.'s stock rose 12%, as the company announced the results of its first Wolfcamp A interval well in Midland County. The DL Hutt C #2H had a 24-hour peak initial production rate of 1,712 barrels of oil equivalent production (BOE) per day, with a 30-day average production rate of 1,107 BOE per day.

On the announcement, Permian Basin players Diamondback Energy Inc. and Laredo Petroleum Holdings Inc.'s shares were up more than 11% and 12%, respectively, on the day. Subsequently, both companies did follow-on offerings, with Diamondback issuing four million primary shares and Laredo issuing 16 million shares. The Laredo offering was comprised of 13 million primary shares and a further three million shares that were offered by existing shareholder Warburg Pincus LLC and certain members of management.

Athlon, headquartered in Fort Worth with a field office in Midland, is 100% focused on the Midland Basin. The company has proved reserves of 86 million BOE (99% operated), and as of June, production was about 12,000 BOE per day. Its leasehold comprises 98,348 net acres in the Midland Basin in three primary areas: Howard County, 51,556 net acres; Midland County and other, 33,709 acres; and Glasscock County, 13, 083 acres.

Athlon was founded in August 2010 by former executives of Encore Acquisition Co., following its acquisition by Den-bury Resources Inc., and is backed by Apollo Funds. Its executive officers include chief executive officer Robert Reeves, previously chief financial officer of Encore Energy Partners GP, and Nelson Treadway, previously senior vice president, land, with Encore Energy Partners and currently Athlon's senior vice president, business development and land. Post-IPO, management retains 12.2% in the firm, while Apollo's stake falls to 65.8% and the public float is about 22.1%.

Enthusiasm for Permian players has been enhanced by mounting evidence of multiple zones being prospective in the Midland Basin and elsewhere. Athlon notes its properties in the Midland Basin are in areas with 3,000 to 4,000 feet of stacked-pay zones. It says its Midland Basin acreage has been de-risked by some 230 gross operated vertical Wolfberry wells it has drilled since early 2011 with a 99% success rate, and it has identified an inventory of 4,900 gross vertical drilling locations on 40-acre and 20-acre-spacing.

In terms of horizontal development potential, Athlon says that multiple Wolfcamp formations are prevalent across its entire leasehold position, while the Cline and Mississippian formations are present across portions of its acreage. Based on vertical well control data from its own and offset operators' operations, Athlon has identified 311 gross/272 net horizontal locations in the Wolfcamp A formation, 357 gross/317 net locations in the Wolfcamp B formation, 133 gross/125 net locations in the Wolfcamp C formation, and 227 gross/193 net locations in the Cline.

RBC Capital Markets analyst Scott Hanold initated coverage of Athlon in late August with an Outperform rating and a $37 target price, up from its price at the time, $30.

“We think Athlon shares have a unique advantage in the Permian with its high-return vertical development program, augmented by upside from multibench horizontal opportunities,” the RBC report says. It cites the company achieving production growth over the past two and a half years from 3,600 BOE per day to more than 12,000 BOE daily, mostly from lower-risk vertical wells, and projects growth of 65% in 2013 and 60% in 2014. The anticipated growth will still be mostly from its vertical program, but horizontal drilling should become more meaningful in 2014 and account for 10% to 15% of total volumes.

Jones Energy Inc.'s IPO met with less appetite from the market, with its offering downsized to 12.5 million shares from 14 million and priced at $15 per share versus a filing range of $17 to $19. Based in Austin, Texas, Jones (NYSE: JONE) is focused on the Anadarko Basin, where it holds more than 64,000 net acres and is targeting primarily the liquids-rich Cleveland and Granite Wash formations. In addition, the company has 4,000 net acres in the Arkoma Basin, where it is targeting the liquids-rich Woodford shale.

Recent research includes an early September report by Richard Tullis of CapitalOne South-coast, who initiated coverage with an Add rating and $19 target versus a then-current price of $15.02. JP Morgan analyst Joe Allman initiated coverage with an Overweight rating and $18 target price. The reports both projected year-over-year production increases of 30% or more in each of 2013 and 2014.

“This growth rate is above the 13% median for the group and comes while Jones likely will spend relatively close to cash flow,” observed Allman. Both firms set target prices in relation to estimates of net asset value.

Interestingly, both Athlon and Jones Energy qualified as “emerging growth companies” under the recent JOBS Act (Jumpstart Our Business Startups Act). This means they will be exempt from certain reporting requirements, for example, providing an auditor's attestation report on management's assessment of the effectiveness of its system of internal control over financial reporting pursuant to the Sarbanes-Oxley Act. Each would cease to be an “emerging growth company” when passing certain thresholds, including reaching $1 billion or more in annual revenues.

In the wings

One of the more highly anticipated IPOs is yet to come: Antero Resources.

Although the Denver company has had no publicly traded equity prior to its planned IPO, it has provided financial and operating data to its public debt holders. The company's September presentation available on its website shows proved reserves of 6.3 trillion cubic feet equivalent as of June, assuming ethane rejection and a price deck of $3.43 per million British thermal units (MMBtu). Current production was cited at 680 million cubic feet equivalent (MMcfe) per day, including 13,500 barrels per day of liquids, with an additional 115 MMcfe per day of net production shut in and waiting on pipeline, compression or processing.

With more than 4,500 horizontal drilling locations, Antero is poised to continue its rapid reserve growth in Appalachia. In the Marcellus shale, it has 328,000 net acres in its southwestern core, an area where it has completed 195 horizontal wells. In the Utica shale, it has 101,000 net acres in the core of the play, where it has completed 11 wells. Initial production data from the first 11 Utica wells showed a 24-hour peak rate of 4,682 BOE per day, assuming ethane rejection, with 42% liquids content. The wells were drilled with an average lateral length of 6,279 feet in Monroe and Noble counties, Ohio.

Antero's capital budget slide shows 156 wells planned for 2013, with the great majority—some 135 wells—being in the Marcellus. For the first 195 wells drilled there by Antero, the average well cost was $8.7 million and average estimated ultimate recovery (EUR) was 9.8 billion cubic feet (Bcf). For modeling purposes, using an assumed $8-million well cost, a 10 Bcf EUR and a three-year strip at $4.25 per MMBtu, the play's before-tax rates of return were shown to range from more than 30% for dry gas (sub-1,050 Btu), to 57% for rich gas (1,050-1,250 Btu) and 128% for highly rich gas (1,250-1,350 Btu), assuming ethane recovery.

On the MLP side, of course, there are also significant IPO filings—and certainly more indications of further registrations to come. Of note is the plan unveiled by Enbridge Energy Partners LP for a new MLP, Midcoast Energy Partners LP, into which it would drop down all its natural gas and natural gas liquids (NGL) midstream business over four to five years.

At its IPO, Midcoast Energy is expected to hold an approximate 40% interest in the parent's midstream business. Selling a minority of the total limited partnership interest in the offering is expected to raise proceeds of some $400-to $500 million.

This is but one example in a regular diet of offerings filed by a broadening range of MLP issuers that recently has included, for example, refining and marketing and chemical companies. In refining, Phillips 66 this summer up-sized an offering of a new MLP, Phillips 66 Partners LP, selling 18.9 million common units at $23 per unit, $2 above the high end of the offering range. The MLP was formed to own and operate crude oil, refined petroleum product and NGL pipelines and terminals and other transportation and midstream assets. Proceeds totaled $434 million.

Also in Texas, OCI Partners LP was formed as an MLP to own and operate an integrated methanol and ammonia production facility that is strategically located on the Gulf Coast to access attractively priced natural gas feedstock supplies. The facility is the largest merchant methanol producer in the US and is undergoing a debottlenecking project that is designed to raise its methanol production capacity by 25%. The MLP is being spun out by OCI NV, a fertilizer producer and engineering and construction company based in the Netherlands. Proceeds from the IPO are expected to exceed $400 million.

But amidst the flow of MLP issuance—and lesser, but increasing C-Corp issuance—what factors could lead to troubled waters? What could go wrong?

“One thing you have to worry about is the intense market focus around the Fed and how it is going to manage the whole tapering exercise,” says Asamoah-Duodu. “October could be volatile. There could be some broader market volatility and dislocations that could weigh in on the timing of some of these capital market transactions.

“To the extent that interest rates do rise precipitously, you could see a little bit of an impact on the MLP side, because those are yield-oriented securities,” he says. “However, I would point out that the last time we had market turmoil around the Fed tapering in July, the MLP and midstream companies held up a lot better than other yield-oriented stocks, like utilities or telecom companies. In fact, MLPs recovered very, very well.”