De­spite oil's de­cline, en­ergy com­pa­nies win with eq­uity of­fer­ings

The Pak Banker - - MARKETS/SPORTS -

More than a dozen com­pa­nies in the hard-hit ex­plo­ration and pro­duc­tion en­ergy in­dus­try have an­nounced new share of­fer­ings this year - and have gen­er­ally been re­warded in the stock mar­ket for the strat­egy. Al­though it might seem that com­pa­nies would up­set their in­vestor base by di­lut­ing earn­ings per share when they added more stock, most of the 15 com­pa­nies that have done so have ac­tu­ally out­per­formed their peers. Their share prices have beaten an oil and gas pro­duc­ers index, on av­er­age, by about 3 per­cent­age points since their re­spec­tive of­fer­ings, and the out­per­for­mance is even stronger when com­pared with that of the broader S&P en­ergy sec­tor.

With wide­spread wor­ries about en­ergy com­pa­nies col­laps­ing un­der debt loads, an­a­lysts and in­vestors said that share­hold­ers could more eas­ily stom­ach the di­lu­tion of their hold­ings if it means adding cash to strengthen bal­ance sheets.

The stronger com­pa­nies in the in­dus­try were gen­er­ally those able to raise cap­i­tal through share sales, an­a­lysts said, and the re­cent suc­cesses did not nec­es­sar­ily mean a flood of fur­ther of­fer­ings would fol­low.

"The com­pa­nies that are do­ing it are good solid com­pa­nies," said Mike Breard, an en­ergy stock an­a­lyst at Hodges Cap­i­tal Man­age­ment in Dal­las. "If your fund has been out of en­ergy for two years, these are the stocks you look at first."

Hodges Cap­i­tal owns shares of Di­a­mond­back En­ergy Inc (FANG.O), which said on Jan. 13 it was rais­ing $226 mil­lion through a stock of­fer­ing to re­pay the debt un­der a re­volv­ing credit fa­cil­ity, with the rest for ex­plo­ration, devel­op­ment ac­tiv­i­ties and other pur­poses.

Since then, Di­a­mond­back's shares have climbed 31 per­cent against a 19 per­cent rise for the SIG Oil Ex­plo­ration & Pro­duc­tion index. De­spite "mixed emo­tion" about the of­fer­ing be­cause it did di­lute the stock, Breard pointed to the "safety" pro­vided by the fund­ing given that oil was only about $30 a bar­rel at the time, about $10 cheaper than it is now, mak­ing the cli­mate more un­cer­tain. "Un­der the con­di­tions that ex­isted then, you'd rather own 90 per­cent of a com­pany with a stronger bal­ance sheet than 100 per­cent of one with a slightly worse bal­ance sheet," Breard said.

Oa­sis Petroleum Inc (OAS.N), Cal­lon Petroleum Co (CPE.N) and PDC En­ergy Inc (PDCE.O) have also out­per­formed the oil pro­duc­ers index by more than 10 per­cent­age points since their re­spec­tive of­fer­ings. Cabot Oil & Gas has lagged the most, un­der­per­form­ing by more than 30 per­cent­age points. All told, U.S. ex­plo­ration and pro­duc­tion com­pa­nies have raised more than $10 bil­lion through eq­uity of­fer­ings this year, an­a­lysts at Cap­i­tal One Se­cu­ri­ties es­ti­mate.

Com­pa­nies in­clud­ing Pi­o­neer Nat­u­ral Re­sources Co (PXD.N), Syn­ergy Re­sources Corp (SYRG.A), PDC En­ergy and Cal­lon did not ur­gently need cash but stood to "im­mu­nize" their bal­ance sheets in case the oil mar­kets are ugly into 2017, said Irene Haas, ex­plo­ration and pro­duc­tion an­a­lyst at Wun­der­lich Se­cu­ri­ties in Hous­ton.

Mata­dor Re­sources (MTDR.N) and En­er­gen (EGN.N) have as­set sales pend­ing, but the newly raised money means they do not have to worry about tim­ing of pro­ceeds, Haas said. "Peo­ple would rather they have money in their pocket and sur­vive," Haas said. "They'll worry about di­lu­tion later."

In­vestors who gob­bled up shares dur­ing of­fer­ings in Jan­uary and Fe­bru­ary may have called a bot­tom in oil prices, which have re­bounded 50 per­cent since mid-Fe­bru­ary.

While plenty of oil com­pa­nies want to of­fer shares, "I would guess we've seen most of the low-hang­ing fruit that's been picked," said Chris­tian Le­doux, se­nior port­fo­lio man­ager at South Texas Money Man­age­ment in San An­to­nio. Le­doux said he doubts many more will fol­low, "not be­cause (the com­pa­nies) don't want to, but be­cause they won't be able to at­tract in­vestors" un­til oil prices are much higher.

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