Subdued energy prices keep a lid on Texas securities offerings
The number of securities offerings handled by Texas lawyers who specialize in capital markets remained disappointingly low during the first six months of 2018, according to exclusive new data collected by The Texas Lawbook’s Corporate Deal Tracker.
The same data, however, shows that the size of securities offering and the amount of money raised during the first half of 2018 reached the highest level in three years.
The Corporate Deal Tracker shows that Texas-based capital markets lawyers handled 129 offerings — including initial public offerings, equity offerings and debt offerings — from January to June and raised $66.8 billion. Not surprisingly, 70 percent of the securities involved the energy sector.
The 129 offerings was nearly 12 percent lower than the first half of 2017 and 27 percent fewer than the same period in 2015.
The $66.8 billion raised during the first six months of 2018 was 15 percent higher than the first half of 2017, but it is 28 percent less than the $93.4 billion generated through the capital markets during the same period in 2015, according to the Corporate Deal Tracker.
Analysts say that the continued softness in capital markets activity in Texas is due to lower commodity prices in the energy sector, which led investors to want the oil and gas companies to live within cash flow and not take on more debt.
“The industry is going through a moment of change, when companies are focusing on growing operations from their cash flow,” said Hillary Holmes, co-chair of Gibson, Dunn & Crutcher’s capital markets practice in Houston. “Companies have had to be disciplined in how they raise and spend their capital. There’s a lot more focus on use of proceeds, with investors asking, ‘What are you going to do with my money?’”
Experts say there also has been investor disinterest in IPOs after being burned in the most recent downturn. But that may be changing.
“We’re seeing activity, with the oil names and the minerals companies having the best opportunity for IPOs,” Kirkland & Ellis partner Sean Wheeler told
The Texas Lawbook. “The recent Berry deal priced below the range, but the good news is that it got done, which is a good omen for 2019.
“I don’t think the floodgates will open, but oil-weighted companies and mineral companies will have the best chances. The gas names are still weighed down by commodity prices.”
Despite caution in the oil patch, the energy industry dominated securities offerings with almost $46.6 billion worth of
deals in the first half — 24.6 percent higher than the first half of 2017.
The utilities sector ranked second in value at almost $6.9 billion, thanks to transactions by NRG Energy and FirstEnergy. Finance/banking was third with $4.17 billion, followed by chemicals at $1.6 billion and manufacturing with $1.58 billion.
There were 88 energy-related capital markets transactions during the first half of 2018 — up from 77 in the second half of 2017 but down from 100 in the first half of 2017, according to the Corporate Deal Tracker.
David Oelman, who co-heads Vinson & Elkins’ M&A and capital markets practice, said there is still a great need for long-term capital, citing IHS Markit figures that project the energy sector will require $890 billion in investment through 2025.
“Private equity is an alternative form of financing, but it’s not there to be long-term,” he said. “The need for capital markets activity in the form of initial public offerings and followon offerings over the long term should be robust for an extended period of time.”
Oelman said there were only six energy-related IPOs in the first half, versus 20 for all of 2014 and 21 between 2015 and 2017. But he thinks a healthy amount of activity is coming, although it may arrive in spurts.
“It will be cyclical depending on commodity prices and other areas to invest in,” he said, noting technology and biotech. “There are reasons for optimism.”
Exploration and production companies are showing new discipline in capital spending, while midstream entities are changing their structures, deleveraging and delivering better returns at a time of great demand for more infrastructure, Oelman said.
Baker Botts capital markets practice leader Josh Davidson is more encouraged by the capital markets given higher activity levels, but he said it’s a far cry from the boom years of 2011 to 2014.
“There are a lot of private equity firms sitting on investments that they may want to monetize and will look at the private and the public markets,” said Davidson, who is working on several IPOs, including one for Yorktown Energy Partnersbacked Carbon Energy. “The stock market is healthy now.”
Of the 129 securities offerings during H1, 74 were public debt offerings and 40 were public equity offerings. There were six private debt offerings and five IPOs.
Ryan Maierson, global cochair of Latham & Watkins’ public company representation practice, said that while the number of new energy issues is way down from historic highs and down from last year, the amount of optimism that the IPO market will improve is as high as he’s ever seen it.
“There’s a view that there will be sustained levels of relatively higher oil prices — high $60’s to low $70’s [per barrel] — creating a favorable commodity price backdrop,” he said. “While some investors have gotten beaten up over the years, some of those investors will be willing to wade back into energy space. And the need for capital is as strong as it’s ever been, to build out pipeline capacity in the Perman and export capability.”
Mike O’Leary, co-head of Hunton Andrews Kurth’s corporate team, said 2018 started with opportunities for oil field services companies to go public, but only a handful made it out of the chute. He counseled the underwriters on the Quintana Energy Services IPO, which priced in February below its expected range.
“There has been some discussion that maybe fall will be better. But it doesn’t look like it’s open, with the Permian having issues, sand companies under pressure from pricing and so much competition,” O’Leary said. “The hope for a renaissance for oil field services may be in 2019, but it’s a bit of a hostile environment right now.”
The utilities sector ranked second in value at almost $6.9 billion in securities offerings in Texas in the first half of 2018.