Sub­dued en­ergy prices keep a lid on Texas se­cu­ri­ties of­fer­ings

Houston Chronicle Sunday - - BUSINESS - By Claire Poole

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.”

Eric Chris­tian Smith / Associated Press file

The util­i­ties sec­tor ranked sec­ond in value at al­most $6.9 bil­lion in se­cu­ri­ties of­fer­ings in Texas in the first half of 2018.

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