Local IPOs
Fewer companies went public in Houston in 2018 than the year before as investor uncertainty in the energy sector limited confidence in initial public offerings, spinoffs and promising niche companies.
Seven Houston-area companies went public in 2018, raising nearly $958 million combined in public offerings.
Four of Houston’s newest publicly traded companies are oilfield services companies: Apergy Corp., Cactus Inc., Nine Energy Service Inc., and Quintana Energy Services Inc.
Compared with 2017, when 11 companies in Houston were offered for a total of $2.97 billion, including seven oilfield service companies, 2018 was not a good year for IPOs. The seven Houston companies that went public in 2018 raised only a little over a third of that raised in 2017.
One oil production company was listed, Riviera Resources Inc.; one bank, Spirit of Texas Bancshares; and one “blank check” company, Graf Industrial Corp., which will pursue a merger or similar business combination in the industrial sectors, including manufacturing, technology and services. Joe Dunleavy, an energy, utilities and mining deals leader in Houston at consulting firm PwC, said these “blank check” companies, or SPACs, special purpose acquisition companies, have become more popular
in recent years.
“One of the risks we see with SPACs is that they go public so fast,” Dunleavy said.
Production at all costs
Byron Pope, an analyst with the Houston investment bank firm Tudor, Pickering, Holt & Co., said that investors were frustrated with exploration and production companies in 2018; the sector was failing to generate free cash flow and was generally undisciplined with regard to how capital was deployed.
“They had a production at all costs mindset,” Pope said. “Because of the oil price collapse, it was crystal clear, not just for oilfield services stocks, but for energy stocks broadly, that (it) was going to be really difficult for energy companies to go public in that environment.”
The price of oil hit a year high of $76.41 per barrel in 2018 at the beginning of October and then crashed to a low of $42.53 at the end of December. Prices in the first months of 2019 hovered between about $50 to $60 per barrel.
Still, there were some bright spots in 2018 for companies that were able to differentiate themselves from the rest of the oilfield services sector. Apergy Corp., one of the oilfield services companies that went public in 2018, and headquartered in The Woodlands, takes a unique approach: It’s focused on the artificial lift side of oilfield services, competing with only the larger services firms, such as Schlumberger and Baker Hughes a GE Co., on this niche service, analysts said.
The company, which was a spinoff of the industrial equipment manufacturer Dover Corp., employs more than 400 people in the Houston area.
Cactus and Nine, two other oilfield service companies that went public in 2018, were also differentiated in some way, Pope said. Cactus has carved out a niche in wellhead equipment and well completion, he said, and the company has a strong management team that has been in the industry for decades, which boosted investor confidence.
Similarly, Pope said that investors viewed Nine Energy as having a strong CEO, Ann Fox, who before taking on leadership positions at Nine, worked in private equity for the energy services industry and served in the U.S. Marine Corps.
Looking ahead
In 2019, uncertainty remains for energy investors, analysts said. Investors do not yet know if exploration and production companies, particularly in West Texas’ booming Permian Basin, will generate more free cash flow, and if they do, how they will spend it.
The question is if exploration and production companies will opt to return the cash to shareholders and begin to “walk the talk,” or if they will lose capital discipline and re-deploy the cash back into incremental activity, Pope said.
Still, merger and acquisition activity could be healthy in 2019, said Dunleavy of PwC.
“I think we’ll continue to see deals,” Dunleavy said. “We feel like the later half (of 2019) will see an uptick in activity.”
To the extent that investors’ lack of enthusiasm closes the door to more IPOs in 2019, that may result in more industry consolidation for oilfield service companies, like in 2018.
“We are finally in the nascent stages of what’s been a long-awaited recovery in activity,” Pope said, but still, “Investors are taking a much more waitand-see approach (in 2019).”