Energize Weekly, November 6, 2019
The stock and bond markets continued to cool for oil and gas drillers in the third quarter of 2019 with $495 million raised in equity, a 79 percent decline year-over-year, according to a report from Enverus, an industry analytics firm.
Bond offerings for “upstream” drillers rose for the quarter to $14.6 million, a 70 percent jump from the third quarter of 2018, but that was driven by the $13 billion raised by Occidental Petroleum to finance its acquisition of Anadarko Petroleum Corp. Without the Occidental issue, bonds were down 81 percent for the quarter.
Except for larger companies with investment grade ratings, the bond market has become largely closed off to the sector, the Enverus report said.
Overall across all oil and gas sectors, including midstream, downstream and integrated services, $40.6 billion in equity and bond funds were raised by the industry. That was nearly double the amount raised in the third quarter of 2018.
“On the upstream side, a lack of access to capital for shale companies is becoming a defining story of 2019,” Andrew Dittmar, an Enverus analyst, said in a statement. “Their stock has significantly underperformed the broader market with the S&P E&P [exploration and production] Index down nearly 20 percent in 3Q19 versus flat performance for the S&P 500.”
The result is that investor confidence has been eroded for new stock issues of companies trying to go public, Dittmar said.
The biggest stock deal of the quarter – accounting for two-thirds of all equity value – was Switchback Energy Acquisition Corp.’s $300 million initial public offering (IPO). The company was formed by former RSP Permian executives to focus on the energy industry.
The lack of capital has led to an acceleration in bankruptcy filings among smaller shale drillers and service companies, with 16 companies – nearly triple the number in the third quarter of 2018 – seeking bankruptcy protection for $15 billion in debts.
Private equity financing for the industry was also down in the quarter with 27 announced commitments worth $3.6 billion, a drop of 58 percent year-over-year. About $1.2 billion of that went to upstream companies
The largest disclosed upstream commitment went to WildFire Energy, with more than $1 billion from Warburg Pincus, Kayne Anderson and its management team. Wing Resources IV LLC received $100 million from NGP Energy Capital Management, and Indianola Energy LLC got $100 million from Kayne Anderson.
Upstream companies may be relying on credit facilities – such as revolving bank loans – with increasing rates. “Investors will also be closely watching how drawdowns are spent,” Dittmar said. “They want any use of this credit to be a short-term plug, not another way to delay getting to positive free cash flow while adding leverage to the balance sheet.”
Drillers are working toward trimming expenses, greater efficiency to generate positive cash flow, but not all companies will be able to reach that goal, Enverus said.
“Companies have found themselves facing restructuring in a number of ways, but it usually boils down to overly aggressive CapEx [capital expenditures] to fund growth, wells substantially underperforming expectations, or some combination of the two,” Dittmar said.
