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US oil/gas industry raised $186 billion through public offerings in 2016

2016

A WPX Energy natural gas drilling rig in Parachute, Colorado, December 10, 2016. REUTERS/Jim Urquhart

2017 pace picking up on rebounding commodity prices, surge in M&A activity

Depressed oil prices took the wind out of US oil and gas capital markets in 2016, according to a new report from PLS Inc., a Houston-based oil and gas research firm.

Report highlights:

  • 2016 aggregate value of $186 billion across 346 bond and equity deals compared with $196 billion from 322 deals in 2015.
  • $53 billion in equity offerings and $133 billion in bond issuances by the U.S. energy sector in 2016.
  • Equity financing activity in Upstream sector surged 69 per cent over 2015 offerings, while traditional equity issuers in the Midstream/MLP sector reduced equity offerings.
  • Upstream sector saw 80 equity deals at $31.7 billion (60 per cent of equity deal amount offered in 2016) and 70 bond deals at $46 billion (35 per cent of bond deal amount offered in 2016).
  • Slowdown in the IPO market, with only 6 energy IPOs last year in Upstream and Services sectors.
  • Virtually no MLPs went public in 2016 relative to the high levels seen in 2011 and 2014.
  • Banks earned $1.3 billion in aggregate fees for equity secondary offerings and IPOs on a total deal amount of $53 billion.
  • Issuing bonds earned banks $1.3 billion in fees on an aggregate $133 billion in deals.
  • JP Morgan most active underwriter on equity and bond offerings in the U.S. energy markets, with a market share of 14 per cent on equity and 12 per cent on bond deal amounts.
  • Credit Suisse lead underwriter on 3 out of the 6 energy IPOs in 2016.
  • The expectation of lower oil prices at the beginning of the year coupled with the increase in Permian Basin M&A and drilling activity, pushed companies in the Upstream sector to raise a significant amount of equity in 2016.
  • Capital markets activity is expected to pick up in 2017 in the energy industry, building on growth of Upstream M&A and private equity investments in the U.S.

In its tracking of the US oil and gas sector, Capitalize reported that the aggregate value of bond and equity issuances fell 5 per cent in 2016 to $186 billion spanning 346 deals, compared with $196 billion from 322 deals in 2015 and $211 billion from 410 deals during the much higher-priced 2014 environment.

Decreased liquidity in the bond markets was a result of investors becoming more risk-averse in a low commodity price environment.

That affected profit margins and increased the credit risk of energy related companies, which had an impact on funds raised through bond offerings.

This decrease was met with a healthy increase in equity issuances, a 36 per cent surge in amount raised over that in 2015.

Oil price accounts for much of the deal market volatility as it began descending from July 2014 highs of $100-plus per barrel and accelerated in Nov. 2014 when OPEC decided to open the taps to gain market share.

This resulted in prices plummeting to a low of $27 per barrel in Feb. 2016. Two years after OPEC’s attack on oil prices began, both OPEC and non-OPEC countries agreed to cut production beginning Jan. 1, 2017 — a decision that is expected to further boost oil prices this year.

2016 in Review

Deal counts for equity and bond offerings increased by 7 per cent in 2016 to 346 deals versus 322 in 2015 but also fell shy of 2014’s 410 deals. Note, these deal counts do not include at-the-market equity offerings.

On the other hand, total deal amount decreased by 5 per cent in 2016 to $186 billion from $196 billion in 2015 and $25 billion lower than 2014’s $211 billion of bond and equity deal amount issued.

2016 Energy Bond and Equity Issuances
Year Deal Amount
($ billion)
Deal Count
2011 $119 276
2012 $196 382
2013 $193 432
2014 $211 410
2015 $196 322
2016 $186 346
Source: PLS. Capitalize.

The 2016 capital markets landscape was characterized by some interesting phenomena, as well. Capitalize saw Upstream companies coming out with multiple offerings in 2016, fueled substantially by the need to raise money to act upon opportunities to grab inexpensive assets.

Some companies go years without doing even one secondary offering. Callon Petroleum raised about $1.3 billion across four raises last year. Parsley Energy and Synergy Resources issued equity three times.

Matador Resources, Rice Energy (plus one for its midstream subsidiary), Resolute Energy, Gulfport Energy, PDC Energy, SM Energy and Ring Energy all had two offerings.

Return of the SPAC — after an absence from the US energy equity landscape, 2016 saw the IPOs of two blank-check companies willing to wait before pouncing on reasonably-priced oil assets.

One of them, Silver Run Acquisition Corp., became Centennial Resource Development in September and the other, KLR Energy Acquisition Corp., combined with Tema Oil & Gas to form Rosehill Resources. This transaction is expected to close in the first half of 2017.

Good execution on Chapter 11 Restructuring Support Agreements — Most of the companies that filed for bankruptcy last year came to court with at least a preliminary restructuring support agreement in hand, enabling them to get through the process faster.

Those that hadn’t garnered strong support from creditors and other stakeholders from the onset, like Energy XXI, waited over eight months to get through the process. Swift Energy, like its name suggests, got through in just three months.

Tender offers still hot — Chesapeake Energy and Devon Energy undertook massive waterfall tender offers on several series of outstanding debt last year. Tender offer activity among overburdened oil companies was consistent throughout the year, continuing the momentum begun in 2015.

Tendered debt was swapped for new debt, cash or a combination. Most everyone paid an early tender premium of $30 per each $1,000 of debt tendered. Many companies did equity or new debt raises for cash to pay for the tender offers.

“We’re spending within our means” — More and more CEOs and CFOs uttered these words or something similar in more press releases and on more conference calls this year, beating out “rightsizing” and “headwinds” for the most overused energy capital phrase of the year. Many companies used 2016 as an experiment to ratchet capex down below expected cash flow rather than borrow more to fund capex.

2016 equity offerings — The increase in 2016 equity offerings was mainly the result of the large increase in deal amount raised by companies in the Upstream, Midstream, and Services sectors which helped keep 2016 equity deal amount raised close to the levels seen in 2015. Largest equity issuance increases over 2015 were in the Upstream and Services sectors at 69 per cent and 342 per cent respectively.

Top 10 Energy Upstream Equity Offerings in 2016
Company Lead Bookrunner Lead
Bookrunner
Allocation
Total
Number of
Bookrunners
Deal Amount
($ Million)
Anadarko Petroleum JP Morgan 100% 1 $1,876
Pioneer Natural Resources BAML 32% 4 $1,404
Devon Energy Goldman Sachs 70% 15 $1,294
Concho Resources Credit Suisse 39% 24 $1,155
Marathon Oil Morgan Stanley 78% 7 $1,109
Southwestern Energy Credit Suisse 35% 24 $1,085
Diamondback Energy Credit Suisse 53% 23 $1,000
Rice Energy Barclays 60% 2 $1,020
Encana Credit Suisse N/A 4 $1,000
Hess Goldman Sachs 35% 17 $975
Source: PLS Capitalize. Does not include overallotment shares.

Lead equity bookrunners — JP Morgan was the most active bookrunner in the Upstream sector for equity offerings with deal amount share of $6.1 billion or 19 per cent of total Upstream deals.

Barclays took the lead in Midstream with a share of $3.2 billion (24% of Midstream). Wells Fargo was the most active in Downstream at a share of $0.4 billion (27 per cent of Downstream). Morgan Stanley took the lead in the Services sector with $1.2 billion or 27 per cent.

Top 10 US Banks for U.S. Energy Equity Deals in 2016
(Allocated Deal Amount $ Millions)
Bank Upstream Midstream Downstream Services Integrated Total
JP Morgan $6,123 $211 $75 $747 $254 $7,411
Credit Suisse 5,558 263 0 408 0 $6,229
Barclays 1,662 3,191 228 644 0 $5,724
Goldman Sachs 3,318 436 15 293 0 $4,063
Morgan Stanley 1,720 282 87 1,163 68 $3,320
RBC 649 2,064 9 35 147 $2,903
BAML 1,878 77 107 127 147 $2,335
Citi 1,557 349 54 83 147 $2,190
Wells Fargo 1,380 167 352 229 0 $2,128
TD Securities $387 $1,199 $9 $16 $372 $1,983
Source: PLS. Capitalize.

2016 bond issuances — Low commodity prices at the start of 2016 tightened liquidity in the bond markets. As a result 2016 deal amount decreased by 15 per cent to $133 billion in 2016 from $156 billion in 2015.

Upstream bond issuances saw a minor uptick of 1 per cent in deal amount raised over 2015 to $46 billion. Largest increase in bond issuances was seen in the Downstream sector, increasing over 2015 amount by 67 per cent to $16 billion. Midstream, Integrated and Services sectors saw decreases ranging from 22 per cent to 49 per cent over levels in 2015.

2016

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Lead bond bookrunners — JP Morgan took the lead allocation in the bond arena, capturing the largest market share in 3 out of the 5 energy sectors PLS covers; this was in Upstream, Midstream and the Integrated sectors.

On average, the bank captured a 13 per cent market share in each of those sectors. Bank of America Merrill Lynch captured the largest market share in Downstream at 8 per cent.

Morgan Stanley replicated its success in equity offerings in the Services sector by capturing the largest bond share in that sector at 12 per cent.

Top 10 US Banks for U.S. Energy Bond Deals in 2016
(Allocated Deal Amount $ Millions)
Bank Upstream Midstream Downstream Services Integrated Total
JP Morgan $6,543 $2,087 $1,260 $370 $5,259 $15,520
BAML 5,189 1,216 1,430 126 4,293 $12,253
Citi 2,317 976 661 576 4,447 $8,976
Barclays 1,719 1,056 231 308 2,933 $6,247
Morgan Stanley 982 307 598 1,293 2,933 $6,112
Wells Fargo 1,661 1,608 942 575 1,130 $5,916
Deutsche Bank 1,143 1,741 240 588 2,009 $5,721
Mizuho 1,793 1,328 728 66 226 $4,141
RBC 648 794 373 358 1,949 $4,121
Credit Suisse $1,868 $615 $865 $411 $0 $3,760
Source: PLS. Capitalize.

Posted in: Energy Financial

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