Weak oil prices stifle US energy IPOs, boost M&A outlook

oil prices

Stagnating oil prices have made oil companies and oilfield services companies looking to go public rethink their plans. Vimud.net photo.

Stagnant oil prices delay IPOs after promising start in January

At the beginning of 2017 with oil prices on the rise, a number US energy companies considered going public. However, as prices have stagnated, many companies have opted to hold off on their IPOs and private buyers looking for mergers and acquisitions are poised to take advantage of the volatility to secure cheap deals.

A report by Reuters shows that six companies that filed for listings in the first quarter of this year have delayed their ventures, even after they were green lighted by local regulators.

The four US oil and gas companies that did go public in January have seen their share prices tumble by 14 per cent on average by March 31, as crude prices fell to end Q1.

STEP Energy Services and Source Energy, two Canadian oilfield services companies pulled their March IPOs due to adverse market conditions.

“There was talk of upwards of 20 IPOs getting ready to go at the start of the year, but now everyone is slowing down their processes as share prices have gone down as rapidly increasing production raised concerns about how fast and how far the recovery in oilfield activity would go,” Brian Williams, managing director at Carl Marks Advisors told Reuters.

Most of the companies are in the oilfield services sector and many are looking to re-list and raise fresh capital.  Oilfield services companies that did list in 2017, did so based on expected performance in years to come.  The recent slide in crude prices weakened hopes for growth in the future.

“The market was looking past current conditions to 2018 and 2019 projections with valuations of eight or nine times 2018 EBITDA (earnings before interest, tax, depreciation and amortization), on the assumption that if you wanted to get in ahead of the future upside, you’d have to pay now,” said Williams.

Lower IPO valuations and languishing oil prices will encourage energy companies to look for private buyers instead, according to banking officials.

Some of the companies are owned by distressed debt investors and hedge funds that bought them out of bankruptcy and are looking to secure a profit even though valuations have fallen in recent weeks.

According to the Reuters report, this switch in focus should not be too difficult as many IPO processes have been run as dual-track, where concurrent attempts to list and sell the company are made by advisors.  Private equity and similar investors looking to invest in the energy industry have adequate capital.

“In the current market, when the IPO valuations start to come down, if buyers are still optimistic, the sale proceeds might be more attractive to sellers than what they would get in an IPO,” Jeffery Malonson, a capital markets partner at King & Spalding told Reuters.

Malonson added owners would then get the benefit of a full exit from their investment, unlike a partial one through a listing.

A delay in listings would also mean that companies could bulk up their operations through acquisitions, making them bigger and more valuable when they do go public. This is especially true for oilfield services and equipment providers looking to cut costs as cash flow stalls and capex drops.

Last month, Schlumberger and Weatherford agreed to form a $535 million joint venture to deliver oilfield services for unconventional resource plays in Canada and the United States.

Financing such deals through banks could prove difficult as financial institutions are less likely to fund recently-restructured companies, leaving room for private equity firms and other non-bank lenders to step in.

 

 

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