INVESTOR CONFIDENCE is on the rise, and with it may come a rise in IPOs in the oil and gas space. Following a two-year dry spell during which the oil patch struggled with cripplingly low prices, Denver, CO-based Extraction Oil & Gas Inc. sold 33.3 million shares for $633 million in an initial public offering of $19 per share.
Performance of the mid-October IPO was positive. With a first day trading end of $21.85, the company's value sat around $2.4 billion with its stock up 15%. As of this writing, Extraction's stock had settled around $21.93 following a high of $23.12.
Reading the news about the offering, two things struck me. Writing for a publication focused on the financing of the oil and gas industry, the first was the sheer significance of the upstream company IPO. The fact that it happened. At all. After two years. When Eclipse Resources went public in June 2014, crude traded at $106/bbl.
My second thought? Wait…this isn't a Permian player. Denver, CO-based Extraction operates…in Colorado. Rig data from Baker Hughes shows a slight uptick in drilling activity in the Denver-Julesburg Basin where Extraction operators on roughly 224,000 acres in the Wattenberg Field. Things appear to be going well. Just after the IPO, the company announced plans to add a third drilling rig in the first quarter of 2017, earlier than the previously disclosed mid-year 2017 timing for the third drilling rig. The company's D&C capex budget for 2016 stands at $335 million and increases 60% for 2017 to $535 million. Extraction's total capex budget for 2016 is $365 million and increases 62% for 2017 to $590 million.
Extraction's IPO shows you don't have to play in the Permian to IPO. But, you're likely to have more company if you do.
I reached out to Alexander G. Montano, Managing Director, Investment Banking at ROTH Capital Partners following Extraction's offering for thoughts on IPOs in the sector. Investor appetite is coming back, Montano said. Especially if an issuer is focused in a basin where it is perceived it can be economic in the current to lower price environment.
"Most of the real players in the Permian have been able to access the public markets pretty easily and are trading at or near 52 week highs. We believe that we will see several Permian players file in the next quarter or two," he continued.
At presstime, speculation about possible IPOs from a few Permian players was making the rounds.
One company mentioned was Double Eagle Energy Permian LLC. The company, formed in early October through the merger of Double Eagle Lone Star LLC and Veritas Energy Partners Holdings LLC, holds more than 63,000 net acres in the Midland basin.
Others, according to reports from The Wall Street Journal, are privately-held Brigham Resources LLC and Jagged Peak Energy LLC. Both are said to be contemplating an IPO as a possible alternative to an outright sale.
Brigham Resources, founded by Bud Brigham not long after selling Brigham Exploration to Statoil for $4.4 billion in 2011, holds 72,000 acres in West Texas. In a September research note detailing completion optimization efforts of privately held companies in the Permian, Seaport Global Securities pointed to Brigham's 75,000 net acre block east into Pecos County.
Completion optimization efforts have "consistently produced results deemed on par with the best parts of Reeves County. With a few tests under its belt, Brigham noted encouraging Bone Spring potential (a.k.a. Spraberry West) in and around its position, touting comparable returns vs. the Wolfcamp A given lower well costs due to shallower depths," said the analysts. "We think this also bodes well for operators with a foothold in Pecos County including CXO, Jagged Peak, MCF, OXY, and PE."
Denver, CO-based Jagged Peak Energy LLC, a Quantum Energy Partners portfolio company, is focused on the Wolfcamp play of the Southern Delaware Basin.
Getting back to the big picture, Montano told me that ROTH Capital Partners believes that much of the IPO activity will be driven by PE backers. "We have seen several PE groups that have been actively trying to get portfolio companies into the public markets, believing that value will most likely recover faster in the public markets than in the M&A markets. Likewise, many have positions they have been in a while, so this is a chance to not "sell" assets, but to dilute themselves but be positioned to ride the upside as the market turns stronger."
