Wall Street investors are throwing a lifeline to the embattled US energy sector.
US oil and gas companies from Marathon Oil Corp to Weatherford International have announced plans to raise about $9.2bn in new equity, the most year-to-date since at least 1999, according to data compiled by Bloomberg.
“Billions of dollars of dilutive equity continue to roll in with seemingly no end in sight,” Houston-based oil investment bank Tudor, Pickering, Holt & Co said in a research note.
Until only a few weeks ago, bankers, executives and investors had assumed the capital markets were closed to the energy sector, which is laboring under oil prices that have fallen 70% from the summer of 2014. Then, in early January, a handful of companies with assets in the prized Permian Basin in Texas successfully tested the waters. Now “the window is clearly open” for almost everybody, Tudor, Pickering, Holt & Co said.
Pioneer Natural Resources Co’s $1.6bn offer on January 5 was followed a week later by Diamondback Energy’s announcement of a $250mn sale. Pioneer Chief Executive Officer Scott Sheffield said he raised equity fearing lower oil prices. “We wanted to protect the company for at least a 2-year period,” he told the Credit Suisse Energy Summit in Vail, Colorado, last week.
Some of the biggest names in American energy, including Hess Corp and Devon Energy Corp, have each offered more than $1bn in new equity, while smaller companies like QEP Resources and Synergy Resources Corp have also managed to successfully raise funds.
The equity raising could resonate beyond the US oil-patch and Wall Street, as fresh capital could lead to higher spending and a shallower drop in US oil production than currently expected, and hence to a longer period of low oil prices.
Diamondback and Marathon both said their equity issuances would help provide liquidity to fund their capital programmes.
John Hess, chief executive officer of Hess, said he wanted extra cash to maintain a strong balance sheet, and equity offerings are more receptive than debt with the Bank of America/Merrill Lynch High Yield Energy Index rising to a record effective yield of 21% on February 11.
“So now, we had this additional development cost,” Hess said at the Credit Suisse summit. “You know what’s going on in the debt markets. Debt markets have basically seized up for high yield.”
Weatherford, the world’s fourth-largest oilfield services provider, was the latest to throw its hat in the ring, offering 100mn shares at $5.65 a share, with a 30-day option for up to 15mn more.
The company intends to use the net proceeds for general corporate purposes, including the repayment of existing debt. JPMorgan and Morgan Stanley will act as joint book-running managers of the offering. In a sign of investors’ appetite to support US oil and gas companies, most of the companies that have raised equity so far this year have increased the size of their offering within hours of their announcement. With oil prices recovering, share prices have also risen from the offering, further enticing other companies to follow suit.
West Texas Intermediate, the US oil benchmark, closed at an eight-week high of $34.40 a barrel on Tuesday, up about 30% from this year’s low in February. Prices yesterday slipped 1.1% to $34.03 a barrel as of 1:46 pm Hong Kong time.
“People are seeing oil prices start to bounce back, and they’re starting to think that maybe we’ve found a bottom and can turn it around,” said Carl Larry, head of oil and gas for Frost & Sullivan. “These share offerings are an opportunity for institutional funds to get into the energy play.”