US, Canadian energy IPOs could rebound this year as oil prices rise

energy IPOs
Energy IPOs could reach their highest in four years and with pressing financial needs, oilfield services companies will likely lead the recovery.  Dome Energy photo.

Energy IPOs could reach their highest in four years and with pressing financial needs, oilfield services companies will likely lead the recovery.  Dome Energy photo.

Canadian energy IPOs could include Canbriam Energy, Velvet Energy

According to a report by Reuters, higher oil prices and a positive earnings outlook for energy companies are likely to boost energy IPOs in Canada and the United States this year.

With bankers confident investors will continue to be optimistic about the sector, North American energy IPOs could reach their highest in four years.

Oilfield services companies are expected to lead the recovery, mostly due to strong capital needs.

Over a dozen energy companies are looking to go public this year, including a number of private equity-backed US exploration and production companies.

Covey Park Energy, backed by Denham Capital may jump into IPO waters, and are planning to have conversations with investors in the coming weeks.  Reuters reports Vine Resources along with Indigo Natural Resources are considering IPOs in 2018.

In Canada, Canbriam Energy and Velvet Energy, both backed by Warburg Pincus, are considering going public this year.

The shift to equity markets for such energy companies comes at an opportune time for private equity firms looking to cash out of their long-held investments.

Reuters reports company fundamentals are stronger than they were 12 months ago and investors are encouraged by oil prices remaining above $60/barrel, despite rising US production.

“The stability in oil prices is a net positive. If energy companies can demonstrate to investors that they can generate cash flow in the current oil price environment, they can go public,”  Grant Kernaghan, Citigroup’s managing director of Canadian investment banking told Reuters.

“The recent volatility hasn’t resulted in markets shutting down,” he added.  Kernaghan says equity markets are still open, despite a slump in February where the S&P 500 fell by over 10 per cent.

Analysts warn that should oil prices drop below $60/barrel, energy IPO plans could be thwarted.

So far this year, five energy IPOs have raised $1.26 billion, according to Reuters data.  In 2014, energy IPOs amounted to $11.7 billion.  After oil prices tanked in 2014 and for the following three years, a combined 21 offerings only raised $9.8 billion.

In 2017, energy service companies’ IPOs were based on forward earnings and were lacking in existing cash flows.  “Now, companies are well supported by current earnings and trade at low multiples,” Robert Santangelo, co-head of equity capital markets for the Americas at Credit Suisse told Reuters.

Exploration and production companies have not been as amenable as service companies to accept a lower valuation that would restart offerings.  An anonymous energy banker says this has resulted in a “Mexican stand-off”, where potential IPO candidates wait to see who goes first.

Reuters reports Covey has incentive to go first due to a financing agreement that gets more expensive if it is not able to list in 2018.

Mergers and acquisitions are a viable exit option for buyout firms even as companies consider IPO options.

“Private equity firms have been waiting for a better environment. The settling of the oil price does help them move forward,” Kevin Headland, senior investment strategist at Manulife Investments told Reuters.

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