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Evaluating Recent Energy IPOs

By Elliott H. Gue on May. 30, 2017

After a prolonged lull ushered in by the collapse in oil prices and reduced drilling and completion activity in the US, the flow of initial public offerings (IPO) in the energy sector has increased in recent months, with private-equity outfits seeking to monetize investments in the upstream and oil-field-service segments.

In particular, this year has ushered in a bumper crop of IPOs focused on pressure pumping—the horsepower that forces the fracturing fluid into the reservoir rock—and related downhole services. The timing of these deals coincides with expectations for increasing demand, as exploration and production companies ramp up their completion activity in prolific US shale plays.

However, not every prospective debutant made it to the market on time, with a difficult tape prompting Liberty Oilfield Services (NYSE: BDFC) to postpone its IPO. Investors should tread carefully with these highly cyclical names that specialize in highly commoditized products and service lines; near-term volumetric upside from stepped-up completion activity aside, history suggests that any pricing traction will prove short-lived.

Within the upstream space, the trend toward IPOs involving recycled acreage in the Eagle Ford Shale and revivified Haynesville Shale demonstrates how one company’s noncore assets can become a new holder’s crown jewel, with the appropriate attention and a reset cost basis.

These transactions underscore the scope of the resource base in the US and why the competition for market share will only intensify—an environment that favors players with the strongest balance sheets, highest-quality acreage and lowest cost basis.

Within the midstream segment, the recent crop of IPOs has come primarily from upstream operators seeking to monetize assets. Potential upside for these master limited partnerships usually hinges on a combination of drop-down transactions and increasing throughput volumes, with the market preferring names weighted toward organic growth.

Here, investor must remain laser-focused on the sponsor’s motivations, balance sheet and growth prospects in an environment where energy prices remain lower for longer.

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