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Upstream IPOs: Private Equity Cashes Out

By Peter Staas on May. 30, 2017

Despite the underperformance of SPDR Oil & Gas Exploration & Production (NYSE: XOP) this year because of concerns about the outlook for energy prices and surging US production, several upstream operators have completed initial public offerings and more remain on the docket.

Private-equity outfits have poured money into the US energy patch seeking outsized returns. Most strategies focus on accumulating early positions in the next big play or unlocking value by buying acreage in out-of-favor basins that might have struggled to compete for capital in the sellers’ portfolio.

Over the past year, much of the merger and acquisition activity in the upstream segment has centered on the Permian Basin and the emerging SCOOP and STACK plays in central Oklahoma.

The best-positioned publicly traded companies took advantage of elevated equity valuations in late 2016 and early this year to build footholds or enhance existing positions in these red-hot basins. Backed by equity issuance, these transactions have the added benefit of deleveraging the balance sheet by adding cash flow without assuming additional debt.

Deals of this nature appear to be the preferred way for private-equity players to monetize their upstream investments, reflecting strong valuation multiples and the appeal of avoiding the vagaries of the public market.

Some companies have pursued dual-track processes, filing their initial registration statements with the Securities and Exchange Commission and courting publicly traded buyers at the same time. Private equity-backed Vantage Energy, for example, opted to withdraw its initial public offering (IPO) after agreeing to a $2.77 billion takeover offer from Rice Energy (NYSE: RICE), a transaction that complements the buyer’s existing midstream and upstream assets in the Marcellus Shale.

Centennial Resource Development likewise pulled its $100 million IPO after private-equity outfit Riverstone Holdings offered to pay $175 million for a majority interest in the Permian player and merged the upstream operator with a special-purpose acquisition company run by Mark Pappa, former CEO of EOG Resources (NYSE: EOG).

Against this backdrop, Jagged Peak Energy (NYSE: JAG) represents the lone IPO offering pure play exposure to the Permian Basin. Since debuting on the New York Stock Exchange in late January, the shares have given up more than 25 percent of their value, lagging the 16 percent loss posted by SPDR S&P Oil & Gas Exploration & Production.

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    • Elliott H. Gue

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Roger S. Conrad

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor