Plagued by low energy prices and recent overcapacity, oil and gas companies hoping to go public might have to sit out 2009, if not wait longer. Crude oil prices are off about 70 percent from the $147 per barrel all-time highs hit last summer, compromising not only the profitability of oil and gas projects, but also that of alternative energy projects and leading investors to avoid IPOs in the energy sector.
In the latest sign of pain, Stallion Oilfield Services Inc, a Houston-based company that provides wellsite services to oil companies, earlier this week pulled its planned $400 million IPO, citing market conditions.
"To sell IPOs, investors want to see companies that are growing," said Stephen Trauber, the Houston-based global head of energy banking at UBS AG. "And in this oil and gas environment, there really aren't any small companies that are growing. The industry is in a contraction mode." Without knowing whether oil prices will rise again, the sector is set to languish for awhile.
"You need to see oil prices back up north of $55. Then you will start to see companies drilling again," Trauber said. US crude was trading at $45.60 a barrel on Friday afternoon. Interest in oil and gas IPOs starting waning last summer, when energy prices began receding and the IPO market in general seized up.
Energy IPOs in 2008 fell 59 percent, with only 7 deals yielding $2.6 billion, while IPO activity across all sectors dropped 43 percent, according to Thomson Reuters data. Last year saw the cancellation of a number of blockbuster energy IPOs, including a $1.725 billion deal by Exco Partners LP and a $500 million IPO by US Power Generating Co. The New Year has scarcely brought better luck.
On top of the Stallion cancellation, this week Changing World Technologies of New York's Long Island, which makes diesel fuel from animal waste, lowered the estimate of its planned IPO proceeds by two-thirds, to $35.75 million.
Still, energy and power companies make up the largest group in the IPO pipeline, with 19 companies hoping to raise up to $3.5 billion. They include Cloud Peak Energy Inc, a Wyoming-based coal company, which filed in August for a $1 billion IPO, and First Wind Holdings' $450 million IPO.
There are also natural gas companies, including NiSource Energy Partners LP, which is planning a $302 million issue, that are facing the additional challenge of overbuilding during the recent boom that has depressed prices. "If we saw natural gas prizes stabilise around $6 per (thousand cubic feet), the economics of the projects make sense," said Ralph Eads, vice chairman at Jefferies & Co. "We've got an oversupply of natural gas, and that has to correct itself." Prices Friday afternoon were around $4.75 per thousand cubic feet.
But energy analysts polled by Reuters have cut their outlook for 2009 natural gas prices by an average of 25 percent since last quarter, because of how the severe recession will curb demand. Oil companies are also suffering from overcapacity. "You need supply to shrink, which it will. Companies are slowing their drilling," UBS's Trauber said. Alternative energy companies, all the rage less than a year ago, are facing pressure on fears that low oil prices will reduce the urgency of finding new energy sources.