If there’s anything I’ve been consistent on over the past several months, it’s been the idea that Wall Street and investors probably shouldn’t throw good money after bad when it comes to US shale.
US operators have demonstrated an unwavering propensity to outspend, forcing them to rely on capital markets to plug funding gaps. Fortunately (for them), the central bank-inspired hunt for yield has meant that both debt and equity markets are relatively forgiving. And so, otherwise insolvent production weathered the two year downturn in prices and lived to pump another day.
When the OPEC (non) cuts drove prices up some four months ago, these operators came out of hibernation and it’s been off to the races in terms of US production and ramped up capex plans ever since. As a reminder, here’s a bit of color out last month from Wells Fargo:
Street Missing The History Lesson. With the activity ramp fully underway and the attention now on volumes growth, we wanted to revisit the topic of E&P outspend. We Model Outspend Much Greater Than Consensus. Operators seem to have short memories when it comes to capital discipline which is why it’s no surprise to us that we’re already starting to see signs of a meaningful ramp in spending emerge.
Poor capital discipline has consequences as enterprise values are expanded through either net debt or equity increases. In all cases, existing common stockholders’ share of total EV is diluted, all else equal. Therefore, production and cash flow forecasts are less impactful than headline figures suggest after making an adjustment for associated dilution.
Right. “In all cases, existing common stockholders’ share of total EV is diluted,” but don’t tell that to all the gullible folks who contributed to a blockbuster January in terms of equity raises by US producers. Via Bloomberg:
Wall Street is throwing the most money at U.S. energy companies since at least 2000 amid growing confidence that the industry is emerging from the worst downturn in a generation.
Energy firms raised $6.64 billion in 13 equity offerings in January, drawn in by a rich combination of oil prices consistently above $50 a barrel and a rush to drill that’s doubled the rigs in use in the U.S. and Canada since May. The biggest change from last year: oilfield servicers that provide the rigs, fracking equipment and sand used by drillers.
Included in that $6.64 billion was the $508.4 million raised on January 20 by Keane Group, a Houston-based provider of fracking services, in what was the first IPO of the year in the US. Here’s what I said back in early February about that: