| LONDON/NEW YORK
LONDON/NEW YORK The stream of U.S. energy companies going public at the start of 2017 has dried up on concerns over the future direction of oil prices, but private buyers seeking mergers and acquisitions are ready to take advantage of the volatility to secure cheap deals.
Texas-based FTS International and Select Energy Services are among six U.S. energy companies that filed for listings in the first quarter but delayed, even after receiving the green light from local regulators, Thomson Reuters data showed.
Four U.S. oil and gas companies went public in January, when more stable crude prices gave them confidence to tap into investor demand after a barren listings period that followed a slump in U.S. crude prices in late 2015.
Share prices for that quartet tumbled 14 percent on average by March 31, according to Thomson Reuters data, as crude prices retreated to end the first quarter 6.5 percent lower, the biggest quarterly decline since late 2015.
Two Canadian oilfield services firms, STEP Energy Services and Source Energy, pulled their March public offerings due to adverse market conditions, further undermining the case for energy IPOs.
"There was talk of upwards of 20 IPOs getting ready to go at the start of the year, but now everyone is slowing down their processes as share prices have gone down as rapidly increasing production raised concerns about how fast and how far the recovery in oilfield activity would go,” said Brian Williams, managing director at Carl Marks Advisors.
Most are in the oilfield services sector, with many looking to relist and raise fresh capital after going through bankruptcy proceedings during the last oil price downturn.
With the sharp cost cutting by oil producers in the last 18 months continuing to hurt profits at service firms, companies that listed in 2017 often did so based on expected performance for coming years. Sliding crude prices in March undermined hopes for future growth.
"The market was looking past current conditions to 2018 and 2019 projections with valuations of eight or nine times 2018 EBITDA (earnings before interest, tax, depreciation and amortization), on the assumption that if you wanted to get in ahead of the future upside, you'd have to pay now," said Williams.
Bankers said that lower IPO valuations and lingering caution on oil prices would encourage energy companies to sell themselves to private buyers instead.
Some are owned by distressed debt investors and hedge funds that bought them out of bankruptcy and could still secure a substantial profit even though valuations have declined in recent weeks.
Such a switch in focus should not be too difficult. Many IPO processes have been run as dual-track, where concurrent attempts to list and sell the company are made by advisors. Private equity and similar investors seeking energy assets have adequate capital.
"In the current market, when the IPO valuations start to come down, if buyers are still optimistic, the sale proceeds might be more attractive to sellers than what they would get in an IPO," said Jeffery Malonson, a capital markets partner at King & Spalding.
He noted the owners would also secure the benefit of a full exit from their investment as opposed to a partial one through a listing.
Companies could also use the delay in listing plans to bulk up their own operations using acquisitions, which will mean they have bigger and more valuable companies when they eventually go public.
This is particularly true for oilfield services and equipment providers, which need to cut costs in the face of stalling cash flows and shrinking capex, bankers said.
Improved scale was seen as one of the main drivers of Schlumberger NV's agreement last month to form a $535 million joint venture with Weatherford International Plc to deliver oilfield products and services for unconventional resource plays in the United States and Canada.
While some could fund deals with their own reserves, others will need to borrow cash. With banks likely reluctant to lend substantial sums to recently-restructured companies, private equity firms and other non-bank lenders could step in here as well. However, terms for borrowers would be more onerous than they would get at banks.
(Additional reporting by Jessica Resnick-Ault in New York and Ron Bousso and Eddie Dunthorne in London; Editing by David Gregorio)