Despite the recent pullback in the crude oil market, the outlook for the energy sector has shown significant improvement and is making way for opportunity. There are several factors driving a could-be energy resurgence in the back half of 2016. Here, we explore four of those trends.
The asset A&D market is warming – beyond the Permian Basin.
In recent months, the gulf in energy asset values was historically wide – with sellers asking as much as 50% more than buyers were willing to pay, according to Reuters. And that divide left many energy companies holding onto assets and increasing efficiencies as they waited out a price rebound. For their part, buyers were similarly unmovable. The standstill had many analysts predicting price slashing and fire sales, but as crude rallied in the early days of May, the playing field began to level out – even beyond the Permian Basin. The value gap is narrowing and the evidence of a return to form has already been seen in recent deals, including the sale of Devon Energy Corp.’s Anadarko Basin assets for nearly $1 billion.
Offerings in the E&P industry are ticking up.
Another cause for optimism is the growing popularity of equity offerings among exploration and production companies as a means of strengthening balance sheets and paying down debt. As of June 2016, $15.3 billion in new equity sales had been announced year-to-date in E&P. While it might seem counterintuitive to offer new shares – and potentially upset existing shareholders – during a down period, a majority of the 25 companies that made offerings have actually outperformed their E&P peers and seen share prices increase.
Resource scarcity is driving competition between private equity and public companies.
After a long period of readily available resources and opportunities for organic growth, the energy market’s struggles have forced private equity firms to shift away from the cheaper, more fluid lease-and-drill strategy and back toward the acquire-and-exploit model that dominated 10 years ago, which places them in direct competition with public companies for more mature, reliable assets. And though attractive assets are still scarce and activity remains relatively low, this shift represents significant potential as private equity firms focus their tremendous supply of capital – a collective $85 billion to $100 billion – on larger transactions that could help reinvigorate the market as oil prices recover.
High-yield bonds are showing signs of life.
In January 2016, U.S. junk-rated energy debt hit a two-decade low. However, despite a virtual shut down in the market, a recent $200 million high-yield bond offering by Parsley Energy could signal that things are opening back up. The May 2016 deal represented a rare positive headline for the exploration and production sector after months of default and bankruptcy reports and was the first for the year. It also cleared the path for Extraction Oil and Gas to follow suit with their own upsized $550 million high-yield bond offering in mid-July, another sign that there is indeed life in the junk bond market.
While these factors don’t spell a certain rebound, taken together, they indicate that the market is opening back up and make a compelling case for action. If your 2017 outlook is positive, now is the time to get an experienced drilling team together and begin preparing for the next chapter.