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The energy sector has typically accounted for 10% of overall IPO issuance.
The energy sector has typically accounted for 10% of overall IPO issuance.

Oil’s Plunge Below $50 Is Killing the IPO Market

Oil’s Plunge Below $50 Is Killing the IPO Market

The return of oil and gas initial public offerings was nice while it lasted. Energy companies aiming to go public are staying on the sidelines as crude prices struggle to keep above $50 a barrel, analysts and investment professionals say.

The price weakness has halted a recovery in stock debuts in the energy sector, which typically accounts for one-tenth of the overall IPO market, CNBC reported.

"Nothing's happening with oil below $50 frankly. I think $50 is the line of demarcation," said Rob Thummel, portfolio manager at Tortoise Capital, an investment management firm with $16 billion of assets under management.

The energy sector has typically accounted for about 10% of overall IPO issuance, according to IPO specialist Renaissance Capital. That ratio spiked higher during the shale oil boom of 2011 and 2012 and fell off in 2016 after oil prices tanked from more than $100 a barrel in 2014 to about $26 last year.

Energy IPOs picked back up late last year, as major oil exporters agreed to cut production, buoying prices firmly above $50 a barrel. That bolstered US drillers, who had already driven down the cost of producing oil from US shale fields using a process called hydraulic fracturing to free oil and gas from rock formations.

But with oil prices back in the mid-$40 range, energy is now the worst-performing sector of the IPO market this year, said Kathleen Smith, manager of IPO-focused exchange traded funds at Renaissance Capital.

"Unless energy prices turn upward, we don't expect to see many energy IPOs in" the second half of 2017, she told CNBC in an email.

CNBC screened 12 energy companies that went public in the last three quarters and found just two are trading above their IPO prices.

To be sure, some of those companies are outperforming the broader S&P energy sector, which is down 12.5% this year, but that's likely little comfort.

Energy firms are not yet taking their offerings off the table entirely, but they are waiting for the window to reopen, according to Joe Dunleavy, a partner at PwC, which helps companies launch IPOs and manage public filings.

Dunleavy thinks the signal is the psychologically important $50 a barrel level.

 

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