Oil and gas prices are at levels that don’t allow for economic returns across drilling programs. Anyone who tells you different is playing fast and loose with the truth. But rigs continue to drill and producers continue to fund uneconomic activity, bringing new production to an already oversupplied market. We have highlighted the influence of outside capital in the E&P industry in the past, and posed the question as to whether that influence was beginning to wane. The past few weeks provided an answer. The equity markets are open, and the industry is hitting the ATM as if the cash might run dry.
In the last thirty days nine US E&P companies have successfully tapped the equity markets or announced common stock offerings, including PDC Energy (NASDAQ:PDCE) and Matador Resources (NYSE:MTDR) yesterday. While the use of proceeds announced with the offerings does vary by company, by and large, most companies sought capital solely for ‘general corporate purposes’, meaning to shore up damaged balance sheets.
While companies can access capital, prudent investors should ask ‘at what cost’? Issuing new stock is inherently dilutive, although the market can respond positively when the use of proceeds is an investment which raises earnings and/or cash flow more than enough to offset the dilution of adding more shares. We measure the market’s response to equity offerings by comparing the price performance of the stock to the performance of a basket of comparable companies over the same period of time. So how does the market feel about recent offerings?
The graphic above shows the relative stock price performance for US E&P companies issuing equity over the past thirteen months. Why thirteen months? The equity market window can open and close quickly, and there was a spur of activity at the end of February last year that we wanted to include in the analysis. For each company, stock performance was compared to the performance of the Philadelphia Stock Exchange SIG Oil Exploration & Production Index over the same five day period.
Approximately half of the offerings outperformed the broader sector five days following the stock offering announcement. Also, almost half (46%) of the offerings came from producers whose primary assets are in the Permian Basin (orange dots). Six of the offerings were from Appalachian producers (dark blue dots), including more recent offerings from Cabot Oil & Gas (NYSE:COG) and EQT Corporation (NYSE:EQT). The mixed performance data appears to indicate that while the equity window is open for some (particularly Permian producers), we shouldn’t expect equity markets to welcome the issuance of new shares with open arms. Outside capital will continue to prop up activity in select basins, but the majority of US E&P activity will be subject to cash flow from operations limiting rig and well activity.
For further analysis on the outlook for North American production, industry cash flow, DUCs, commodity prices and market timing, request a copy of BTU Analytics’ Upstream Outlook.