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:
In a sign of the times, a fracking company was the first US IPO in 2017, as Keane Group, a Houston-based provider, raised $508.4 million on January 20.
The ticker: FRAC. No, seriously:
“The public equity markets are looking to invest in pure-play completion companies with a footprint and a growth story,” Keane’s CEO James Stewart told Bloomberg in a phone interview after the IPO.
I mean, come on folks. Are people really this gullible?
Well, that turned out to be pretty prescient, because here’s what FRAC’s done since the IPO:
And when it comes to my question (i.e. “are people really this gullible”) the answer, apparently, is “yes, absolutely.” Because despite FRAC’s post-IPO performance and despite last week’s collapse in crude prices, we got still another fracker IPO on Friday. Here’s how “ProPetro” describes itself:
We are a growth-oriented, Midland, Texas-based oilfield services company providing hydraulic fracturing and other complementary services to leading upstream oil and gas companies engaged in the exploration and production, or E&P, of North American unconventional oil and natural gas resources.
And here’s what they’re going to use your money for:
- to repay borrowings outstanding under our term loan;
- fund the purchase of additional hydraulic fracturing units;
- for general corporate purposes, including to fund growth capital expenditures.
Great. So they’re going to use your money to i) pay off a debt to someone else, ii) buy themselves some equipment and iii) buy some more equipment.
Sounds like a winner.
And at the end of the day, just like you could tell a lot about how things were likely to go for investors in Keane Group’s IPO just by looking at the ticker symbol (“FRAC”), you can probably tell a lot about ProPetro by its symbol, which is… wait for it…
So there’s the “PUMP.”
All that’s left now is to wait for the “dump.”