By Alex Kimani
After a brief hiatus on reports that OPEC+ is pondering another production hike starting in August, oil prices have resumed their march higher after U.S. crude supplies fell for the fifth straight week. Brent prices have pushed past $75/bbl for the first time in two years as U.S. inventories fall by 7.6M barrels to post a fifth straight weekly decline after EIA reported that U.S. crude inventories fell by 7.6M barrels during the week ending June 18, 2021. That works out to 224,000 fewer barrels per day than the previous week’s average.
Wall Street remains largely optimistic about the mid-term oil price outlook.
Piper Sandler says that whereas the backdrop of tighter monetary policy, the trajectory of the economic recovery, and the sustainability of inflation are likely to create some volatility curveballs, they will not be enough to derail the secular bull market.
Given this backdrop, you would be tempted to think that young shale companies are rushing to the capital markets to tap into the sudden gush of goodwill. After all, after years of disappointment, the U.S. IPO market has been recording a solid comeback. Last year, 471 U.S. companies (including SPACs) went public, representing levels last seen in 1999 at the height of the Dotcom boom.
With markets awash with liquidity, the first quarter of the current quarter has set the pace for yet another record year for IPOs both in the domestic market and globally.
Unfortunately, it appears that Wall Street is still souring on the U.S. oil and gas patch, if the first initial public offering of a U.S. shale driller in four years is any indication.
Despite all the chatter about natural gas being the perfect bridge fuel in the transition to clean energy, even a natural gas explorer backed by private equity giant Blackstone Group Inc. was unable to raise the capital it had expected. In its March IPO, Vine Energy Inc. (-3.41%) sold 21.5 million shares for a total of $301 million, falling short of its target of $361 million. To get the deal done, Vine had to accept a lower price than its target price, while Blackstone and its affiliates had to step in with a $60 million purchase to push it through.
That IPO miss underscores how much investor appetite for oil and gas plays has waned after years of poor returns. While oil and natural gas prices have recorded an impressive rebound this year, Wall Street appears to have little interest in seeing another shale boom materialize. Indeed, Ed Hirs, an economics professor and energy industry expert with the University of Houston, says that Vine just being able to complete the IPO was in itself a victory.
But as they commonly say in investment circles, low prices are the best cure for low prices.
Wall Street cannot forever remain on the sidelines and will have to bite sooner or later. After all, despite President Biden recently striking a $1.2 trillion Bipartisan Infrastructure Framework to modernize the nation’s deteriorating transportation and public works systems, including building a nationwide network of EV charging stations, it will be years, if not decades, before EVs can begin to put a serious dent on oil demand.
Here are some upcoming oil and gas IPOs to watch as the U.S. and global IPO market rebound.
#1. Daqo New Energy
A few days ago, Politico reported that the Biden administration has banned imports of solar materials from several Xinjiang-based solar panel manufacturers.
The Commerce Department’s Bureau of Industry and Security has banned imports from Hoshine Silicon Industry Co. Ltd, a major manufacturer of raw materials used in the polysilicon used in most solar panels. Hoshine has been the subject of a report earlier this year on forced labor from Uyghur’s Muslims in the global supply chain of the material in Xinjiang.
Four other firms located in Xinjiang have also been included in its feared “entity list”: Xinjiang Daqo New Energy Co., a subsidiary of Daqo New Energy Corp (12.80%).; Xinjiang East Hope Nonferrous Metals Co., Xinjiang GCL New Energy Materials Technology Co., and the Xinjiang Production and Construction Corps.
But in a show of defiance, Xinjiang Daqo New Energy Co has just completed its IPO Registration with China Securities Regulatory Commission. Daqo aims to raise 5 billion yuan (US$772.5 million) from listing the subsidiary in Shanghai. Daqo hopes that the Shanghai IPO will strengthen its polysilicon industry position in the controversial area of Xinjiang and also help it expand into high-end markets, such as semiconductor-grade polysilicon. Xinjiang is responsible for supplying ~45% of the world’s solar-grade polysilicon.
#2. Tamboran Resources
The struggles of young American shale companies looking to go public have not discouraged their brethren in other jurisdictions with similar aspirations.
Australian shale gas explorer Tamboran Resources is set to debut on the Australian Securities Exchange (ASX) on June 30, marking the country’s biggest oil and gas float in a decade.
Tamboran–which is pitching itself as a growth story–owns assets in the Beetaloo shale sub-basin in the Northern Territory, comparable to the biggest U.S. natural gas field–the prolific Marcellus Shale. The company aims to commence production in 2025.
Although Beetaloo could have quite a big impact on the Australian gas industry if Tamboran is able to achieve the desired flow rates, there are serious questions about whether the company will be in a position to raise the billions of dollars required to develop the gas field.
Eager to see the remote basin developed, the Australian government has already committed A$224 million to improve roads and spur drilling there. However, a lack of infrastructure makes the development of Beetaloo a major challenge. For instance, Tamboran has to bring sand for fracking operations from 2,000 km (1,200 miles) away in South Australia.
Tamboran has so far raised more than A$60 million ($45 million), just above the low end of its target range, though it was forced to lower its sights from an initial target of A$80 million. At the offer price of A$0.40 a share, the company will have a market value of about A$260 million when it lists on June 30.
The funds raised will be used to drill three wells, including two with Santos Ltd (STO.AX), in two assets estimated to have 31 trillion cubic feet of prospective resources over the next 12 months.
Despite the gargantuan task ahead, Tamboran is confident it will hit its targets thanks to receiving plenty of interest from institutional investors such as Inpex Corp (1605.T) and TotalEnergies (-0.60%) that have been part of the U.S. shale boom.
#3. LG Energy Solution Whereas oil and gas IPOs might not be in play just yet, the renewable energy sector is a different beast altogether.
Last year, LG Chem (OTCPK:LGCLF), South Korea’s largest chemical company and a leading EV battery supplier, announced plans to spin off its battery division LG Energy Solution (LGES). LGES is one of the world’s top electric vehicle (EV) battery makers, supplying the likes of Tesla (2.51%) and General Motors Co (-2.75%).
LG Energy Solution applied for preliminary approval of an IPO that publication IFR says could fetch $10 billion-$12 billion, easily South Korea’s biggest-ever listing.
LGES and the Korea Exchange announced the application for approval of the previously flagged IPO on Tuesday without mentioning its size. IFR reported the potential size earlier in June, citing people close to the deal.
LGES says the IPO was planned for 2021, although the company is yet to confirm or deny the IPO size.
A $10 billion IPO would be more than double the 2010 IPO of Samsung Life Insurance, which was valued at 4.9 trillion won ($4.39 billion). If successful, it would mark the third U.S. IPO of South Korean companies following the $2 billion domestic float of material solution provider SK IE Technology Co Ltd and $4.6 billion U.S. IPO of South Korean e-commerce company, Coupang.
The timing of the IPO could not have been better, with global sales of battery-powered electric cars exploding as automakers race towards electrification.
LGES has announced plans to invest more than $4.5 billion in its U.S. battery plant by 2025.
Cosan S.A. (2.01%) is a Brazil-based biofuels conglomerate with operations across South America, and the U.K. Cosan has interests in the bioethanol space, among other energy projects. The company generates 1000 MW of sugarcane bioethanol through its Raízen Energia arm, placing it among the leading producers of bioenergy.
Raizen–a joint venture between Cosan and Royal Dutch Shell Plc (-3.68%)–is looking to go public in one of the biggest IPOs in the energy sector. Raizen wants to list on Brazil’s stock exchange B3, with the IPO expected to raise up to 13 billion reais ($2.25 billion). The IPO
Raizen controls a large fuel distribution network and is Brazil’s fourth-largest company by revenue behind state-controlled oil producer Petroleo Brasileiro SA (-0.59%) iron ore miner Vale SA, (-1.10%) and meatpacker JBS SA.
Raizen may be valued at up to 100 billion reais ($17.3 billion) and is viewed as one of the potential buyers of one of the refineries Petrobras has put up for sale.
About a week ago, Spanish renewable energy giant Acciona SA (3.34%)announced plans to go public, targeting a valuation of up to 9.8 billion euros ($11.66 billion) for its energy business in what is set to be one of Europe’s biggest IPOs this year.
The IPO will see Acciona initially offer between 15% and 25% of its renewable business and also includes the so-called greenshoe option of between 10% and 15% of the offer in a deal that could be worth up to 2.817 billion euros. Companies that want to go public sometimes use the greenshoe option to stabilize initial pricing if they think public demand is likely to exceed expectations and the stock trades above the offering price. A greenshoe is a clause that allows underwriters to buy up to an additional 15% of company shares at the offer price.
It’s probably safe to say Acciona is likely to be one of the few blockbuster IPOs in the energy sector this year.