Despite the underperformance of SPDR Oil & Gas Exploration & Production (NYSE: XOP) this year because of concerns about the outlook for energy prices and surging US production, several upstream operators have completed initial public offerings and more remain on the docket.
Private-equity outfits have poured money into the US energy patch seeking outsized returns. Most strategies focus on accumulating early positions in the next big play or unlocking value by buying acreage in out-of-favor basins that might have struggled to compete for capital in the sellers’ portfolio.
Over the past year, much of the merger and acquisition activity in the upstream segment has centered on the Permian Basin and the emerging SCOOP and STACK plays in central Oklahoma.
The best-positioned publicly traded companies took advantage of elevated equity valuations in late 2016 and early this year to build footholds or enhance existing positions in these red-hot basins. Backed by equity issuance, these transactions have the added benefit of deleveraging the balance sheet by adding cash flow without assuming additional debt.
Deals of this nature appear to be the preferred way for private-equity players to monetize their upstream investments, reflecting strong valuation multiples and the appeal of avoiding the vagaries of the public market.