Investors reward 'pure play' shale firms: BMO's US energy head

Tue Nov 5, 2013 5:12am EST

The logo for the Bank of Montreal is seen at its branch Toronto, March 5, 2013. REUTERS/Mark Blinch

The logo for the Bank of Montreal is seen at its branch Toronto, March 5, 2013.

Credit: Reuters/Mark Blinch

(Reuters) - Private oil companies, unable to get others to fork out enough money to buy them, are increasingly going to public markets to tap investors who are eager to get a piece of the U.S. onshore boom - especially if the firms target just one shale basin.

Tod Benton, the head of U.S. energy banking at Canada's BMO Capital Markets, said initial public offerings are giving companies higher valuations at a time when buyers and sellers of oil and gas properties are having a tough time reaching agreements on price.

"The (IPO) pipeline is very full. The public markets are very active and giving people multiples on exits that they can't get in the acquisition & disposition space," said Benton, who spoke on Monday during the Reuters Global Commodities Summit.

Hydraulic fracturing, the process also known as fracking, and other technological advances have revolutionized the U.S. energy industry over the past five years and caused a massive jump in domestic oil and natural gas production. Ohio, Texas, North Dakota and several other states have seen a surge in energy production, causing an unprecedented rise in investment and employment in the sector.

Benton said firms backed by private equity funds were among those most keen to hold IPOs.

"We're seeing guys going the public route rather than the sell-side route. Right now we see mergers & acquisitions kind of plateauing," Benton said.

While there have been 18 energy and power IPOs so far this year compared with 21 last year, the value of those offerings is up more than 50 percent, according to Thomson Reuters data.

Benton said the IPO of Antero Resources Corp (AR.N), which valued the Warburg Pincus-backed oil and gas company at more than $11 billion, was among the deals showing the door is open for other firms. The company's shares rose around 25 percent in their market debut and have held on to the gain, valuing the company at around $14 billion.

Other highly anticipated IPOs include Apollo Global Management's (APO.N) EP Energy, which filed to go public in September, just 15 months after the company was bought by the private equity firm, and Rice Energy.

Benton said about half of the asset deals in the energy sector weren't being completed.

"We've seen a lot of disparity between seller expectations and what buyers are willing to pay - partly because of low gas prices," Benton said. "We've seen maybe a 50 percent completion rate" across the industry, he said.

THE POWER OF 'PURE-PLAYS'

Investors are increasingly interested in buying companies that focus on one of a dozen or more U.S. regions that produce oil and gas from shale or other rock - the logic being they can add a company focusing on the Permian, Bakken or Marcellus to their portfolio if they want to diversify.

"Guys that are getting the best interest from the buy-side are the guys that are very focused; single, pure-plays that are easy to understand," he said.

"Buy-side is looking at high-return plays where guys have running room, lots of inventory - up to 10 years in lots of cases. And they like a balance sheet that's clean enough to develop the acreage they want to develop" without seeking joint venture partners or 'crazy financing,' Benton said.

Shares of Kodiak Oil & Gas (KOG.N), which primarily operates in North Dakota's Bakken shale field, have surged nearly 250 percent since a 2006 IPO, tracking the field's dramatic development.

CEO Lynn Peterson said in a September interview with Reuters that Kodiak's exclusive focus on the Bakken appeals directly to investors looking for strategic investments in U.S. shale plays.

Diamondback Energy Inc (FANG.O), which is making a big push in the Permian, has seen its stock price rise some 200 percent to around $52 since its shares debuted a year ago.

GROWTH AFTER STUMBLE BY U.S. PEERS

Benton spoke at the Reuters office in Houston. BMO has been in Texas for more than 50 years and has gained market share in the United States since the 2008 credit crisis.

That is because Canadian banks generally steered away from risky assets and had higher capital ratios than U.S. banks sidelined by the crisis.

"We sidestepped the credit crisis because capital ratios were very high and because we have a focus on the energy industry we stayed in the game and actually chose to use it as a market share-gaining opportunity."

Benton said BMO has hired numerous bankers from larger firms over the past five years that had backed away from the energy space.

"We've made incredible market share gains," Benton said. "In the league tables we are one of the top five or six high-yield bookrunners at the moment, we are one of the leading equity capital markets underwriters in North America, our M&A business has really taken off, and we've always been a good loan shop."

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(Additional reporting by Eileen O'Grady, Anna Driver and Ernest Scheyder; Editing by Terry Wade and Phil Berlowitz)

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