Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

You've probably noticed a spot of turmoil in the stock market this week, especially in anything to do with oil.

Here's a strange thing, though: Pioneer Natural Resources' stock has fallen 7 percent since the company announced it would sell up to $1.6 billion of new shares to cover its funding needs. Meanwhile, the SPDR Oil and Gas Exploration and Production ETF has dropped by more than 9 percent.

Things shouldn't work that way. Companies that sell more shares dilute existing shareholders, and they usually get punished for it -- just ask SunEdison.

That Pioneer got off lightly, at least relative to the broader E&P sector, offers some evidence that taking steps to shore up the balance sheet can actually be favored by shareholders in these volatile times. 

Pioneering
Despite a dilutive offering announced on Jan. 5, Pioneer shares have outperformed their peers.
Source: Bloomberg

But here's the really crazy thing: It turns out that oil companies selling more shares have actually done better than the sector overall.

Last year was a bonanza for equity raising in the E&P industry, as companies raced to shore up their finances in the face of the oil price slump. There were 45 secondary offerings by U.S.-listed and domiciled E&P companies announced and priced in 2015 , raising $14.3 billion, according to a screen performed on Bloomberg. Prominent sellers included Diamondback Energy, Noble Energy and Concho Resources. Of those, only 3 issues are currently trading for more than what they sold at -- hardly surprising given how 2015 turned out for oil.

What is surprising is that slightly more than half of those dilutive issues have still beaten the SPDR Oil and Gas ETF.

Indeed, imagine you constructed a portfolio consisting solely of those share sales, weighted by the dollar amount that was raised in each. In absolute terms, you would have lost 36 percent of your investment. Compared to buying the ETF on those days, though, you would be ahead by 5 percentage points now.

Thank heavens for small mercies, delivered in a decidedly sarcastic tone, may be all the response such a performance deserves.

Yet there is an important message here: When oil is crashing, companies that move fast to address credit concerns can get rewarded compared to those that don't, even if it means selling more shares to do so. Not every company can do it, of course -- Pioneer's relatively healthy balance sheet and assets give it leeway in this respect, as I laid out here. Still, take a look at this chart below:

Insurance Premium
Less-levered E&P stocks have fared better.
Source: Bloomberg

This shows the SPDR ETF versus a custom index of 16 members of it, excluding pure royalty companies, that had debt-to-equity ratios of less than 50 percent as of their last quarter, according to data compiled by Bloomberg. Notice that while the less-leveraged stocks haven't escaped the crash, they have held up much better than the sector as a whole. It's almost as if E&P investors have rediscovered the delights of a healthier balance sheet.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net