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.

Pioneer Natural Resources has certainly been living up to its name this year, if for no other reason than leading the pack when it comes to tapping investors for more money.

It was the first U.S. exploration and production company out of the gate in 2016, with a $1.6 billion share sale, Bloomberg data show. That one alone made it the biggest issuer in the sector so far this year. Late on Wednesday, it announced it had its hand out again, this time seeking $827 million -- to help pay for an acquisition, no less.

Pushing Forward
Pioneer is by far the biggest seller of equity among U.S. E&P companies so far this year
Source: Bloomberg
Note: As of June 16. Assumes latest Pioneer equity sale prices successfully.

Pioneer's stock was vying with United Rentals for the dubious honor of worst S&P stock on Thursday, falling about 6 percent. Pioneer probably won't fret too much: It lost 7 percent the day after its bigger offering in January priced. Plus, anyone who actually bought those shares has done extraordinarily well.

The Killing
Pioneer's last equity sale has proven to be a real bargain so far
Source: Bloomberg
Note: Assumes buying Pioneer's stock at the offering price of $117 on Jan. 5, 2016.

But with the oil rally having stalled just as $50 appeared to signal U.S. shale producers getting back to work, Pioneer's offering comes at an interesting moment. So what does it tell us about the state of the E&P industry?

It likely doesn't suggest the door to the public equity market has simply swung wide open. True, the pace of stock sales in the sector is running hot compared to history, as this chart shows:

Drilling on Wall Street
Trailing 4-quarter stock issuance by U.S. E&P firms is still running at around $16 billion
Source: Bloomberg
Note: Assumes Pioneer's latest offering prices successfully and there is no more issuance in June 2016.

But there are reasons to suspect this could slacken off after June. First, E&P share sales in the past five years have been overwhelmingly concentrated in the first half of each year, with stock sold in the first six months accounting for 68 percent of all issuance between 2011 and 2015, Bloomberg data show.

Last year, the first half accounted for 81 percent of all E&P stock issuance. There's no guarantee 2016 will repeat that, of course. But in at least one respect, it appears to have a similar profile -- as displayed in the charts below, which show what happened with oil prices and E&P stocks in 2015 and 2016 up to June 16.

Looking Back...
E&P stocks stalled out in April 2015 slightly ahead of the rally in oil also topping out
Source: Bloomberg
Note: Performance indexed to 100.

 

...And Seeing a Reflection
Similarly, this year's E&P rally stalled in April and the oil rally has reversed sharply this month
Source: Bloomberg
Note Performance indexed to 100.

There are some obvious differences, most notably the sector's exuberance at the start of 2015, which largely explains why equity issuance was so skewed to the first half of last year. But the pattern of E&P stocks signalling a loss of faith in oil's strength ahead of a reversal is striking.

The glut of oil weighing on the market is closer to clearing now than it was this time last year, which offers some hope that a second-half washout won't be repeated. But the glut is still enormous. And, as I wrote here, we could be well into 2017 before it begins to clear properly. What's more, the big push that took oil back above $50 a barrel was largely caused by unexpected supply outages in places such as Canada and Nigeria. Those either are reversing or may reverse as the year progresses. Meanwhile, on the demand side, gasoline has done much of the heavy lifting in supporting the crude-oil market -- and history shows we may have already passed this year's peak in prices for that fuel.

This shadow over oil prices gets at why Pioneer, of all companies, can likely get away with dumping more shares on the market to buy assets: Hedging.

Leading Hedge
Pioneer leads its peers in terms of how much of its projected 2017 output is already hedged on price
Source: Evercore ISI, Citigroup

As I wrote here back in January, when Pioneer sold its first slug of equity this year, the company's use of hedges to provide some comfort on future cash flow is a big reason why investors were willing to buy. While E&P shareholders typically prefer exposure to oil prices, that doesn't hold true when those prices aren't going in the right direction. Today, Pioneer's relative insulation is an advantage that enables it to raise money for deals like the one it just announced.

The flip side is that, as long as equity markets remain even partially open, U.S. oil supply will prove more resilient in the face of low prices, thereby helping to perpetuate those low prices. On that front, Pioneer's latest sale won't make oil bulls happy. At least they can take some comfort from knowing that not every company is so privileged.

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