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.

Diamondback Energy did something a bit odd on Wednesday: It only fell 1 percent.

Consider what happened. Oil prices slumped by more than 4 percent on a disappointing U.S. inventory report. That same morning, Diamondback announced it would pay $560 million to acquire shale assets in west Texas. It also raised its capital spending budget for this year by roughly a quarter. And to help pay the bills, it sold new shares -- its fifth equity offering since the start of 2015 -- equivalent to 7 percent of its float.

Yet its stock actually did better than the sector overall: The SPDR S&P Oil & Gas Exploration & Production ETF actually fell by 2 percent.

There are lessons here for oil and gas investors. First, as my colleagues at Bloomberg News reported, the equity market stands ready to buy new E&P stock, despite the battering of the past couple of years.

Gusher
U.S. E&P companies have sold more stock so far this year than in the whole of the record year of 2013, when oil averaged almost $100 a barrel
Source: Bloomberg
Note: Data for 2016 through July 13th.

One reason for pressing the green button on these new shares even while glancing nervously at the oil price is that, by and large, they've done better than the E&P sector overall. Analyzing 87 issues announced since the start of 2015, and adjusting them for the size of the offering overall and the dates they priced, they have in aggregate beaten the E&P ETF by a resounding 16.1 percentage points.

The ETF, it should be pointed out, has dropped 27 percent in that time. Even so, it is remarkable that companies diluting their shareholders with stock sales in the middle of a rampant bear market for oil should be doing better on average. And some of the gains on these new issues have been enormous.

Raise and Beat
Weighted average return on new equity issuance since the start of 2015 above that of the SPDR E&P ETF
Source: Bloomberg, Bloomberg Gadfly analysis
Note: Data for Rosetta Resources reflects performance of Noble Energy following all-stock acquisition in July 2015.

Investors aren't necessarily just waiting there with their checkbooks hanging open, pen poised for whichever E&P comes knocking. Of 48 issuers in the period, the top 10 account for slightly more than half of the money raised, according to figures compiled by Bloomberg (Diamondback comes in at number 7). Another sign of investors showing a little more discernment, albeit somewhat tentative: 26 E&P companies have sold stock so far this year, compared with a wider scattering of 35 in the same period in 2015.

This makes sense. Take Diamondback for example. A big reason why it can serially tap the market to keep drilling is that it sits smack in the middle of some of the best acreage in the U.S. A study released on Wednesday by Wood Mackenzie concluded that west Texas contains some of the lowest-cost barrels in the world when it comes to expected new production over the next decade. Sticking with the lowest-cost resources is Investing 101 in an oversupplied and uncertain commodity market.

Any indication the equity gate is coming down even a little will be welcomed by oil bulls, especially rival producers such as OPEC countries bent on taking more market share. Yet, amid tentative signs of the U.S. rig count picking up and maybe even oil job losses starting to bottom out with oil at less than $50 a barrel, they must wonder in frustration why it hasn't slammed shut completely.

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