Texas Shale Drillers Lure $2 Billion in New Equity to Permian

  • Pioneer, Diamondback issuances mean `equity window' is open
  • Asset sales generating below-market returns for those who sell

What Is Fair Value for Oil Medium Term?

Oil producers in West Texas, defying expectations they would fall victim to OPEC’s price war, are instead selling investors on the idea that they can still profit with prices below $35 a barrel.

Drillers in the Permian Basin, the biggest U.S. shale field, have raised at least $2 billion from share sales over the past eight weeks. And more issuances are on the way as producers try to avoid piling on additional debt.

Pioneer Natural Resources Co.’s 12 million-share issuance on Jan. 5 was followed a week later by Diamondback Energy Inc.’s announcement of a 4 million-share sale. Private equity is getting in on the act, too -- Kayne Anderson Capital Advisors LP is bankrolling a startup called Invictus Energy LLC with $150 million to drill the Permian and another Texas field known as the Eagle Ford Shale.

Crude’s crash below $30 a barrel for the first time in 12 years means explorers are facing cash shortfalls, and selling shares is less painful than adding debt or auctioning off assets that would attract weak prices in the current environment, said David Deckelbaum, an analyst at KeyBanc Capital Markets Inc.

“In a world where the oil price can break you, taking on debt is an absolute no-no,” said Deckelbaum, who pegged Diamondback as a likely stock seller six days before the company’s announcement. He foresees a “heavy wave” of new share sales.

Shares Outperforming

Since its Jan. 5 sale, Pioneer has outperformed the crude market, falling 2.3 percent as oil dropped 13 percent. Diamondback has surged 22 percent since its Jan. 13 issuance.

Oil prices have tumbled by about 60 percent since the Organization of Petroleum Exporting Countries nixed any production cuts in November 2014 to shore up crude markets that at that point had been falling for five months. Saudi Arabia, the group’s leader and the world’s largest single source of oil, has sought to defend its market share by letting prices slide to the detriment of the U.S. shale industry. West Texas Intermediate crude fell 4.4 percent to $30.23 at 12:20 p.m. Tuesday on the New York Mercantile Exchange.

The Permian Basin, an ancient seabed that sprawls across an area seven times the size of Massachusetts, has bucked the trend of shrinking production. Drillers were getting 30 percent to 40 percent returns in the Permian’s richest zones when crude was at $40 a barrel, according to Laird Dyer, a Royal Dutch Shell Plc energy analyst.

U.S. benchmark West Texas Intermediate fell 68 cents, or 2.2 percent, to $30.94 a barrel on the New York Mercantile Exchange at 9:35 a.m. London time.

Further Gains

Crude output from the Permian is expected to continue rising through at least next month after more than doubling in the past half decade, the U.S. Energy Information Administration said on Jan. 11. The region accounts for about one in every four barrels of domestically produced oil.

“The Permian really is a diamond in the rough,” said Gianna Bern, founder of Brookshire Advisory & Research Inc. in Chicago and a former BP Plc crude trader. “With the supply glut in the global market, these are challenging times for the entire industry, but the Permian is one place with the resources, ingenuity and engineering expertise to continue improving the cost structures.”

The Permian is unique in that geologists and engineers have been probing and mapping its layers of oil-rich stone for most of the past century, compiling a treasure-trove of core samples, pressure data and porosity profiles that prove useful as drilling innovations develop. 

More Sales

Other Permian explorers who may be tempted to sell new shares to help fund their 2016 drilling budgets include Callon Petroleum Co., Cimarex Energy Co., Energen Corp., Laredo Petroleum Inc., Parsley Energy Inc. and RSP Permian Inc., Deckelbaum said.

Julie Ryland, a spokeswoman for Birmingham, Alabama-based Energen, declined to comment. Spokespeople for the other five companies didn’t immediately respond to voicemail messages.

The “equity window appears to be open” following the Pioneer and Diamondback sales, Gordon Douthat, an analyst at Wells Fargo Securities LLC, said in a Jan. 13 note to clients. More companies with oil fields and balance sheets similar to Diamondback’s profile probably will follow with their own stock sales, he said.

Selling assets is a bad way to raise cash right now because of an oversupply of property on the auction block and pessimism about the future direction of crude prices, Deckelbaum said.

While the oil producers he follows for KeyBanc are trading at an average of about $62,000 per barrel of output, recent asset sales in the sector have only fetched about $44,000, a 29 percent discount, Deckelbaum said.

“The best play-book for many names is simply to issue equity,” he said.

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