Oil investors see bargains in the bottom of the barrel (2024)

Bargain-hunting investors are pouring money back into oil stocks and bonds, giving cash-strapped U.S. producers a surprise boost from some of the same people who yanked billions out when crude prices began falling last summer.

Since the beginning of the year, producers have collected more than $8 billion in 18 separate stock sales and $5.6 billion from six bond offerings, according to Simmons & Co., UBS and other investment banking firms. That's the biggest quarterly surge in stock sales in several years, according to Tudor, Pickering, Holt & Co.

One beneficiary was Midland-based Concho Resources, whose executives last month raised $650 million selling new stock during about 90 minutes on the telephone with investors.

"We had a couple of calls and that was it," said Price Moncrief, vice president of capital markets and strategy for Concho. "We opened it up to a Q&A, but we didn't get many questions."

He and his West Texas colleagues typically have to take long trips to New York and hold a series of presentations to raise money for Concho, one of the biggest oil producers in the Permian Basin.

Just six months ago, investors wouldn't have been as eager, and the stock sale might not even have been possible. Oil and the firms that harvest it went out of style on Wall Street for a few months last year in one in one of the biggest industry downturns since the oil bust of the 1980s.

The more recent sizzling market for oil investment is especially impressive given that most of the sales have been what investors call overnight offerings with almost no time for marketing, said Ira Green, an investment banker at Houston consulting firm Simmons & Co.

"We're not saying this is a true turning point, but it is a good sign," Green said.

Houston-based Southwestern Energy led the pack with a $2.3 billion sale in January, followed by Houston's Noble Energy and Canada's Encana Corp., which both raised about $1 billion. This month alone, oil producers including Rosetta Resources, Laredo Petroleum, Oasis Petroleum and others have sold $2.9 billion in equity to investors.

'Turning around'

Capital markets essentially closed to oil companies late last year as crude prices fell from $100 a barrel in July to barely $50 in December.

Although a $2.21 drop Friday sent U.S. benchmark crude down to $44.84, its price mostly has hovered a few dollars on either side of $50 this year - even as production growth has continued and inventories have risen.

"There's more money starting to flow back into energy," said Michael Rowe, an analyst with Tudor, Pickering, Holt & Co.

"I think things are turning around," he said.

Investors pulled $30 billion out of funds investing in risky, high-yield energy debt from June to December, but bargain hunters have pumped $11 billion back into the sector's debt this year, according to UBS.

Analysts say the oil companies are selling stock to pay down debt or bolster their available cash pile in case crude prices stay low for a long time. Some also are refinancing their risky bonds with new bond offerings before next month, when banks begin a biannual re-evaluation of oil companies' capacity to borrow money.

And others are loading up on financial ammunition to snap up competitors later this year.

Coming to their aid are investors who have taken a liking to recent, relatively flat oil prices.

Oil stocks are finally cheap after the oil and gas boom that began in earnest five years ago because of technological advances that allow production from dense shale formations. That's why investors have pounced on these stocks, along with expectations that oil prices may be approaching a bottom.

No one knows whether crude prices will recover this year, so raising money now is giving oil companies some confidence they'll be prepared for a long oil slump, said Robert Turnham, president of Houston oil company Goodrich Petroleum Corp, which raised nearly $50 million in two hours earlier this month.

"It's an insurance policy," he said. "It improves your balance sheet and your liquidity, which gives you the ability to get through the downturn."

But the surge of public funding could prolong the price slump. Since last fall, the U.S. oil industry has cut tens of thousands of jobs, sent hundreds of rigs to the sidelines and sliced billions of dollars out of once-ambitious budgets for oil fields from Texas to North Dakota.

'Bit of a cushion'

Traders are watching for signs the nation's shale oil production might fall later this year, easing a global glut in crude supplies and pushing prices up.

But the more oil companies tap into the stock market, the more they may be able to dodge cuts in spending on exploration.

That might hamper a decline in output necessary to bring supply and demand back into balance.

"It provides a bit of a cushion," said Tamar Essner, an energy analyst with Nasdaq.

"If oil companies are flocking to the market now, it's possible management sees oil as staying lower for longer," she said.

Praveen Kumar, a finance professor at the University of Houston, offered a similar take on how the new financing could support exploration and production.

"I don't think they'll start to drill like crazy, but it does give them breathing room," Kumar said.

Selling stock, or equity, which boosts ownership stakes in a company instead of the money it owes, also improves a key financial measure called debt-to-equity ratios.

Increasing the equity side of the ratio could reduce pressure from lenders worried about defaults, giving producers more financial flexibility to avoid firing workers, selling acreage or idling drilling rigs, Kumar said.

Still, said Nasdaq's Essner, banks next month are likely going to begin cutting the amount of money they're willing to lend to oil companies by as much as 25 percent to 30 percent, and this may incite deeper spending cuts. And even if U.S. oil prices stay put, capital markets may close again to oil companies, said Stephen Caprio, an analyst at UBS.

Some companies with ballooning debt have good reason to line up equity funding.

U.S. producers in the past few years have taken on about $247 billion in junk bond debt - so called because its higher yield represents greater risk - and $300 billion in other kinds of risky debt instruments.

Security capital

Influencing the move to equity sales is the realization that such debt is a burden, said Robert Santangelo, an investment banker at Credit Suisse. He said oil companies with profitable assets and competent management teams will be able to get equity capital even if they have high levels of debt, but firms with more debt than value tied to their oil wells might get left behind.

But is it a good idea for investors who are new to the cyclical oil industry?

"There are just so many variables at play here," said Bill McDonald, a Houston attorney with Thompson & Knight.

Less experienced investors - eager to snare bargains on oil company stock before crude prices eventually go back up again - may struggle to navigate the complex global oil market, let alone pick out which companies might be the best picks, McDonald said.

"It's certainly different than investing in real estate, say, or a building or something," he said. "It's a lot more complex. I think people are realizing that."

Still, it's easy to see why investors would be intrigued by the oil business, even now, said Kumar, the finance professor.

"They're taking a bet that the worst has already happened," Kumar said. "It's a good bet, but prices might be stuck here for a few months. We do expect things to start to pick up again. If you're getting the stock cheap now, that's a relatively good investment."