US energy groups queue to go public as sector returns to favour

Energy companies are making plans to go public in the US at the fastest rate in six years, as a sector that has long been out of favour benefits from renewed investor appetite for businesses that generate steady cashflows rather than prioritising long-term growth.

Texas-based oil and gas producer TXO Energy Partners in January became the first energy group to list in the US in more than six months, and a further nine companies in the energy and utility sector have publicly filed or updated initial public offering documents in the past 90 days, according to data from Renaissance Capital.

If those listings go ahead as planned this year, 2023 would already become the most active year for energy IPOs since 2017, and bankers anticipate a further flurry of deals in the coming months.

The figures mark a resurgence for a sector that has struggled to raise cash in recent years, stung by volatile oil prices, a hangover from a decade of debt-fuelled drilling that racked up huge losses, and distaste for polluting companies among environmentally-minded investors.

“What we’re seeing now is much better engagement and a broader set of investors making themselves available to look at IPOs in the energy sector,” said Justin Bowman, head of energy equity capital markets at Stifel. “The pipeline is continuing to build with names that . . . have not been able to really access the IPO market” in recent years.

Tumbling stock markets and rising interest rates made it difficult for companies in any sector to go public last year — and only two energy companies did so — but deals from the sector were subdued even during the boom years of 2020 and 2021, with oil and gas producers still reeling from the pandemic-induced price crash. 

Energy and utilities accounted for just three of the more than 270 traditional IPOs that raised more than $100mn in 2021, according to Dealogic. They are more than a third of the current public pipeline of similarly-sized deals.

A rebound in commodity prices in the wake of Russia’s invasion of Ukraine and a newfound focus on balance sheet discipline has made energy the best-performing sector in the S&P 500 for the past two years. Supermajors including Exxon and Chevron, as well as many independent producers, reported record profits in 2022, which they used to pay down debt and return cash to shareholders through dividends and share buybacks. 

Traditional fossil fuel producers and renewable specialists alike are benefiting from the increased appetite in capital markets.

TXO, which raised $100mn last month, followed the playbook of already-listed oil and gas producers which have recently focused on capital returns, promising to distribute all of its available cash to investors each quarter. 

Atlas Energy Solutions, which filed preliminary documents in January, reported a net profit of $217mn in 2022 and said it intends to “regularly return capital to our stockholders”. The company, which supplies sand for use in fracking, is expected to raise several hundred million dollars.

The deal boom is also set to hit Canada’s markets, with French supermajor TotalEnergies planning to spin out its Canadian oil sands business this year on the Toronto Stock Exchange in what analysts anticipate will be one of the biggest IPOs the TSX has seen in years.

Meanwhile, renewable energy producers are attracting growth-focused investors who had previously focused on areas such as software that have suffered in the recent downturn.

“Tech investors are stepping in and looking at solar and renewable companies because the view is there’s a very long-term secular growth story for those industries, much like the software-as-a-service companies were a few years ago,” said another senior ECM banker.

Israeli group Enlight Renewable Energy raised almost $300mn through a secondary listing on Nasdaq this month, while MN8 Energy and REV Renewables are both planning IPOs.

The trend is also benefiting companies in energy-adjacent sectors. Last week California-based Nextracker, which produces technology for solar panels, completed the largest IPO of the year so far.

Graham Price, senior equity research associate at Raymond James, said Nextracker’s’s success was helped by the Inflation Reduction Act — the sweeping new US climate bill which pumps $369bn into clean energy in the form of tax credits over the coming decade. He said the subsidies would drive increasing capital market activity among green energy groups.

“I do think the Inflation Reduction Act has probably already spurred a little bit of activity,” he said. “Some of these manufacturing credits are so extensive that they can scale up and should be able to bring forward that profitability timeline and get more conservative investors interested.”