Equity offerings help drive US onshore development


US onshore operators continue to ride equity train to shore up balance sheets and drill their best positions. Two of the most recent operators to issue equity in part to help fund spending on their most economic plays — Matador Resources and PDC Energy — were upsized by 50% and 29%, respectively. Our analysts examine the implications of the equity market's pricing in a crude price recovery relative to the futures market.

US Lower 48 operators have issued US$7 billion in new shares  in the first quarter of 2016 alone. Demand for these shares allows them — as we saw this week with Matador and PDC — to develop more new wells than futures strip prices and organic cash flows might otherwise allow.

Operators are using this equity capital to fund their most economic well locations. Given that equity markets imply a recovery in crude prices to roughly US$65 per barrel by 2018, this creates an incentive to drill locations that are economic at that price. It also reduces the probability of financial distress, should crude prices meet the much lower expectations implied by the commodity futures curve.

It appears so far that share offerings have led to relative outperformance in the companies that have taken advantage of this arbitrage. Our most recent analysis, which calculates the long-term oil price implied by equity valuations and benchmarks nearly 1,800 company sub-play positions against it, revealed that 21% earned a return of 10% or more. The major sub-plays that screened best were in the Permian Wolfcamp, Midcontinent Scoop and Stack, Utica, and Eagle Ford.

Further analysis of  equity valuations and Lower 48 breakevens and company benchmarking  using our proprietary Global Economic Model is available on demand.

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