Energy listing shows investor appetite

Extraction Oil & Gas’s shares jumped on their trading debut on Wednesday after rising crude prices sparked a sharp turnround in investor appetite for the energy sector, helping smooth the path for the industry’s biggest listing globally since 2014.

The Denver-based energy company, which primarily operates in the Rocky Mountains, priced its initial public offering at $19, above its initial range of $15-$18. The 33.3m share sale raised $633m, making it the largest IPO in the oil and gas industry since October 2014, according to Dealogic.

Further highlighting the renewed investor interest in the energy industry, Extraction’s shares had jumped 18.1 per cent to $22.44 on the Nasdaq stock exchange by midday on Wednesday, giving the company a market capitalisation of $3.2bn.

“The big decline in stock prices, combined with what looks like a bottom in oil prices, means investors are taking another look [at energy shares],” said James Paulsen, chief investment strategist at Wells Capital Management.

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Even including Wednesday’s IPO there has just been $1.1bn worth of oil and gas company listings globally in 2016, after a mere $1.8bn last year, according to Dealogic.

The success of Extraction’s share sale will be encouraging for companies in the industry that may still have to raise capital to improve their financial health.

Investor interest in the energy industry shrunk as oil prices crashed from more than $100 a barrel in 2014 to a low of under $30 this year. But the market recovered again this year, and prices were further buoyed by a tentative agreement last month by the Opec oil cartel to curtail production.

The big decline in stock prices, combined with what looks like a bottom in oil prices, means investors are taking another look [at energy shares]

“There’s a feeling that with the reduction in supply, it could be pretty profitable for the players that are left even if oil prices don’t recover back to where they were,” Mr Paulsen said.

As a result, the price of a barrel of Brent oil, the North Sea benchmark, has crept above $50 again, and helped support the prices of energy stocks and bonds.

The S&P 500 energy index has rallied nearly 16 per cent this year, outpacing the broader index’s 4.8 per cent gain. The oil and gas exploration and production sub-index has jumped almost 26 per cent in 2016.

The bond market also reflects the rising appetite for energy. The average yield on risky, lowly rated US “junk” bonds issued by energy companies peaked at more than 20 per cent in February, but has subsequently tumbled to a two-year low of 7.27 per cent. Investors who kept the faith through the early-year turmoil would have made returns of nearly a third in 2016.

Extraction’s IPO comes after Noble Midstream Partners, a so-called “master-limited partnership” managed by Noble Energy, raised $323m in September, but is comfortably the biggest since Vicon Industries and Eclipse Resources Corp listed in October 2014, according to Dealogic. Credit Suisse, Barclays, Goldman Sachs and Citi led the Extraction deal.