All of a sudden, the oil industry is hot. And Wall Street's money is fueling the fire.
Investors are snapping up stock offerings from once-beleaguered energy producers, while U.S. banks ply them with billions of dollars of new loans. The combination is giving drillers a fresh source of cash to buy properties -- even at prices that have almost doubled in the past year.
The dynamic was crucial to PDC Energy's (PDCE - Get Report) agreement this week to buy about 57,000 acres in the oil-rich Permian Basin of West Texas for $1.5 billion. The Denver-based company plans to pay for the assets with stock sales and debt financing; JPMorgan Chase (JPM - Get Report) , PDC's financial adviser on the acquisition, also provided loan commitments to ensure the company has sufficient liquidity to close the deal.
Such a transaction would have been unthinkable earlier this year, as plummeting crude prices and doubts about the health of the global economy led investors to eschew the industry, stymieing oil companies' efforts to obtain financing for deals. Oil's rebound since then to about $47 a barrel has renewed investor confidence in the sector, and central banks around the world have moved to stabilize shaky markets.
The recovery has been so pronounced that even asset buyers, whose share prices often drop following deal announcements, are getting heralded for their ambitions. PDC's shares rallied 5.8% this week alone, en route to a 27% gain so far in 2016. Another recent acquirer, Denver-based SM Energy (SM - Get Report) , has almost doubled its stock price this year.
"Public markets are in a position of being risk-on," Stephen Trauber, global head of energy investment banking at Citigroup (C - Get Report) , said in an interview. "They believe the market is turning around, so they're rewarding companies that are taking some additional risk and bold actions."
Properties in the Permian Basin are changing hands at $30,000 to $45,000 an acre, up from $18,000 to $20,000 a year ago, Trauber estimated. Much of the recent activity has been focused on the Permian and the so-called Scoop and Stack oil fields of Oklahoma, because drilling costs there are low enough to make production feasible even at current prices, he said.
Dallas-based Silver Hill Energy, owned by private-equity firms Kayne Anderson and Ridgemont Equity, recently hired the investment bank Jefferies to explore a sale at a potential valuation of more than $2 billion, Reuters reported this week.
In July, Midland, Texas-based Diamondback Energy (FANG - Get Report) agreed to buy Permian assets for $560 million; the deal was financed partly through a $552 million stock offering underwritten by Credit Suisse (CS - Get Report) , Goldman Sachs (GS - Get Report) and JPMorgan.
Blackstone, the New York-based buyout firm, said yesterday it agreed to create a $1 billion partnership with Jetta Operating Co., based in Fort Worth, Texas, to invest in oil properties in West Texas and southern New Mexico. The firm also has committed $500 million to a separate partnership with Dallas-based Guidon Energy to drill in the Permian Basin; in April the partners bought 22,000 acres in the area.
The market's resurgence has allowed some cash-squeezed producers to liquidate assets, allaying investor concerns that they might suffer deep credit-rating cuts or even join the 65 oil and gas companies that have defaulted this year, including three this month alone.
Devon Energy (DVN - Get Report) , for example, had its credit rating cut to junk grade in February, with Moody's Investors Service citing the prospect for "challenged cash flow" during a "sustained low commodity price environment." Moody's assigned the Oklahoma City-based company a negative outlook, indicating that further downgrades were possible.
Then in June, Devon reached agreements to sell about $1.9 billion of assets. Moody's changed Devon's credit-rating outlook to stable last month, citing "material progress on its asset divestiture program."
There's also the case of SM Energy, which has benefited from the resurgent oil-asset market as both buyer and seller. Early this month, the company agreed to sell assets in New Mexico, North Dakota and Montana for a combined $172.5 million. A week later, it agreed to buy Rock Oil Holdings, a Permian producer controlled by private-equity firm Riverstone Holdings, for $980 million.
The purchase price was funded partly through a $531 million stock offering led by Wells Fargo (WFC - Get Report) , Bank of America (BAC - Get Report) and JPMorgan, among other underwriters. SM Energy raised another $172.5 million in a convertible-note sale led by the three banks.
According to Citigroup's Trauber, the deal flow isn't just limited to just mergers and acquisitions. The bank has a list of 20 to 25 private companies that could go public through initial stock offerings in the next 12 to 18 months, he says.
Assuming the market stays hot.