Recently, there have been signs of buying interest in oil stocks after it had been common wisdom that oil stocks would have a hard time accessing the capital markets in 2016.
That has been proven wrong. In the last 24 hours, two Exploration & Production (E&P) companies announced major secondaries. Not only were they able to sell them, the demand was so strong they increased the size of the offerings.
This morning, Devon Energy priced a 69 million share secondary at $18.75, well above the initial share size of 55 million, though at a discount to the prior day's price.
Yesterday, Energen announced the pricing of 15.8 million shares, a nearly 30 percent increase from the 12 million they initially announced. They will use the money to repay outstanding debt, to fund drilling and for general corporate purchases.
What's going on? Here's the good news:
1) The successful secondaries prove there is appetite there for these E&P stocks, despite the "lower for longer" scenario.
2) Investors would not being putting additional money to work to buy new shares if they didn't believe there was some plausible evidence we were somewhere near a bottom in oil in the coming months.
Now the bad news:
1) No matter how you spin it, investors are being diluted, and that is not good. In the case of Devon, the float has been increased by roughly 15 percent.
2) How much more demand is there for these exploration and production names? Many other names are likely to float stock soon, and that is likely the reason most stocks in the E&P space are down 3 percent to 6 percent today, even with oil up.
The lesson is, investors will buy, but only at bargain basement prices. "Sell the secondary" is the new trade in oil.
2) It's not clear the Street will just keep buying secondaries, even at lower prices. Devon had to price its secondary at an 8 percent discount to yesterday's close. John Kilduff at Again Capital noted to me this morning that the market may only be amenable to E&P companies "that have size, have acreage in the 'sweet spots' of the shale plays and strong balance sheets" which "gives confidence these companies will be around should crude oil prices move higher."
3) Despite the buying interest, there was a slight air of desperation about Devon's secondary. The company had already announced they were cutting capital expenditures by 75 percent, had cut its dividend by 75 percent, had cut its head count by 20 percent, was looking to sell assets, and even that wasn't enough. The secondary was announced after the earnings conference call.
So where does this leave us? It certainly goes a long way toward "solving" Devon's liquidity issues. As in all deep downturns, the ones that survive will reap huge rewards. Specifically, they will survive.
And that's what we have come down to. This is a battle for survival.