The return of oil and gas initial public offerings was nice while it lasted.
Energy companies aiming to go public are staying on the sidelines as crude prices struggle to keep above $50 a barrel, analysts and investment professionals say. The price weakness has halted a recovery in stock debuts in the energy sector, which typically accounts for one-tenth of the overall IPO market.
U.S. West Texas Intermediate crude futures slipped to a fresh a seven-month closing low below $45 a barrel on Thursday after plunging nearly 4 percent in the prior session.
U.S. West Texas Intermediate crude, year to date, source: Factset
"Nothing's happening with oil below $50 frankly. I think $50 is the line of demarcation," said Rob Thummel, portfolio manager at Tortoise Capital, an investment management firm with $16 billion of assets under management.
Companies that explore for and produce crude oil need oil prices to rise from current levels to be confident they can consistently wring profits from — or at least break even on — new production.
"Below $50, if we're still here for a couple of quarters, you'll start to see oil producers slowing their capital expenditures, which would moderate the pace of production growth," Thummel said.
Meanwhile, oilfield services firms can't be certain drillers will pay more for the services they sell, like well design and hydraulic fracturing, with oil prices below $50. The firms offered deep discounts during a nearly three-year downturn, and are now trying to raise prices by 10 to 20 percent.
The energy sector has typically accounted for about 10 percent of overall IPO issuance, according to IPO specialist Renaissance Capital. That ratio spiked higher during the shale oil boom of 2011 and 2012 and fell off in 2016 after oil prices tanked from more than $100 a barrel in 2014 to about $26 last year.