Commodities Today: Oil Secondaries To Pay Attention To

by: Matthew Smith

We are noticing something of a phenomenon taking place recently with many E&P names as well as their Limited Partnership counterparts looking to tap capital markets to continue to fund exploration efforts. We are in one of the biggest oil booms in recent history, one which has created boom towns across the United States as shale drilling unlocks vast amounts of natural gas, NGLs, condensates and oil but requires ever more capital to continue development of these vast fields.

Already in the last month we have noticed Gulfport Energy (NASDAQ:GPOR), EV Energy Partners, LP (NASDAQ:EVEP) and BreitBurn Energy Partners, LP (BBEP) all announce secondaries to raise capital for ongoing efforts.

Chart of the Day:

One has to wonder if we are seeing copper making a move lower that will be prolonged. The metal is declining as investors digest the news out of China regarding their economic plans moving forward, but more importantly is where the price action has taken us. We are dangerously close to breaking through levels which have served as support for some time and that is a bit disconcerting. This will all blow over if US jobs data remains strong over the next month, but as we have previously stated we are not at all sure that will be the case. We are not exactly bullish right now on copper from a trader's perspective but could become so if support does in fact hold.

(Click to enlarge)

Source: CNBC

Commodity prices this morning are as follows:

  • Gold: $1276.50/ounce, up by $5.30/ounce
  • Silver: $20.775/ounce, down by $0.003/ounce
  • Oil: $93.42/barrel, up by $0.38/barrel
  • RBOB Gas: $2.6149/gallon, up by $0.0285/gallon
  • Natural Gas: $3.653/MMbtu, up by $0.036/MMbtu
  • Copper: $3.188/pound, down by $0.046/pound
  • Platinum: $1435.60/ounce, down by $4.00/ounce


Gulfport sold 6.5 million shares in an offering which is expected to bring in $354.3 million, or $407.5 million if the underwriters exercise their option in full, with closing expected today. As part of this effort to increase liquidity, the company also sold 2,000,000 shares of Diamondback Energy (NASDAQ:FANG) which should bring in $102.6 million, or $118 million if underwriters fully exercise their option. The two secondaries will raise anywhere from $456.9-525.5 million for Gulfport to use in buying further acreage in the Utica, capital expenditures for 2014 programs or general administration uses. We were somewhat blindsided by the 6.5 million Gulfport share announcement as the press release did not show up in the syndicated press for a few hours after it was released to the public. So initially we were under the impression that the company was simply selling down their equity ownership in Diamondback in order to reinvest in the Utica and refrain from diluting shareholders. We would point out however that although many readers are frustrated and/or disappointed with the move, each time the company has added acreage in the Utica investors have been well served. We think that taking an equity investment and converting it into a cash flow producing asset will be far more beneficial to investors moving forward and thus feel confident in management's decision to do the dual secondary offerings.

The last month has been pretty bad for Gulfport shareholders, and the secondary of 6.5 million shares did not help matters. Our view is that it is short-term pain for long-term gain.

(Click to enlarge)

Source: Yahoo Finance

EV Energy Partners, LP has been a constant thorn in our side over the past year or so. The entity has routinely dropped the ball and managed the sale of their Utica assets quite poorly to put it kindly. The partnership sold 5 million units at the end of October which netted them $208.4 million which they will use to repay borrowings outstanding under their senior secured credit facility. EV Energy Partners should now be done tapping the secondary market as they will soon be realizing significant cash flows from their new midstream assets in the Utica which should enable further distribution coverage and small increases while also provided further cash flows to cover debt payments. It is still our belief that EV Energy Partners should continue to drill in the oil window to prove to potential buyers that there is in fact productive land and to improve upon drilling techniques to give a buyer a jump start, but it appears that right now management is uninterested in this path. Making matters worse is that Aubrey McClendon's new company does not appear interested in the oil window of the Utica, so that is one less buyer for those assets.

Another limited partnership announced the pricing of its secondary today, as BreitBurn Energy Partners, LP issued a press release stating that they would sell 16.5 million units at $18.22/unit for total net proceeds of $289.7 million (or $333.2 million if the underwriters exercise their overallotment rights in full). BreitBurn is looking to use the proceeds from this secondary to, "repay indebtedness outstanding under its bank credit facility," according to the entity's press release (located here).

In some cases these secondaries were surprises, and in others they were somewhat expected. The bottom line is that we expect to continue to see these type of financings occur as land deals slow and companies seek the capital required to develop the assets they are carrying on the balance sheets. The rush is on to get land categorized as HBP which will allow the holders to then develop the remainder of the undeveloped land at their own leisure, but until then expect to see capital markets tapped by the small to mid-sized E&P plays.

Disclosure: I am long GPOR, EVEP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.