The rise of ESG investing is making the UK equity capital market a more challenging arena for E&P companies.

Traditional investors are shying away from oil and gas, but niche investment managers taking their place have sparked a moderate recovery for the sector. In this article, we explore the firms that are still finding avenues to raise capital and whether there are signs of better fortunes on the horizon.

A tough time to raise capital…

Since commodity prices fell in early 2020, UK equity capital markets have been a harsh environment for E&P companies.

In 2020, only £323m of equity was raised for London-listed companies, across 94 transactions – an average of £3.4m per raise. This is down from an already difficult 2019, where £450m was raised across 84 transactions (an average of £5.4m per raise).

These figures pale in comparison to previous levels of funding. Between 2005 and 2013, equity raises averaged more than £2.4bn per year, across much larger transactions. What was once a buoyant market is now difficult to rely on as a source of funding.

Many of the investors who provided capital during that period no longer have the appetite – or the ability – to fund the traditional hydrocarbon industry. This is largely due to stakeholder pressures from the energy transition.

Equity raised on the London Stock Exchange for E&P companies vs. Brent crude price

Source: London Stock Exchange

Not only were funding levels in 2020 lower, many were emergency raises to keep companies afloat through the crisis, with deeply discounted issues and funding provided by existing shareholders and the retail community. Indeed, while the average raise was £3.4m, the median raise was just £0.5m. The largest was Diversified Gas & Oil’s £69m raise for the acquisition of US assets in May, alongside its transfer from AIM to the Main Market.

Meanwhile, the IPO market effectively remains shut. The last significant IPOs in London were in 2018: Energean and Jadestone. The previous one was SEPLAT, which was in 2014.

…but are there signs of revival?

Set in the context of the strong markets of 2005-2013, it is easy to be pessimistic about companies’ current ability to raise equity. However, there have been signs of a recovery, albeit modest, since the oil price rebound.

Equity raised on the London Stock Exchange for E&P companies since 2015

Source: London Stock Exchange

The fourth quarter of 2020 saw E&P companies raise £117m across 17 raises, a large step up in activity from the previous four quarters. The average size of raise increased to £7m, up from the £2-3m of the previous five quarters. This trend also appears to continue into 2021.

Equity raises over £5m since 2020

Over £90m of equity was raised for exploration, a somewhat surprising amount given the depressed state of the market during the past 12 months. Notable raises in this area included Bahamas Petroleum for its wildcat well in The Bahamas; Touchstone Exploration for its ongoing exploration in Trinidad & Tobago; and Pantheon Resources and 88 Energy for their ongoing explorations in Alaska. That is not to say the market is necessarily open for exploration again, but these companies are targeting significant prospects, or have demonstrated recent success, de-risking their exploration activity.

Furthermore, nearly £130m of equity was raised for acquisitions.

Who are the new investors?

The sector no longer has strong support from traditional, sizeable institutional investors. Familiar names such as BlackRock, M&G and Legal & General, which could be relied on as cornerstone investors 10 years ago, have largely retrenched from the sector. Historical underperformance and, perhaps more importantly, increasing pressure to focus on ESG-led investing agendas, has led to a flight from the oil and gas sector.

A look at the 2020 equity raises gives us some insight into current equity capital providers. Premier Miton has been very active in the London market, as have several, smaller specialist investment managers. High net worths have provided cornerstones in several smaller raises, as have existing debt providers looking to shore up or restructure their balance sheets.

What are these investors looking for?

Our recent conversations with portfolio managers make a few themes clear.

Despite the select equity raises for exploration in 2020, sustainable cash flow is still a key consideration. Investors are increasingly recognising that investing in the space now is likely to be a “hold to maturity” play, due to the lack of buyers for smaller companies.

Therefore, whether the company is able to fund its business internally into the future is critical. While ESG themes are increasingly influencing investors, the hunt for value still takes centre stage. Those companies that can show a clear route to sustainable cash generation with the ability to pay a dividend can provide deep value.

Size and scale are key components. Institutional investors are focusing on mid-to large-cap energy stocks where yield strategies can be employed. Single asset companies in individual jurisdictions are becoming increasingly less relevant to equity investors.

Geographically, it is proving difficult to raise funds in Sub-Saharan Africa and Eastern Europe. Geopolitical uncertainty is often seen by investors as an unnecessary risk, especially when there are numerous opportunities in jurisdictions elsewhere that are perceived as more stable or provide more security.

What does the flight to ESG look like?

The last 12 months were a pivotal period for the ‘flight to ESG’. Two interesting case studies clearly demonstrate the difference in investor appetite between the traditional hydrocarbon industry and renewables.

Ørsted vs. BP: 2020 was a disappointing year for energy majors heavily exposed to oil and gas. There was a significant differential when compared with their counterparts in the renewables market. In terms of output, Ørsted wind turbines generate a fraction of the energy relative to BP. Despite a 5.5% decline in EBITDA in 2020E, Ørsted achieved an 83% increase in share price, as investors place a higher value on ESG.

Share price performance since Ørsted IPO

Source: CapitalIQ, 28.01.2021

Aker Solutions: Norwegian energy company Aker Solutions recently spun off its wind and carbon capture businesses to its shareholders in order to benefit from higher valuations in the energy transition economy. Since IPO, the spin-offs have outperformed their parent: Aker Offshore Wind saw a 151% increase and Aker Carbon Capture a 237% appreciation, while Aker Solutions only experienced a 37% increase.

Share price performance since Aker Carbon Capture IPO

Source: CapitalIQ, 28.01.2021

There’s still a place for the right company

The ESG repositioning from traditional institutional investors presents a major test for E&P companies, which now have to work harder to raise funds in the London equity capital market.

But recent activity shows a modest recovery, coinciding with a rebound in commodity prices. As the cornerstone investors of old are replaced by more niche investment managers, there are opportunities for E&P companies that are getting it right. Those that can clearly demonstrate sustainability of cash flow and are able to grow to a relevant size can still access equity capital markets to fund their growth.

At Gneiss Energy we work with our clients to deliver results in challenging environments. To find out more on how we can help your business contact us here.