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Wintershall-Dea no guide to future IPO performance

Post-merger momentum contrasts with wider industry cynicism over energy IPOs

Trade tensions, warnings of an impending global slowdown and disruptive political events such as Brexit have all contributed towards gloomier European energy initial public offering (IPO) sentiment over the past two years. But a planned post-merger public bow for the combination of Germany's Wintershall and Dea suggests at least some players see brighter skies ahead.

In a mid-March annual Wintershall media presentation in Kassel, the firm's headquarters for 125 years, company officials announced that it and Dea had secured a $6.8bn credit line from five unnamed US banks to push through their merger by the end of June. This paves the way for planned IPO in early 2020.

That would be an accelerated timeframe for the creation of Wintershall-Dea, in contrast to delays that characterised the merger's consummation. The firms' initial agreement target was spring 2017, with a close at the end of that year; but discussions dragged on amid talk of poor market conditions. Up until last September, when a merger agreement was finally signed, the companies stated only that "an IPO is envisaged in the medium term".

Senior Wintershall executives confirmed to Petroleum Economist that the companies had already advised banks to seek a role in the Wintershall-Dea listing before this summer, ahead of a listing that would either be in Frankfurt or London-and would be ready by the end of the year.

The previous caution likely reflected concerns over oil price uncertainty in the final months of 2018, but also a wider slump in the European market for mid- and large-sized energy IPOs that has persisted since the oil price crash in 2014.

Not the right time

In October last year, Spanish refiner Cepsa postponed a listing that would have been the largest oil company IPO in a decade. It was expected to raise $8.1bn, and was called off just as oil prices were beginning an end-of-year rout that saw WTI plummet to $44/bl. A proposed IPO of European fuel distributor Varo Energy, which is partly owned by trader Vitol, US private equity heavyweight Carlyle and a private Dutch investor, was also pulled in April.

An IPO in London and Tel Aviv by Greece's Energean also met with a realtively lukewarm response. The company had to cut its size by $22mn and drop plans for insiders to sell $50mn of their stock.

Kazakhstan's ministry of finance last month rescheduled the IPO of state-owned gas firm Kazmunaygaz to the second quarter of 2020. The $6.5bn issuing, expected to be central Asia's largest, had originally been scheduled for the London stock exchange early this year.

Beyond Europe, energy IPOs have fared no better. Saudi Aramco, the world's largest oil producer, put its partial privatisation plans on hold in mid-2018 to "diversify the company and add value," possibly ahead of another attempt in 2021.

"While there is arguably a gap in the European equity markets for mid-to-large sized full-cycle E&Ps, macro factors will play a crucial role in determining how many of the IPO candidates are taken public," says Greig Aitken, director of M&A research at consultancy Wood Mackenzie. "Low oil prices, extreme oil price volatility and general equity market sentiment all weigh heavily on the appetite for energy IPOs. Following a tumultuous end to 2018, appetite is currently low. But if macro factors improve, this could change."

Wintershall's faster movement towards its initial offering reflects bullish intent founded on the newly-merged companies' targets. The merger brings together businesses that in 2017 had combined sales of €4.7bn. Oil and gas production is around 575,000boe/d, and the new company aims to increase Wintershall and Dea's joint production by around 40pc to 800,000bl/d between 2021 and 2023.

German chemicals firm BASF and Russian investment vehicle LetterOne, the respective controlling shareholders of the merging firms, explained the rationale of combining their respective oil and gas businesses as to better compete against much larger rivals such as Shell, BP or Total.

New production regions

The growth is expected to come from both the existing portfolio, which includes Argentina's shale prospects, as well as new production regions like Mexico, where Dea has made a recent entry, and Abu Dhabi, where Wintershall recently secured a new oil and gas concession.

Wintershall also sees a significant boost from the Nord Stream II project to supply gas to central Europe-particularly Germany, helping the country in its travails to meet environmental goals. In January, a German government-appointed panel recommended the elimination of coal to generate electricity by 2038 at the latest.

"Nord Stream II offers up to 55bn additional m³ of natural gas for European markets. Arithmetically speaking this could replace, for example, Germany's entire coal-fired power generation," says CEO Mario Mehren. Wintershall is helping to finance the Nord Stream II project as a lender and will provide up to €950mn for the project.

Despite its growth ambitions globally and in European gas supply in particular, the new Wintershall-Dea will remain subject to macro economic conditions and shifting trends in the oil and gas industry.

Confirmation that Norway's $1tn sovereign wealth fund will sell some of its upstream oil and gas holdings comes after a torrid couple of years for energy equities as a whole. As an indicator, as recently as 21 March, oil service stocks recently undercut their 2016 lows.

"We still believe the oil industry requires a higher commodity price level in order to encourage re-investment in the business, particularly given the recent decline in oil prices," Invesco Energy Fund wrote in an investors' note in January 2019.

"The team sees a significant disconnect between the underlying cash flow generation capabilities of the fund's holdings and their current stock prices. This is evident from the many holdings that have had share buybacks and dividend increases over the course of the last year."

Across the UK's North Sea and in the US shale market, private equity sponsors have also become larger players over the past 20 years as industry upheaval and price volatility drive out other investors in the public markets. Indeed, one of the factors that might be spurring the firm to quicken the pace of its IPO is the prospect of as many as 15 private equity-backed vehicles in the North Sea who might also be thinking about testing the European public markets' potentially quite finite appetite for oil and gas exposure in the next few years.

A deeper malaise?

In the US, the shale market has to some extent evolved past IPOs, as some private equity managers favour a strategy of privately acquiring and divesting assets without a public market exit, Ed Hirs, energy fellow at the University of Houston, tells Petroleum Economist. "This is a one-off IPO and not a signal that the market for oil and gas IPOs has recovered. The equity markets still value oil and gas assets at a significant discount to replacement value, and this has shut out most IPOs for the past several years."

So, while companies such as Wintershall-Dea have been working very hard to optimise portfolios and make themselves as attractive as possible to investors-by having sufficient material production with growth potential and being cash generative-it may not always be enough to upend broader trends in the world of energy equities.

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