Fewer energy companies are filing for IPOs to raise capital as investors remain cautious while the sector faces less volatility in crude oil prices.

A handful of companies filed for IPOs in 2018, including Berry Petroleum Corp. The Bakersfield, Calif.-based onshore oil production company aimed to raise $300 million from the offering but fell short of its goal after a lukewarm response by the market.

In July, Berry closed its IPO with the company’s shares priced at $14, below its target range of $15 to $17 and raising about $146.96 million. The stock was trading at $15.64 on Sept. 6, dipping below its high of $16.50 a share.

The subdued response from Wall Street signals the continued concern about supply due to the U.S. tariffs imposed on China, geopolitical issues and economic problems from emerging markets, said Patrick Morris, CEO of New York-based Hagin Investment Management.

“We had Berry’s IPO, but the reception was tepid by the market,” Morris said. “I think that there is a tremendous amount of uncertainty concerning the global supply-demand balance.”

Morris believes the number of companies filing for IPOs is likely to remain lackluster for several quarters.

“Once the demand side wins the argument, you will see a bunch of new IPOs,” he said. “But right now, given the commodity price uncertainty, I don’t think you will see much activity in the sector.”

Companies who are considering going public are likely to wait until investor appetite returns.

In 2014, the energy sector was more promising and 20 IPOs worth $11.7 billion occurred, according to Thomson Reuters data. In the aftermath of oil prices dropping steeply by 40% from a high of $115 a barrel to below $70 in December, IPOs became scarce. During the next three years, there were only 21 IPOs, which raised a total of $9.8 billion, based on Thomson Reuters data.

“I expect the energy IPO backlog to continue to build this year,” said Ethan Bellamy, a managing director who covers energy stocks at Baird. “The floodgates probably won’t open until 2019.”

While investors remain hesitant, many of them “still need upstream and midstream companies to deliver on deleveraging and free cash flow,” he said. “Another few quarters of oil price stability and production growth will go a long way to coaxing investors back to the table.”

Some IPO candidates include Dallas-based Lucid Energy Group, Irving, Texas-based Medallion Midstream LLC and Midland, Texas-based EagleClaw Midstream Ventures LLC among many other private-equity-backed entities in midstream, said Bellamy.

“There won’t be any shortage of candidates in the upstream if the public-equity market heats up,” he said.

The energy IPO markets seized up because of the collapse of oil prices starting in 2014, coupled with balance sheets saddled with high levels of debt, said David Zaozirny, a partner and southwest region financial accounting advisory services leader at Ernst & Young (EY).

“The steepness of the drop and the duration of the depressed prices led many companies to focus on restructuring their debt or even file bankruptcy,” he said. “For those who survived liquidation, management teams focused on cost cutting and learning to do more with less. Many of these companies today are better operationally than they were prior to the collapse and have been able to right-size their balance sheets.”

Another producer which had an offering this year was PermRock Royalty Trust based in Midland, Texas. The stock has ranged from $12.87 to $16.69 a share.

Oilfield service companies also conducted offerings earlier this year, which included Houston-based Quintana Energy Services Inc., Houston-based Cactus Inc. and Denver-based Liberty Oilfield Services Inc.

The management teams at energy companies are waiting for market conditions to improve before they go public, said David Palmer Oelman, a partner at law firm Vinson & Elkins LLP. Under the Securities and Exchange Commission’s guidelines, companies can confidentially submit for an IPO, but investors will not see the documents until the companies are ready to start their marketing period. A substantial number of energy IPOs have been submitted, but are holding off until they believe investors are more confident.

Investors remain wary because they “got their fingers badly burned” when oil dropped to $26 a barrel in 2016, resulting in a negative impact for all energy-related IPOs that had been completed in the prior several years, Oelman said.

“IPO investors have memories that are reasonably long,” he said.

Another reason why the flow of IPOs has stalled this year is because a substantial portion of investment money has been allocated to biotech and tech IPOs, which have yielded returns of up to 24%.

“If you look at IPOs, which were conducted in 2018, 60% were in the biotech, health or tech industries and only 4% in the energy industry—both percentages are very substantial deviations from their historical norms,” Oelman said.

In addition, many investors are still concerned about the price of crude oil and whether it will remain stable and have funneled their money into higher growth beta stocks.

“There is not a lot of new money coming into energy investments to fuel IPOs,” he said.

While there remains a degree of uncertainty about the energy sector, prices are less volatile and E&P, midstream and oilfield service companies reported better performance during the second quarter.

“We are cautiously optimistic because of continued production growth in the U.S. combined with substantially stronger operating results,” Oelman said. “The outlook is improving.”

During the past decade, the energy industry has changed dramatically as a result of the shale revolution, resulting in large amounts of money being invested in the sector since 2008, but to reach the U.S.’s full potential, substantial investments are needed, he said.

“Long-term projections consistently estimate that hundreds of billions of dollars are needed to fully develop shale resources, including upstream, midstream and downstream, over the medium and long term,” he said.

The energy IPO market has been slow because investor appetite for them is way down, said John Goodgame, a corporate and securities partner at law firm Akin Gump.

Prior to 2015, many MLPs and traditional E&Ps went public via IPOs. Investors were generally eager to invest in them by buying shares in companies with assets in or near the rapidly expanding shale production areas. Once oil prices began to slide in late 2014 and into 2015, these companies’ stock prices dropped, the MLPs’ distributions were cut or stopped entirely and the formerly eager investors were “burned badly” and lost a lot of money, he said.

Since public-equity capital is less available for the upstream, midstream and downstream businesses, these companies are seeking ways to increase efficiencies, Goodgame said.

“These types of market conditions always lead to industry consolidation,” he said.

While viewpoints in the upstream sector has risen as oil prices have increased from $40 a barrel to more than $60 a barrel, investors remain on guard.

“The investor sentiment is just not there yet and that is why you’re not seeing the volume of upstream and midstream IPOs that we had become used to,” Goodgame said.

The market is also seeking more return on equity from existing E&Ps. Before 2015, many producers were growing their reserves at any cost, he said. During the shale boom, companies were being rewarded for increases in proved reserves and not necessarily for generating a positive return on equity.

“Now investors are rewarding companies that are profitable and have a positive return on capital,” Goodgame said. “The larger investors are really focused on that—during earnings calls, all of the independents are talking about returns-based metrics like return on capital or return on capital employed.”

When investors are focused on return metrics as opposed to growth, this usually bodes poorly for the IPO market.

“Production and volume growth metrics were really good from 2010 to 2014, but investors lost money the three years after that,” Goodgame said. “Now E&P companies are trying to be more efficient by not drilling every last well, and midstream companies are retaining more cash by reducing distributions or dividends because investors won’t blindly finance growth anymore.”

Many energy companies want to access the capital markets if valuations reach attractive levels, EY’s Zaozirny said.

“Often there is a dual track process where the pre-IPO companies will look at accessing the capital markets and compare that to the valuation they can obtain through an outright sale,” he said. “Sometimes the opportunity for investors and management teams to cash in total offsets the value and effort of being a public company.

The companies who have their assets in the right places and solid balance sheets are likely to go public.

“As oil and gas prices continue to recover, we likely will see more equity investors return from a space they vacated during the collapse,” Zaozirny said. “We need equity valuations to outweigh replacement cost.”

Volatility in oil prices will continue and even though they are headed in the right direction, timing remains very important for an offering.

“Preparing a private company to operate in a public environment takes time, and we are definitely seeing an uptick in the number of management teams exploring and preparing for the capital markets,” Zaozirny said. “However, time and commodity prices will dictate when we see this resurgence, but a prepared company with a registration statement on file will have a much better chance of hitting the window when the market presents itself.”

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