With oil and gas prices testing previously undreamed-of levels and all things energy in the headlines, investors' appetite for new public issues appears to be insatiable. Initial public offerings during the past 18 months have given investors a variety of choices: oil and gas production, coal, midstream master limited partnerships, even new LNG ships. Sources say the market still has pent-up demand and is not too frothy, although it is selective. The IPOs of several energy companies were in the pipeline at the Securities and Exchange Commission this summer. "Capital markets are open and should stay open for energy IPOs and 144A offerings that combine attractive assets, sound capital structures, line-of-sight growth, predictable cash flows and top-notch management teams," says Pat Keeley of Friedman Billings Ramsey. "Investors are increasingly comfortable with the sustainability of strong commodity prices and supply/demand fundamentals, permitting them to overcome concerns that we are experiencing only a short-term energy 'bubble.'" His colleague at FBR, George Hutchinson, adds, "At the moment, institutional investors are generally somewhat overweighted in upstream energy. As a result, they are a bit more selective than they were 18 months ago. Having said that...compelling value opportunities and aligned management teams will be well received. Substantial amounts of capital continue to be available for quality energy investments." FBR has raised $1.5 billion of equity during the first six months of 2005 and its pipeline also looks very strong for the latter half of the year. What type company? The biggest energy-related IPO year-to-date, not surprisingly, was the June offering of China Shenhua Energy Co. Ltd., now the second-largest publicly traded coal company in the world. The US$2.9-billion offering was led by Merrill Lynch and Deutsche Bank to list on the Hong Kong Stock Exchange. In the U.S., the upstream outfit with the largest market capitalization at the time it went public was W&T Offshore Inc. in January. Its opening-day market cap was $1.2 billion, or about $200,000 more than Bill Barrett Corp. had with its December 2004 IPO. (For more on Bill Barrett Corp., see "Piceance Basin" in this issue.) W&T, of Houston, raised $240.4 million in January 2005, backed by year-end 2004 proved reserves of 467.5 billion cubic feet equivalent, 62% developed and 49% gas. Its fortuitous stock symbol, WTI, is trading on the New York Stock Exchange. Investors don't seem to be showing a preference for one kind of E&P company over another, Keeley says. "The capital markets will fund both short- and long-life reserve stories, so long as they are appropriately valued. But investors are increasingly sensitive to F&D costs, LOE (lease operating expenses) and reinvestment risks, in the event any break in commodity prices should occur. They are less concerned about whether the reserves are offshore, onshore or are nonconventional." Frank Murphy of A.G. Edwards sees more IPO activity ahead because investors recognize what is happening with commodity prices and supply-and-demand fundamentals. What's more, since newly public E&Ps haven't built up a following yet, they tend to receive an attractive valuation relative to the existing public companies that are fully "discovered" and tend to carry premiums in today's market, Murphy says. Newly public companies tend to be perceived as having more growth potential, whether from the drillbit or through acquisitions. Companies with a lot of drillable locations should be able to tap into the IPO market fairly well, Murphy says, if they reinvest the IPO capital in drilling. Many E&Ps are gaining added visibility to take advantage of the current market environment, without doing an IPO. Since January 2003, for example, some 23 E&P companies have listed on the American Stock Exchange alone. That's not counting several mining and midstream stocks that also listed. Most of these new E&P listings were seeking greater liquidity by moving up from an OTC Bulletin Board or Nasdaq listing. (For more on some of the OTC-listed firms, see "The OTCBBs," Oil and Gas Investor, June 2005.) Today, energy is big business at the Amex. A third of the top 25 companies listed, based on market cap, are energy names. These include two Canadian trusts, Provident Energy Trust and Petrofund Energy Trust; drilling contractors Nabors Industries and Grey Wolf; three E&P companies, Imperial Oil, Ultra Petroleum and InterOil Corp.; and an LNG-focused company, Cheniere Energy Inc. IPO proceeds W&T Offshore ranked seventh among the top-100 fastest-growing companies in an annual Business Week survey recently. The magazine cited W&T's three-year average sales increase of 50.5% and a return on capital of 22.1%. Not bad for a company co-founded by chief executive officer Tracy Krohn in 1983 with just $12,000 of seed capital. The IPO provides fuel for more growth. Analysts at Raymond James & Associates now expect the company to grow organic production at least 3% in 2005 and 5% in 2006-implying compound annual growth of 23% for the prior seven years. In the first six months of 2005, it was 10 out of 13 in its exploration and development program in the Gulf of Mexico. "We wanted to put ourselves in a position to do significantly larger acquisitions or mergers and felt we could also become an aggregator of companies in the Gulf of Mexico," Krohn says of the reasons behind the IPO. "Also, we are exploring in the deepwater Gulf of Mexico and drilling deep-shelf wells where substantial reserves can be found. We wanted to have the capital readily available to develop a significant find ourselves without committing a disproportionate percentage of our cash flow to a specific project." Of the other largest E&P companies that have gone public since 2003, the prospectus of only one said proceeds would be used for drilling. That was Warren Resources, which is drilling along the Atlantic Rim of the Washakie Basin in Wyoming with partner Anadarko Petroleum. Proceeds of Warren's $82.5-million IPO in December 2004 will fund its coalbed-methane developments in the Washakie and Powder River basins, and a waterflood project it acquired in January 2005 in the Los Angeles Basin. The other companies used proceeds to pay down debt or provide liquidity-an exit-for major shareholders. When Whiting Petroleum led off the parade in November 2003 with its $267.4-million offering, all proceeds went to the selling shareholder, Alliant, a utility holding company that had taken it private some years ago. Providing a payout for a selling shareholder is also part of the reasoning behind the IPO of W&T Offshore and will be for Mariner Energy Inc. The case for Bois d'Arc Energy going public in May 2005 was a bit different. The Houston company was formed in July 2004 as a successor to an offshore-focused joint venture formed in 1997 between Comstock Resources, Bois d'Arc Resources and related entities, where each contributed offshore assets. Exploration on the shelf and deep shelf of the Gulf has resulted in proved reserves increasing 97% in the past four years, to 305 billion cubic feet equivalent at year-end 2004. But Comstock's increasing call on capital to fund the successes associated with Bois d'Arc-in addition to its own onshore program-led the two companies to decide that Bois d'Arc should be restructured and spun off from Comstock. The latter still owns 47% of the outstanding shares, post-IPO. Bois d'Arc repaid most of a loan it had from Comstock. It is still focused on exploration. The newly public company receives a discount to its offshore peers based on in-ground reserves. "Although 58% of the reserves are behind pipe, we view these as being lower-risk and easily accessible if the company decides to ramp up production," says an analyst with Petrie Parkman & Co., which initiated coverage with a Buy. Public partnerships In addition to traditional producer IPOs, some new twists are emerging that resemble the popular energy trusts so prevalent in Canada. Companies with stable, long-life production may adopt a limited liability (LLC) partnership structure and pay quarterly cash distributions to unit-holders, not common-stock owners. "There is a lot of activity going on and it's due to a unique combination of two important factors-high commodity prices and low interest rates. That sets the stage for companies to consider the limited-partnership structure as a viable vehicle," says A.G. Edwards' Murphy. So far, these have been in the midstream space. One example is Copano Petroleum LLC, which went public in November. It raised $115 million and trades on Nasdaq as CPNO. Formed in 1992, the Houston company owns gas pipelines and processing facilities solely in the Texas Gulf Coast region. As a limited liability company, Copano distributes cash to unit-holders on a quarterly basis. The LLC structure provides tax treatment identical to that of master limited partnerships, but in this case, there is no general partner with which to split profits. The unit price is up about 50% since the IPO. But now, E&P partnership offerings are coming. RBC Capital Markets and Lehman Brothers are poised to bring public Linn Energy LLC. In June, the Pittsburgh-based E&P company filed to offer 5.5 million units that would trade on Nasdaq as LINE. Linn will spend the estimated $100- to $120 million of proceeds on development drilling in the Appalachian Basin, where it has long been active as a private firm, and on paying back some capital to its private-equity backer, Quantum Energy Partners. Post-IPO, Quantum would still own about 45% of the company. The public will own 34% of Linn, which will distribute cash from production to its investors in the form of a quarterly payout. It owns interests in 1,360 producing wells and says it has another 696 locations to drill. Also in June, a new Houston company, Ensource Energy Co. LLC, filed with the SEC to take public what executives Scott Smith and Marshall Eubank call a "growth MLP" or energy income fund. Their plan is to obtain control of and merge with Eastern American Natural Gas Trust, Houston, (NYSE: NGT) then go public as a newly named, publicly traded partnership called Ensource Energy Income Fund, to trade on the NYSE as ENF. The firm is billing the $190.5-million offering as an income partnership. The prospectus cites the popularity of the Canadian trusts and explains their business model. Like their Maple Leaf cousins, this entity will be based on long-lived assets, in this case, all in Appalachia.

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