Oil and Gas Investor A&D Trends: Will Market Smile on Colgate?

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Could an oil and gas IPO happen in 2022?

It’s possible, and if it happens, it will be by a company that has methodically built itself through Permian Basin dealmaking. Or it could be just the disaster that fossil fuel naysayers are hoping to see.

Colgate Energy Partners III LLC is reportedly considering an IPO, the first public offering since Vine Energy went public in March and was subsequently gobbled up in November by Chesapeake Energy Corp. in a $2.2 billion deal.

Colgate would likely hang back until the second quarter to launch an offering—possibly in April—and is just as likely to explore a sale. Or Colgate, which reportedly has strong free cash flow, could just go on being a private independent money maker.

Other IPOs date back to 2018, when Berry Petroleum went public. The last major offering in Permian Basin was Jagged Peak Energy’s entry into the market in January 2017.

Colgate Energy, based in Midland, Texas, is a privately held Permian Basin E&P founded in 2015 and backed by Pearl Energy Investments and NGP. Colgate has played the long game in acquisitions, with roughly $1 billion in announced deals in the past four years.

In 2018, Colgate began serious acquisitions with Concho Resources Inc., which along with Luxe Energy II LLC, paid $280 million for about 22,000 net acres in Ward and Reeves counties, Texas.

Colgate subsequently acquired Luxe Energy LLC in 2021 in an all-stock transaction. Luxe owned 22,000 net acres adjacent to Colgate’s Reeves and Ward positions and averaged net daily production of 17,000 boe/d. Then, it rattled off three deals in the Permian.

With deals flying this year, Colgate next agreed to buy acreage from Occidental Petroleum Corp., again in the Permian’s southern Delaware Basin for $508 million. It was Colgate’s second transaction in June after buying Luxe.

In November, Colgate once again seized on an opportunity to expand, this time purchasing 22,000 net acres in Eddy and Lea counties, N.M., for $190 million.

At the time, Colgate said that, pro forma, it would hold 108,000 net acres in Reeves, Ward and Eddy counties with production of about 62,000 boe/d. The company also said it was running five rigs, keeping with a more aggressive drilling pace for private companies in 2021.

Reuters reported that Pearl Energy Investments and NGP want to take Colgate public at a valuation approaching $4 billion, including debt, the report on Dec. 14 said citing people familiar with the matter. Colgate and Pearl Energy did not respond to request for comment.

Colgate has had an easy time in the bond market paying for its deals. In June, the company made a private placement of 5.875% senior unsecured notes in the aggregate principal amount of $500 million—$100 million more than it originally proposed in its offering.

Reuters reported that Pearl Energy Investments and NGP are working with Credit Suisse Group AG for the Colgate IPO, which could launch by the middle of 2022. However, they cautioned the IPO plan had not been finalized, and Reuters noted the sources had spoken on condition of anonymity because the matter was confidential.

Still, E&Ps face an uphill battle as some consider oil and gas a sunset industry, said Chris Kalnin, CEO of BKV Corp., which owns assets in the Marcellus and Barnett shales.

Publicly traded oil and gas companies have seen their values steadily tick up since December 2020, but despite now throwing off cash returns to investors, they lag behind other sectors, even those “green” companies that may not produce revenue or income.

Kalnin, who spoke at Hart Energy’s DUG East, said the reason is that investors see oil and gas as an industry with a limited shelf life. While the energy transition is occurring, it appears to be happening far slower than all of the chatter suggests.

Still, the ultimate trial for companies that test the public waters such as Colgate will be whether they can step into a market that has for years been overtly hostile to fossil fuels.

Colgate will have to make a compelling case not just that it can be profitable, but that it has a rigorous ESG plan. Look for Colgate to be the test case for E&P IPOs that make money but also have been squeezed out of the market by aspirational, cash-lite companies.