After BKV’s IPO, Is Market Open to More Public SMID Caps?

DALLAS—Analysts, bankers and investors argued for years that, “We don’t need another sub-$5 billion upstream company or service company.”

Those comments were being made as recently as 12 months to 18 months ago, said Dylan Tornay, managing director of equity capital markets at Citigroup.

But that sentiment might be changing in today’s market, which has been increasingly receptive to go-public deals by small- and mid-cap companies.

“I think what has changed in the investor mindset is one size doesn’t fit all for everybody,” Tornay said during Hart Energy’s Energy Capital Conference on Oct. 3.

“Investor feedback is, we’re open to the right small- and mid-cap companies,” he said, citing palpable interest from the largest mutual funds to the energy-dedicated hedge funds.

Investors don’t want 20 IPOs from new energy companies, but there’s room for a handful of new entrants every six months to 12 months, Tornay said.

Citi has worked on several of the most recent IPOs in the energy space, including go-public transactions for BKV Corp., LandBridge Co. and Tamboran Resources.

BKV and Tamboran are both natural gas producers; BKV in the Barnett Shale, Tamboran in the Beetaloo Basin in Australia’s Northern Territory. LandBridge owns land and water interests across the Permian’s Delaware Basin.

A handful of E&P and energy-adjacent companies held IPOs last year:

• TXO Partners LP, an MLP led by XTO founder and industry veteran Bob Simpson;
• Mach Natural Resources LP, a Midcontinent-focused MLP led by Chesapeake co-founder and industry veteran Tom Ward;
• Kodiak Gas Services, a provider of contract compression services; and
• Frac sand specialist Atlas Energy Solutions, with a large position in the Permian Basin.

During the past two years, energy IPOs have all been in the $300 million range, Tornay said. Investors “have winced a little” at that, preferring floats ranging between $500 million and $750 million.

“Realistically, small- and mid-cap companies are going to have $250 million to $500 million IPOs,” he said. “Smaller than [$250 million], you’re going to lose a large portion of the investor base.”

RELATED

BKV CEO: IPO Driven by AI Power Demand, Improving Natgas Macro

Reeling in investors

Most of the big public oil and gas companies are doing what their investors are telling them to do: lower costs, maintain output and return as much cash to shareholders as feasibly possible through dividends and share buybacks.

That capital discipline model has drawn investors back into the oil and gas space, experts say.

But there’s room in the market for energy companies with different goals and strategies, too. Some investors are hunting for growth, Tornay said.

“Growth isn’t a bad thing,” he said. “If you’re a small- to mid-cap company and you grow production 20% or 30% because you have the right assets, you’re not going to destroy the economics of the basin.”

There’s also been investor appetite for PDP-heavy, cash flow-focused limited partnerships. Both TXO and Mach Natural Resources were set up as upstream MLPs, making regular distributions to shareholders.

In BKV’s case, the E&P is the largest gas producer in the storied Barnett Shale, with assets in and around Fort Worth, Texas. But BKV also has a more diversified portfolio in power generation, retail electricity and carbon capture, utilization and storage, or CCUS.

LandBridge isn’t an oil and gas producer, but the company holds significant value from the land and water rights it owns in the Permian Basin.

“I think those are things that allowed IPOs that would have been harder 12 or 18 months ago to really gain a lot of momentum,” Tornay said. “If you think about the transactions that have come across this year, they’ve all been three-, four-, five-times oversubscribed.”

Tornay said Citi is watching several energy companies in the IPO pipeline that are assessing their own time frames.

RELATED

Mach Natural Resources Closes Two Midcontinent Deals