Why the IPO Market is Screaming

Commodities Commodity Prices
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Want further proof that an oil and natural gas boom is looming? Simply scan the list of recent IPOs.

Seven of the last nine companies to go public on U.S. exchanges were energy companies. Two others went public in late September. Southcross Energy (NYSE: SXE), a Texas-based gatherer, processor and transporter of natural gas, became the latest energy IPO, pricing at $20 a share today.

So far, the returns among all the new publicly traded energy companies have been stellar. All but one of the nine energy companies that have gone public since September 19 are currently trading above their IPO prices.

What does that tell us? Two things, really:

  1. That energy companies are feeling emboldened enough by the growth prospects in the oil and gas industries to take the leap of faith that investors will want to own shares of their stocks.
  2. That investors are indeed snatching up new energy stocks, and are seemingly very willing to take a flier on a sector well positioned for major growth.

I’m not suggesting you should do the same. IPO investing is always risky, and you’d probably be better off spending your money on more mature energy companies like Chesapeake Energy (NYSE: CHK) and Exxon (NYSE: XOM).

What I am saying is that the glut of energy IPOs is yet another sign that the sector is poised for some serious growth. And the returns suggest that many investors agree.

The IPO market isn’t the only harbinger of the impending energy boom. Recent mergers and acquisitions are another good gauge.

Exxon just paid $2.9 billion for Calgary-based Celtic Exploration, giving it access to the oil and natural-gas producer’s myriad shale-gas fields.

Linn Energy (NASDAQ: LNCO), an independent oil and natural gas company that went public last month, bought BP’s (NYSE: BP) interest in Wyoming’s Jonah fields for a cool $1 billion.

You get the point. Improved extraction technologies have helped create a surplus of shale oil and natural gas, which has allowed energy companies to buy those resources on the cheap.

Eventually, however, demand is sure to catch up with supply. Our global dependence on oil and gas is showing no signs of waning. And as demand rises, so too will oil and natural gas prices.

That makes this an ideal time to invest in oil and natural gas.

As if the logjam of energy IPOs and high-priced takeovers isn’t proof enough.

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