When investors think of big gains from newly minted stocks, they tend to focus on the technology sector. That’s been true as some recent big tech IPOs — like GoPro (GPRO) have surged since hitting the ticker tape this year. Tech has certainly been the reigning IPO king.
At least until fracking came to town.
As the U.S. has undergone its energy renaissance, the appetite for new energy stocks has been great. How great, exactly? There were seven new energy stocks that went public during the second quarter alone. Perhaps more importantly, data from Dealogic shows that those IPOs in the energy sector saw an average first weekly gain of nearly 19%.
And they aren’t done yet.
With conditions in the energy industry that haven’t been seen in decades, the newly minted IPOs went public at just the right time. For investors, betting on these new energy stocks is risky, but could lead to outsized gains in the years ahead. Here are five of the best energy IPOs to buy right now.
Energy Stock IPOs to Buy #1: Memorial Resource Development (MRD)
Located in northern Louisiana, the Terryville Complex — while not well known — has traditionally been a hunting ground for energy companies using vertical drilling to extract its natural gas and liquids. In fact, new stock Memorial Resource Development (MRD) has 800 vertical wells in the region.
But investors should really get excited about Memorial Resource’s horizontal and fracking program. MRD hopes to roughly double the size of its vertical efforts in the field on the horizontal side. As with many older shale fields, Memorial is using ultra new drilling techniques to extract every last bit of energy from the Terryville and the Cotton Valley in East Texas.
So far, MRD has been pretty successful at that. Memorial’s latest earnings results — filed before the IPO — showed a gain of 100% from the year-ago period with revenues up 56%. And as primarily natural gas-focused driller, increased demand and higher natural gas prices will only help its bottom line. Add in the “drop-down” benefit from being associated with upstream MLP- Memorial Production Partners LP (MEMP) and you can see the potential.
Investors already have — MRD stock is up 55% from its IPO price.
Energy Stock IPOs to Buy #2: Viper Energy Partners LP (VNOM)
Speaking of MLPs, there have been plenty of new energy MLPs going public this year. However, the most interesting could be Viper Energy Partners LP (VNOM).
Spun off from Diamondback Energy (FANG) — a relatively new energy stock itself — VNOM isn’t a typical pipeline or midstream MLP. Nor is it a downstream refining firm. VNOM is the first company to stream royalty payments tied to shale mineral rights it owns. Basically, others will do the drilling on its properties — in this case, FANG and RSP Permian (RSPP) — and VNOM will get a share of the profits.
The key difference is that, unlike royalty trusts, VNOM can continually add to its reserves and acreage holdings. There’s no “end-date” for investors to have to worry about. And as an MLP, VNOM will kick back much of cash flows from these royalties as dividends.
In fact, based on current production, VNOM’s management estimates it will pay a total of about $1.10 in quarterly distributions over the next four quarters. That works out to be a 3.2% yield and doesn’t include any increases in daily production or price increases for oil or natural gas.
Basically, the VNOM IPO has created a liquid vehicle for investors to bet on the shale boom without dealing with production costs.
Energy Stock IPOs to Buy #3: Eclipse Resources (ECR)
Aside from being home to arguably the greatest university in the Big Ten, State College, Pennsylvania is quickly becoming the epicenter for the growing fracking movement in the Marcellus. The latest firm to take the Marcellus IPO plunge is Eclipse Resources (ECR).
The new energy firm holds roughly 227,239 net acres across the Appalachian Basin — which contains the Utica and Marcellus — and is currently focusing on 97,000 of those acres in Eastern Ohio. This acreage sits atop the liquids-rich window of both fields and should help ECR realize higher profits from production.
This year, Eclipse plans to invest around $577 million into drilling and hopes to complete/spud roughly 176 shale wells. The IPO is currently operating 3 horizontal rigs, but will double that in an effort to expand with its drilling program.
ECR makes an interesting bet for investors, as the firm hasn’t really monetized its acreage and production just yet. It was only founded in 2011. However, as we’ve seen before, it only takes is one gusher to ignite a smaller wildcatter into superstardom. And given ECR’s operating area, that could come true earlier than expected.
And with ECR trading at $23, investors can now snag shares below the $27 IPO price.
Energy Stock IPOs to Buy #4: Parsley Energy (PE)
From one prolific shale field to another: the Permian Basin in Texas. And Bryan Sheffield, founder of new stock Parsley Energy (PE), knows all about the Permian. His dad was one of founders of fracking kingpin Pioneer Natural Resources (PXD).
And like PXD, PE is taking an aggressive approach to the region and has nine horizontal rigs operating there. While it’s actual land holdings may seem small — currently only around 99,000 net acres — those holdings are pretty prolific. Parsley currently has 530 gross producing wells and proved reserves of around 54.8 million barrels of oil equivalent (BoE).
That plentiful acreage is also helping on the new IPO’s bottom line, as well. Over the last three years, PE has managed to see an earnings growth rate of 56%, with its three-year revenue rate surging by 215%.
It’s no wonder shares of PE have received several upgrades and buy recommendations.
And now could be a good time to buy shares. PE stock is still above its IPO price of $18.50, but has retracted from its recent highs. Investors now have a chance to add the Permian’s new superstar at cheaper price.
Energy Stock IPOs to Buy #5: PBF Logistics LP (PBF)
For many energy firms, placing midstream infrastructure into a MLP is one of the best ways to improve shareholder returns and get a hefty dose of tax-deferred distributions. One of the biggest users of the corporate strategy has been refining stocks. Pretty much all of them have MLPs, and the latest to carry on the trend is PBF Energy (PBF) via its new MLP PBF Energy Logistics (PBFX).
PBF is a smaller refiner — with facilities in assets in Ohio, New Jersey, and Delaware. As such, PBFX is a smaller logistics MLP. The kind of big “drop-downs” aren’t necessarily available at first blush. Although, there are several terminals, ports and facilities that PBF could move into PBFX. So growth isn’t out of the question. Secondly, as the refiner’s MLP, PBFX has long-term fee agreements with PBFX. So its cash flows should be pretty steady.
That cash will flow back to investors in the IPO. Based on fee agreements, PBFX will return 30 cents quarterly to investors as distributions. That’s about a 4.5% yield, which is great when compared to some of its refining MLP peers.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.