At the Market Issuance In The Oil & Gas Sector

During the 2007-2009 financial crisis, capital raising in the equity capital markets slowed dramatically. Many companies, particularly small and mid-cap companies or those in higher risk sectors, such as oil and gas, were effectively shut out of the capital markets and unable to raise additional funds. These companies faced the unappealing alternative of either becoming zombie companies hoping to ride out the crisis with operations put into suspended animation or entering into highly dilutive structured equity or PIPE transactions that stunted or even aborted their growth even after the crisis ended and the markets reached some degree of normalcy. However, one capital raising product, At the Market Issuance (ATM), grew substantially in usage during the financial crisis and has continued to grow dramatically in the years since the end of the last crisis. In 2011 the ATM has become a popular financing vehicle for both large and small cap companies in the Oil & Gas sector. ATMs filed by large cap companies include the $600M ATM by Kinder Morgan Energy Partners (KMP), the $500M ATM by Linn Energy (LINN) and the $140M ATM by Vanguard Natural Resources (VNR). Small cap companies that filed ATMs in 2011 include the $85M ATM filed by Gastar Exploration (GST), the $20M ATM filed by Double Eagle Petroleum (DBLE), and the $4.5M ATM by Evolution Petroleum (EPM).

Through an ATM an S-3 (shelf) eligible public company makes periodic sales of registered common or preferred stock through a broker-dealer in the amount, and at the time and price of the issuer’s choosing during the term of the offering, which can often be over several weeks or months (or longer if the issuer desires). In 2006, there were 23 ATM transactions. This comprised approximately 6% of the follow-on offering market.

In the 5 years since, the number of ATMs has increased dramatically both in absolute terms and as an overall percentage of the follow-on offering market, such that in 2011 there were 123 deals filed, which comprised approximately 22% of the total follow-on offering market. In other words, almost one out of every four “traditional” equity offerings in 2011 was an ATM. In some sectors, such as the REIT space, ATM use is well regarded and in fact represents the majority of the total equity raised in that sector. ATM is also rapidly gaining traction in the oil and gas sector as CEOs are realizing that it offers the least dilutive way to raise common equity capital, and is therefore the most shareholder friendly. The opportunity to raise capital at 15-20% better terms then a competitor (who raises funds through a traditional financing) is an important advantage that can’t be overlooked.

Because of this rapid growth, much has been written in the financial press over the last several years regarding ATMs. These articles, however, have tended to repeat several myths about the limitations of ATM that are not borne out by the twin realities of the large amount of capital that has been raised via ATM and the substantial number of diverse companies employing ATM across a broad range of industries. What these articles have missed is that ATM is slowly creating a new paradigm on Wall Street where companies have more control over their capital raising enabling them to raise equity at lower costs and typically more proceeds per share than any other type of equity offering product. This directly results in minimized shareholder dilution and maximized proceeds to the company.

The traditional overnight or marketed follow-on offering (the primary follow-on offering product of traditional Wall Street investment banks) escapes the same level of scrutiny. In a traditional offering, an investment bank raises capital for an issuer in one large chunk, whereby a company typically raises capital in one large equity offering for the next year (or 2 or 3 years). The problem with this strategy is that it runs contrary to a fundamental law of economics–the law of supply and demand. No CEO or CFO would ever seek to sell their company’s yearly output on a single day, thereby flooding the market with its product and driving down the price that a consumer would pay. Yet, when it comes to capital raising, that is precisely what occurs. Companies sell many multiples of their average daily trading volume (a corollary to the demand for a company’s stock) in a follow-on offering. This floods the market and often depresses their stock price for many weeks or months afterward. This is most often the case in capital intensive sectors, like oil and gas, metals and mining and biotech, that need to raise equity capital to continue to grow and develop into cash producing enterprises.


1. ATMs cannot raise large amounts of capital.


The “big” investment banks have typically derided ATM programs as “dribble outs” where only small amounts of stock can be dribbled out over time. It is curious to note that many of these same financial institutions used ATM to raise large amounts of capital to recapitalize themselves at the end of the financial crisis. For example, BofA raised over $13 billion in 11 days through an ATM. A substantial number of the TARP recipients did the same.

Curiously, ATM is not a product that the major players on Wall Street promote to a wide range of clients. One possible explanation is that banks typically charge much lower fees to raise money via ATM, often in the 1% to 3% range, depending on the size of the client and the deal, as compared the 5% to 7% that they may charge for a typically underwritten deal. Additionally, ATM requires a much greater level of ongoing client interaction during the time ATM sales are being executed — be that over several weeks or months — as opposed to the one week of attention they usually give in a typical follow-on offering.

2. ATMs are not appropriate for all companies.


As long as there is some underlying liquidity in a stock, an ATM is a viable financing option.

3. ATMs are disliked by investors.


Investors dislike dilutive deals. As opposed to a traditional equity offering, an ATM is not priced at a discount to market so the ATM offers current investors the least dilution as compared to other traditional equity offerings. The only investors who do not like the ATM are the “structural” investors (as opposed to fundamental investors) who are looking to profit from receiving discounted shares.

Moreover, the equity research analyst community has typically viewed an issuer’s filing of an ATM program quite favorably. Analysts have focused on the ATM’s benefits, such as (a) allowing issuers to raise low cost capital while having ultimate control over the size and timing of sales, (b) expanding institutional ownership, (c) limiting the dilutive effects of an offering, (d) reducing the risk of having an issuer’s stock price drop in the market in the period between announcement of a deal and pricing and (e) eliminating the distraction to management that occurs in connection with a road show or the marketing of a deal.

4. Shareholders/Investors “lose control” over a company’s fundraising when they use an ATM.


If anything, a company’s board, on behalf of it shareholders, can exert much greater control over capital raising. Not unlike any other type of follow-on offering, many boards convene a “pricing committee” to exert continual oversight over ATM sales. It is unusual for a CFO to be given carte blanche in making ATM sales. Rather, they have various thresholds at which they are permitted to make sales.

Once a company commits to do a standard follow-on offering, often it becomes a point of no return, even as the stock price may deteriorate during the process or the deal terms worsen in order to get the size deal the company set out for, perhaps resulting in a greater discount to the current price, or, in certain cases, warrants coverage becomes necessary as a sweetener to induce buyers to participate in the deal.

Conversely, the ATM can be “turned on” or “off” on a moment’s notice: (i) should the stock price drop below the Board’s threshold price; (ii) if the Board decides to change its threshold price; or (iii) if market conditions are not conducive to making sales. Thus, the ATM becomes a very powerful fundraising tool for the company as the company totally dictates the conditions under which it makes sales, as opposed to the investment bank or the investor buying into the deal. The investment bank executing the ATM on behalf of the issuer instead becomes an extension of that issuer in the public markets. It becomes the issuer’s direct conduit into the market.

5. ATMs depress a company’s share price and create an overhang.


It is the anticipation of a highly dilutive deal that depresses a company’s stock price and creates an overhang. ATM eliminates the expectation of an overnight discounted offering which is the primary cause of the overhang because traders short or sell ahead of an expected deal in anticipation of buying back newly issued (but discounted) shares.

In summary, as ATM proliferates into the market, an increasing percentage of all shelf based offerings are executed as ATMs, as referenced above. Both the gross number of deals and percentage of deals has increased year over year across all sectors, but in particular in the oil and gas industry. Additionally, while a growing number of investment banks have taken a me too attitude to doing ATM, the vast majority of ATMs are executed by a handful of firms, as seen below in the 2011 league table. The 2010 league table was essentially similar, with the same three banks holding the first, second, and third spots.

Date Range : Jan 1 2011 – Dec 31 2011
* The sum of deals in the Number of Deals column is greater than the actual number of deals
completed to account for co-managed transactions.
**Amount filed, split equally among bookrunners

Source: Company Filings