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How Do I Choose the Best Energy IPO?

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  • Written By: Geri Terzo
  • Edited By: PJP Schroeder
  • Last Modified Date: 03 November 2016
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When an energy company is planning an initial public offering (IPO), it can stir excitement amongst financial professionals. Energy companies often have much cash because of the nature of the business, especially when energy prices are high, and as a result, the prospects for profitability can be promising. Selecting a large energy IPO where there is a lot of attention surrounding the new stock is one way to build an industry stalwart into an investment portfolio and will introduce you to the new-issue market.

Sometimes in the financial markets, a company that has traded shares publicly may agree to be acquired by a private entity. In doing so, the public company no longer lists its shares for public investors. Later, when market conditions improve for oil and gas or if operations at the company are strengthened, management may decide to issue another energy IPO and list shares in the public markets once again.

This could be a compelling way to enter the energy IPO market. The company and management have a history in the stock market and may have gone private only to increase the prospects for profitability. Investing in an energy company that you and the markets are already familiar with introduces familiarity to a portfolio and could be rewarding.

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Pure play energy companies focus on a particular business line, such as oil drilling or natural gas transportation via pipelines, for instance. Selecting an energy IPO with a company that has a singular focus is one way to participate in these markets. Compare the financial performance of a new issue available in a public filing with that of other companies in the same or similar sector. Review the investment performance of competitors to learn about challenges that this segment of the energy industry faces and also what drives profitability.

Consider companies that have a hybrid approach to the energy industry. As alternative energy gains momentum around the world and technology becomes more affordable, traditional energy companies that develop oil and gas are increasingly turning to green energy as well. Investing in an energy IPO where there is evidence of incorporating both traditional and renewable energy businesses could pave the way for future profits.

Observe the way the markets are receiving new issues, particularly energy IPOs, over a period of time. The more investors reward an IPO in a sector, the more likely privately held rivals are likely to go public. If there is positive momentum surrounding new issues in the energy sector, it is easier to compare and find the right energy IPO investment for you. When energy IPO performance is lackluster, it may be best to wait on the sidelines for a more opportune time.

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