Private equity is ditching shale. “It is the end of an era in which private equity was often the shale sector’s crucial financier.” A little bit of a last gasp: Oil producers are “dying on the vine.”

US oil drillers ‘dying on the vine’ as PE flight prompts funding drought, Stricken operators launch ‘last gasp’ efforts to boost cash flow and attract buyers by Derek Brower and Justin Jacobs, April 14, 2021, Financial Times

A vital source of funding for the US oil sector is drying up as private investors retreat, prompting stricken operators to make “last gasp” efforts to boost production and cash flow to lure in buyers.

The exodus mirrors shale’s experience in public markets, where even before last year’s crash investors had soured on an industry notorious for poor returns and weak environmental, social and governance performance.

“Private equity has been decimated in this downturn,” said Wil VanLoh, head of Quantum Energy Partners, one of the largest PE investors in the shale patch. “The total quantum of money available out there to private companies has shrunk and is going to stay much, much smaller.”

Now scores of oil producers are “dying on the vine”, said Ben Dell, managing partner at rival Kimmeridge, as they are left without the regular cash infusions to bankroll the capital spending needed to keep on drilling.

The private flight comes despite oil’s recovery to $60 a barrel — a price that allows many operators to break even and has raised investors’ hopes of a profitable final exit from the sector.

Those notions gained strength this month when Pioneer Natural Resources, a large listed operator in the prolific shale fields of Texas’s Permian Basin, agreed to buy privately owned rival DoublePoint Energy for $6.4bn — the biggest public-private deal in the US upstream oil and gas business in a decade.

DoublePoint, which made national news last year when Donald Trump delivered a stump speech in front of one of the company’s rigs in Texas, was backed by VanLoh’s Quantum, Apollo Global Management, Magnetar Capital and Blackstone credit. But investors say deals of that scale are unlikely to be repeated. “DoublePoint is one and done,” said Adam Waterous, head of the Calgary-based private equity group Waterous Energy Fund. “There’s a risk that people will see it as a return to 2013”, when private equity enjoyed a bumper shale harvest. “It’s not.”

The private mood has been shifting for some time. Between the start of 2015 and the end of 2019, 136 private funds closed after raising an aggregate of $86bn to spend in US oil and gas, according to Preqin, a financial data provider. The influx helped to finance an unprecedented surge in American oil production to a record high of about 13m barrels a day last year.

US private equity is ditching shale

But the “dry powder”, as PE groups refer to investors’ capital, has diminished and the same “war chest mentality” is not evident in this recovery, according to Raoul LeBlanc, head of North American unconventionals for the consultancy IHS Markit.

Just 11 funds closed last year and only $4.5bn was raised as oil prices crashed, according to Preqin. Production plunged and remains around 11m b/d now.

“What’s different this time is there’s very little new private equity going into forming new private companies, because they don’t have capital to deploy,” said Kimmeridge’s Dell. “They are not confident they can raise more capital.”

“What you’re seeing is this little bit of a last gasp of the capital that was committed to funds three or four or five years ago,” said VanLoh, referring to recent deals in which private equity groups have bought assets from public operators. “It’s spend it or lose it.”

Failing companies are likely to be starved of capital and forced into “blow down” mode, said Waterous, producing what oil they can as quickly as possible and as long as possible, just to keep some cash trickling in.

“This business is broken,” said Waterous.

“The industry is going through a multiyear process of wringing capital out of the sector, not bringing new capital in.”

Specialist funds will remain in the sector, some investors say, but the generalists are moving on, seeing greater opportunity outside a volatile fossil fuel business and in fast-growth and low-carbon businesses favoured by ESG-minded investors.

It is the end of an era in which private equity was often the shale sector’s crucial financier. The available cash pile has dwindled.

“There’s not a lot of dry powder left,” said VanLoh. “And once it gets spent, these guys aren’t going to be able to go reload.”

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