Private Equity for Oil & Gas in Flux

Professionals in petroleum engineering, law, tax and finance offered advice on the path forward for the E&P industry at a Houston Geological Society panel discussion in February.

Several years into an energy downturn, the buy/drill/flip game is over, said participants at the February event, “The State of Private Equity in Oil and Gas.”

Panelist David Wishnow, head of energy technology at Darcy Partners LLC, said, “The traditional game of punch a hole in the ground and flip it is done. We have clients today, who two years ago, would have thought, ‘I’m not going to operate this asset. Why would I ever need production surface technology?’ Today, they say, ‘we really could use some sensors and flow meters.’”

Investors expect a high level of operating efficiency now more than ever.

Panelist Gabrielle Morrow, senior vice president at Ryder Scott, said, “The reluctance by private equity to invest in deals is a loss of trust. If banks and investors trust operators to deliver volumes in a capital-efficient manner, year-in and year-out, then they’re probably going to spend money.”

Panelist Chris Micsak, director of private equity at Pickering Energy Partners LP, opined that while capital is tight, opportunities are available.

“There’s all this private equity capital that’s sitting there on the sidelines. That’s a lot of dry powder,” he said. “We’re starting to see a lot of interesting opportunities moving toward the operating side, but you have to be at the table to play the game.”

During the downturn, teams working in private equity (PE) have scaled back management and operating staff. Panelist Clark Sackschewsky said management firms are slimming down to create more value. He is the U.S. natural resources industry leader, tax market leader at BDO USA LLP.

“What we’re starting to see is the elimination of management and operating teams altogether,” said Sackschewsky. “Why have 10 teams when one on the payroll creates greater value? That eliminates a whole level of overhead costs.”

The “rightsizing” of private equity teams and oil and gas companies are not the only signs of consolidation. PE firms are considering options to merge companies within their investment portfolios despite obstacles in gaining agreement among shareholders and other parties.

Panelist Glenn Reitman, attorney at DLA Piper LLP, said, “The most interesting thing I’m hearing about, but haven’t seen yet, is consolidation mergers among portfolio companies. There’s a lot of talk about ‘expect the unexpected,’ because it makes sense from a value perspective.”

ESG and carbon neutrality

The latter half of the panel discussion focused on environmental, social and governance (ESG) and fossil-fuel divestments. Some universities have moved their endowment funds out of oil and gas. Insurance companies, pension-fund managers and others have also divested.

PE firms are not divesting for the sake of ESG. However, shedding fossil-fuel investments is a near-term concern of the oil and gas financial community.

“North American E&P companies have a staggering level of debt maturing over the next five years, when they’ll likely continue to face tight access to the credit markets,” said Moody’s Investor Service in February.

Ethical investing, carbon neutrality

“Investors are constantly looking at renewables and other opportunities,” said Morrow. “If our industry had a better image, then PE managers might be more willing to invest.”

Oil and gas companies support ESG issues, for instance, by buying carbon credits to claim carbon neutrality. Morrow said that the Society of Petroleum Engineers has begun to create awareness of environmental sustainability programs.

Oil not going anywhere

Morrow compared the longevity and economics of oil and gas to other energy sources. “Oil and gas is not going anywhere, not by a long shot,” she said.

“To say that solar and wind are going to take over oil and gas doesn’t make sense. As for BTUs, solar and wind don’t come close,” said Morrow.

Oil and gas comprise about 55 percent of global energy sources today, states the latest outlook by Exxon Corp. By 2040, hydrocarbons will supply more than 50 percent of global energy — only a 5 percent drop relative to all energy sources.

Undeniably, investment will be required to arrest natural production declines and to meet demand.

Some prognosticators say that oil and gas will no longer be the dominant energy source by 2040, including BP. It claims that renewable energy will be the world’s main power source in 20 years.

Morrow disagrees. “Oil and gas is going to be king for a long time.”