Role of Private Equity and Private Operators in the Current Market

August 22 - Fort Worth

Welcome to another insightful edition of Behind the Drawworks, where today we dive into the complex landscape of Oil & Gas operations and their intersection with financial strategies. Our recent Crue Club Topic Series event brought together E&P operators and OFS companies for a transparent conversation about our industry's ongoing financial pressures and opportunities.

Key Takeaways:

1. Operational Costs and Margins Pressure: Rising operational costs are eating into margins, making profitability a challenging target.

2. Private Equity and Investment Hurdles: The industry faces a tough landscape with high expectations for quick returns from private equity.

3. Technological Advancements: Improvements in technology have reduced fracking costs significantly but have also complicated cost management.

4. Collaboration among Small Operators: Small operators need to band together to share costs and survive the financial pressures.

5. Labor and Equipment Expenses: Both labor and equipment costs are rising, further squeezing profit margins despite technological improvements.

6. Alternative Capital Sources: There are emerging opportunities in financing beyond traditional private equity models.

7. Strategic Flexibility: Emphasizing flexibility in operations and scheduling can lead to significant cost savings and efficiency gains.

Operational Costs and Margins Pressure

A central theme of the discussion was the significant rise in operational costs. Service companies now need to charge $500 per month for profitability, a sharp increase from $350 just three years ago. This has put immense pressure on margins, posing challenges to maintaining profitability. As costs mount due to factors like inflation, technological advancements, and necessary equipment upgrades, the industry struggles to balance the books while keeping up with market demands.

Private Equity and Investment Hurdles

Funding remains a contentious hurdle, particularly with private equity firms that demand high, often unrealistic returns within short timeframes. Our hosts were vocal about the frustration this places on companies trying to find a sustainable path to profitability. The typical 18-month return expectation has driven many to take more significant risks or look for alternative funding sources, complicating long-term planning and stability.

Technological Advancements

Advancements in technology have dramatically reduced the cost of fracking—down to $40,000 per stage from $300,000 in less than six years. While this is a positive shift, it has also led to more intricate cost management as maintaining this technology and training personnel adds to overall expenses. However, these advancements are critical for enhancing productivity and efficiency in operations, as reiterated by several hosts during the discussion.

Collaboration among Small Operators

The consensus was clear—collaboration is vital for small operators. By banding together, these companies can share the financial burdens and operational risks, making it easier to position themselves competitively against larger entities backed by substantial financial resources. A network of small operators working together can drive down costs, innovate, and thrive even in a landscape dominated by private equity and public companies.

Labor and Equipment Expenses

Service companies are already feeling the pinch with rising labor and equipment costs. Despite the increase in productivity, these costs have climbed significantly, leading to further consolidation in the industry. To combat this, some companies have begun investing in amenities like personal entertainment systems to retain workers, highlighting the need for effective workforce management strategies.

Alternative Capital Sources

Interestingly, the event shed light on emerging alternative capital sources beyond traditional private equity. Family offices, for example, are stepping up, albeit with a preference for quick returns to reinvest their funds rapidly. This shift can mitigate the pronounced expectation pressure from private equity, offering a more sustainable financial strategy for smaller entities.

Strategic Flexibility

Emphasis on flexibility in scheduling and business operations resonated throughout the conversation. Efficiency and utilization maximization are essential strategies to navigating the financial pressures. Adjusting to these while ensuring that idle resources are minimized can lead to significant cost savings, which is critical for maintaining profitability in a volatile market.

Conclusion

For all stakeholders in the oil and gas industry, the path to potential value in financials lies in strategic operational adjustments. From embracing technological advancements and fostering collaborative networks among small operators to exploring alternative financing and focusing on strategic flexibility, there is a roadmap for navigating the complex financial terrain.?

By drawing lessons from these discussions, your organization can better manage the rising operational costs and investor expectations, paving the way for sustainable growth and profitability. Let’s continue these conversations and find innovative solutions to the challenges we face.

Stay tuned for more insights and strategies in our next issue. Until then, keep pushing the boundaries of what’s possible.

Warm regards,

JP