Private Equity For Shale Operators Drying Up -- Operators Dying On The Vine -- April 15, 2021

Updates

A reader responds:

A reader responded to the original post below. The following was edited slightly for formatting. If there are typographical and/or content errors, they are mine, not the readers, which occurred during my editing:

I had finished poring over the just-released Pennsylvania production numbers for February (most recent) before turning to your blog.

To "cut to the chase," several smaller "No-Name" companies - all privately owned - continue to post exceptionally strong numbers  from their smallish land holdings. [Connect this line to the concluding statement by the reader.]

My "in-a-nutshell" appraisal ...

Yes, many moneyed people/institutions are about at the end of their rope looking at these monthly figures while simultaneously seeing no financial returns coming their way. 

Yes, it would not surprise me that many private companies have been drilling/producing at a fast pace these past 2 years in order to show the Big Boys just how good their potential is.

However ... for those of us looking at the Bigger Picture, this might be what to expect in the coming years:

• higher pricing for raw hydrocarbons. ~$70 WTI and ~$3/$3.25 Henry Hub (HH) might be a reasonable assumption.
• this assumption is completely meaningless in the Real World as both you and I know things change with blinding speed.
• (the mere fact that ongoing attacks on Saudi infrastructure and a not-so-low-grade war taking place in the Middle have clearly shown no impact on global pricing is SO far removed from our historical experience as to make future prognostications groundless).
• abundant hydrocarbon resources available for decades to come with remaining US producers doing very well.
• fringier areas in the current basins will be developed by tenacious, risk taking Little Guys as the hardware, technology, and proven processes will be employed to 'wring out' every viable barrel, every cubic foot of hydrocarbons
• if/when prices spike upwards (even temporarily) - say, in the ~$90/$100 bbld range - new plays will be exploited.
• these include - but are not limited to - the Powder River Basin, the Tuscaloosa Marine Shale, the Uinta, the Rogersville, and more
• artificial lift and re-frac'ing technologies will continue to improve so as to upend the standard, current production profiles of many of today's  wells
• no one talks about EOR anymore, but there are over a half dozen projects taking place right now with publicised results expected in the next year or two.
• a much higher recovery factor is practically guaranteed, but no operator wants to tout that even MORE oil will be coming to market.

I could go on, but I will stop right there with one recent comparison ... the frenzied boom related to the Dot Bomb phenomenon 20 years ago.

 

Bill Gates said, (2004/5 timeframe, IIRC), that, yes, an over-exuberant atmosphere drew in hundreds of billions of dollars that did not offer a positive financial return.

 

However, Gates continued, a new, paradigm-shattering framework was put into place whereby this new fangled Internet thingy would exert a profound influence across the globe.

This is what Harold, Mark Papa, Aubrey McClendon, et al have bequeathed to the world.

Wow, that's a great note. 

Original Post

Link here to Financial Times, archived. The article begins:

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 (ESG) 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.”

Dying on the vine:

This is very interesting. A reader weighed in earlier with the same factoid that The Financial Times cited: US oil production has stagnated at 11 million bopd. 

The Financial Times article seems to suggest that it's a lack of (private equity) capital is preventing a lot of these smaller E&P companies from re-activating rigs and starting to drill again. 

Playing devil's advocate: maybe that's a good thing. 

Some would argue that the last thing we need right now is more production from companies burning through cash provided by outside sources (private equity). Some would argue that the free market system is working just fine. There are any number of articles suggesting that US shale could kill the resurgence in the price of oil. Maybe we need to have a bunch of drillers stop drilling (and, oh by the way, many of them already have).

A lot of the article is focused on the Pioneer Energy acquisition of DoublePoint Energy. Interestingly, the earlier acquisition (of Parsley) by Pioneer Energy is seldom mentioned. 

In addition, the article seems to be focused on activity in the Permian, although Bruin was mentioned. From the article:

The list of juicy private operators includes CrownQuest, Endeavour Resources, Mewbourne Oil and a few other smaller operators, which each own large Permian positions that have been poured over by public suitors. 

But the tail of weak assets across the shale patch is long — and was exposed by last year’s price crash. Private money is behind as many as 500 producers in the US, accounting for about a third of total American oil output in recent years. 

The bulk are now lossmaking and will never repay the cash ploughed into them, said Waterous. “We think about 80 per cent of them are illiquid,” he said. “There is no bid. So 400 of the 500 are unsaleable.” 

Recent transactions included sales by Bruin E&P, a PE-backed company that went bankrupt in July, and Grenadier Energy Partners II, backed by EnCap and Kayne Anderson, two big private oil industry investors.  

The most interesting company to follow will be Pioneer. From my perspective, they really, really overpaid for DoublePoint Energy.

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