Private equity sees US shale exit window

Private Equity

By: Stephen Cunningham – Rystad Energy – Private equity is finally seeing some upside from shale investments, after treading water for the past few years, as US crude prices rebound above $70/bl. Private exits totaling $17bn have been announced so far this year, according to US bank Morgan Stanley, led by DoublePoint Energy’s $6.4bn sale to US independent Pioneer Natural Resources, with more expected to follow. This is in contrast to last year when publicly listed mergers dominated deals in the sector.

Recent deals have seen Colorado-based Civitas Resources snap up privately held Crestone Peak Resources, giving Civitas an enterprise value of about $4.5bn. And US investment firm KKR is doubling down on the sector after its Independence Energy agreed to merge with Contango Oil & Gas in a recent all-stock deal worth $5.7bn. It is looking for more deals, including among privately held companies seeking liquidity.

The latest consolidation may allay concerns that private equity threatens to undermine a new focus on free cash flow and improved investor returns among its publicly traded rivals after years of reckless spending. One feature of the Pioneer deal was an immediate scaling back of DoublePoint’s production growth targets. Some private operators have ramped up their rig count, but that is more to do with boosting earnings in preparation for an exit, private equity firm Kimmeridge Energy’s managing director Ben Dell says.

The sector’s old model was to buy acreage on the cheap to test new completion techniques and, if the rock quality was good enough, to sell at a profit without caring too much about production. That has changed over the past few years when private equity-linked producers have had few options other than to focus on raising output. The private side now accounts for almost half of nationwide rig activity, but the overall outlook varies across operators. Some of the bigger companies do not need to raise more capital to expand further.

“We’re seeing an increased number of private producers, who went completely inactive during the downturn last year, getting a little bit more confident in the sustainability of the price recovery,” consultancy Rystad Energy’s head of shale research, Artem Abramov, says. But some smaller operators are drilling primarily to fulfill the terms of their leases, rather than because of the oil price recovery, and they remain eager to divest at current prices. “Without oil bumping up dramatically to $80 or $90/bl, they’ve been beaten up so much lately they’re happy just to get out” if the opportunity arises, University of Houston energy fellow Ed Hirs says.

Private enemy number one

The opinion is divided as to whether US shale output will recover to pre-pandemic record highs of over 13mn b/d. Rystad says production could return to these levels in 2-3 years with oil prices at $60/bl or higher, but others disagree. “The oil and gas industry is no longer a growth industry,” US bank Stephens managing director Jim Wicklund says, doubting whether output will get back to over 12mn b/d.

With leading listed US oil firms coming under greater pressure over their emissions from investors and climate activists, private equity could offer a refuge from such scrutiny. A recent report suggests private producers are among the worst culprits for methane emissions. But any reprieve may be short-lived as the whole sector will face growing pressure to address its carbon footprint in future. “For all operators to be competitive, they’re ultimately going to have to deliver a net-zero product,” Dell says. “And that does extend to the private community.”

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