Shale oil slump burns private equity interest
Private equity (PE) investors are accelerating a shift away from the US shale oil sector amid diminishing returns caused by the Covid-19 pandemic.
Over the past decade, private equity firms have poured tens of billions of dollars into the US oil and gas industry, especially as the shale revolution gained full steam. Their funding helped spur the shale oil boom that followed the last market slump in 2015-16. But the lustre was already wearing off shale oil before this year's slump as returns diminished, with PE capital invested in oil and gas firms falling by 45pc between 2017 and 2019, from $118bn to just over $64bn, Pitchbook data show.
And PE is unlikely to underpin an investment revival this time. To get PE dollars, "the industry is going to have be consistently profitable for the first time", US bank Stephens' managing partner Jim Wicklund, says.
PE firm Warburg Pincus recently told investors it is pulling back from investments in the oil and gas sector. Earlier this year, PE giant Carlyle Group sold its nearly 8pc stake in Chesapeake Energy, just before the producer filed for bankruptcy protection with nearly $12bn of debt. In total, 90pc of the combined debt — or $46bn — from producers filing for bankruptcy this year belonged to PE-backed firms, US law firm Haynes and Boone says. The average debt held by bankrupt PE-backed producers was more than four times that of their non-PE-backed peers.
Some observers argue that PE's exit from oil and gas is only temporary, and that investors will return once the industry recovers. But others say the situation has permanently shifted. Institutional investors have been exiting the oil sector in favour of technology firms with higher growth potential, fewer regulatory burdens and lower costs. Covid-19-related oil price volatility and the growing environmental, social and governance (ESG) stigma of fossil fuel firms have scared off investors already tiring of shale's dismal record on shareholder returns.
Effectively, "the equity market is closed to E&P companies", law firm Sidley's energy partner Jim Ricesays. As a result, energy initial public offerings have largely disappeared, depriving PE firms of the exits they need to recoup investment and earn returns. This is one reason US independents will need to consolidate to survive, Pioneer Natural Resources chief executive Scott Sheffield told the Reuters Future of Oil and Gas conference on 1 December. Pioneer recently agreed to acquire fellow Permian producer Parsley Energy for $4.5bn. "There was a lot of capital that went in, but most of them had very poor returns," Sheffield says. "They have to have an exit mechanism. They were built to flip. Those days are gone."
Hard bargain
There are still some quality assets for PE firms to pick off for the right price. For example, Kimmeridge Energy recently paid $140mn for a 2pc share of revenue interests for Callon Petroleum's operated oil and natural gas leases, a transaction known as an overriding royalty interest. But producers that need to raise cash will find that PE investment terms have become a lot tighter. Patrick Gimlett, managing director of AllianceBernstein Private Credit Investors, says he will only lend to companies at loan-to-value ratios of 55-60pc, which means a borrower would have to offer a down payment of 40-45pc of the loan to secure it.
Given the pressing issue of climate change, companies will also find themselves under growing environmental scrutiny. "We require best of class in ESG," Kimmeridge Energy managing partner Henry Makansi says. "Otherwise, they can't get our capital." And PE has moved away from the traditional "equity line of credit" investment model in which it backs an outside team to find drilling opportunities. Instead, firms only want proven wells that already produce energy. Overall, "there is a permanent increase in the cost of capital", Rice says. "It feels pretty dire."
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Argentina's Medanito rises on USWC demand
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Second WTI cargo heads to Nigeria’s Dangote refinery
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Iraq, Kazakhstan keep Opec+ above target
Iraq, Kazakhstan keep Opec+ above target
Most are hitting their targets, but persistent overproducers and target-exempt members are making the group's task that much harder, writes Aydin Calik London, 8 March (Argus) — Most Opec+ members produced at or near their targets in February, but Iraq and Kazakhstan once again significantly exceeded their pledges. Production rose by 80,000 b/d to 34.62mn b/d last month, Argus estimates, leaving the alliance 300,000 b/d above target. Opec+ has been cutting output since November 2022 in a self-described bid to support and balance the oil market. A new round of "voluntary" reductions by several members came into force in January this year and these have now been extended by three months until the end of June. But the already herculean task of managing the markets is being made harder by those members that have proved either unable or unwilling to fully adhere to their targets. 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Opec+ production mn b/d Feb Jan* Target† ± target Opec 9 21.53 21.52 21.22 +0.31 Non-Opec 9 13.09 13.02 13.10 -0.01 Total Opec 18 34.62 34.54 34.32 +0.30 *revised †includes additional cuts where applicable Opec wellhead production mn b/d Feb Jan Target† ± target Saudi Arabia 8.97 8.96 8.98 -0.01 Iraq 4.23 4.22 4.00 +0.23 Kuwait 2.44 2.47 2.41 +0.03 UAE 2.93 2.92 2.91 +0.02 Algeria 0.91 0.91 0.91 0.00 Nigeria 1.54 1.53 1.50 +0.04 Congo (Brazzaville) 0.23 0.22 0.28 -0.05 Gabon 0.23 0.23 0.17 +0.06 Equatorial Guinea 0.05 0.06 0.07 -0.02 Opec 9 21.53 21.52 21.22 +0.31 Iran 3.27 3.23 na na Libya 1.16 1.03 na na Venezuela 0.88 0.84 na na Total Opec 12‡ 26.84 26.62 na na †includes additional cuts where applicable ‡Iran, Libya and Venezuela are exempt from production targets Non-Opec crude production mn b/d Feb Jan* Target† ± target Russia 9.41 9.33 9.45 -0.04 Oman 0.77 0.77 0.76 +0.01 Azerbaijan 0.49 0.47 0.55 -0.06 Kazakhstan 1.59 1.61 1.47 +0.12 Malaysia 0.34 0.35 0.40 -0.06 Bahrain 0.20 0.20 0.20 0.00 Brunei 0.08 0.08 0.08 -0.00 Sudan 0.06 0.06 0.06 -0.00 South Sudan 0.15 0.15 0.12 +0.03 Total non-Opec 13.09 13.02 13.10 -0.01 *revised †includes additional cuts where applicable Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.