Q&A: Kimmeridge says shale not ready to ramp up

Private equity firm Kimmeridge Energy Management has taken on an activist role in the US oil and gas space in recent years, pushing companies to improve their focus on investor returns. Mark Viviano, a managing partner at Kimmeridge spoke to Argus on the sidelines of the CERAWeek by S&amp;P Global conference in Houston last week about how investors want shale producers to respond to the current supply crisis and how the US E&amp;P space is changing.

Can shale respond to the supply crisis?

It is unrealistic to think you are going to have a coordinated response from the US shale industry without government intervention, for obvious reasons. There are rules that prohibit these companies from having coordinated supply responses. These are companies that are answerable to their owners, particularly the shareholders. In my conversations with oil executives over the last couple of days, that messaging from their investors has not changed.

What will it take for firms to boost production?

The US is growing this year, we are seeing companies increase capital budgets versus 2021. The question is, would they re-accelerate that in response to the commodity price volatility? Most companies are going to be reluctant to do that, as investors are not asking them to. There are also a number of operational challenges when you think about service cost inflation, availability of labor, materials.

Any supply response from US shale today is probably 9 to 12 months away. And that's a very uncertain environment to be growing production into. I do not think we are at a point where this industry is ready to ramp up.

Can private companies keep raising output?

There is a question about what the remaining inventory depth is for some of these companies that have been growing at a faster rate than their public peers. They are running into the same operational and logistical challenges that the rest of the industry is.

What is your view of the Oasis Petroleum and Whiting Petroleum merger (Kimmeridge owns a 4.9pc stake in Oasis)?

We were highly supportive of the deal. For these companies to garner investor interest, they need to scale up. And the most logical way to do that is inter basin consolidation.

Will we see more deals like this?

It is typically how you get the most investor support because the synergies coming out of the deal accrue to both sets of shareholders. And if anything, the inflationary environment we re entering into in the US oilfield is going to promote further consolidation.

How does the current market volatility affect the outlook for deals?

The biggest challenge typically for consolidation is the volatility in the commodity price. And so I think we Are going to need to see some stability. But I'd expect as we come out of this period of volatility, people are going to recognize that they need to scale up operationally, particularly in an inflationary environment. So I'm optimistic that we will see further consolidation.

Will M&amp;A be centered on the Permian or other basins?

It's going to be both in the Permian, where companies look for the remaining growth opportunities in US shale, but also in the mature basins where costs have to be brought out of the system.

What is private equity's role in shale now?

It's getting more aligned with what public investors want to see — which is return of capital. That is being recognized both in public markets and increasingly in private markets. The old model — acquiring early-stage resources or acreage, flipping it to a larger player — that model is probably no longer going to be viable.

What will it take to win back Wall Street's favor?

What a lot of investors are looking at is how does this industry respond and do they maintain discipline into a volatile oil price environment. More generalists are paying attention today given what is going on in the world. But ultimately, there is still a lot of skepticism that anything has structurally changed.

What is new at Kimmeridge?

At the end of last year, we launched our second public activism fund. We have been actively building positions — one of which we filed two weeks ago was Enerplus, a small Canadian domiciled company primarily focused on the Bakken.

By Stephen Cunningham

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