E&P’s Shifting Public, Private Interplay

As the energy revolution moves into its later stages, the interaction between private capital and public companies has shifted in one sector.

Oil and gas exploration and production has benefited from public companies divesting assets, which are then sold to private companies backed by private equity, says Carl Tricoli, managing partner and co-president at energy and resources-focused PE firm Denham Capital. A public company may be in five basins, but are only investing in two, so they decide to divest the rest, he adds.

The large resource plays underway today—the Utica and Bakken shale formations among them—are not being tapped and funded exclusively by PE dollars, but private capital has played a key role in backing companies and doing the heavy lifting of de-risking.

Private equity went through a big land grab from 2010 through 2012, Tricoli says, but the amount of capital that it takes to develop the subsequent plays is staggering.

According to data provider PitchBook, from 2010 until Oct. 14, PE investment in U.S. exploration and production companies totaled $86.38B in 418 deals. PE investment hit its peak in 2012, with $21.78B of capital invested in 89 deals. This was a huge jump from 2010 when only $11.42B of capital was invested in 79 deals. Both 2011 and 2013 had about $20B of capital invested, although the latter year had five more deals in the sector. So far in 2014, there has been $12.58B invested in 63 deals.

The other way that PE is playing a large role in E&P is in the acquisitions and divestitures market, says Tricoli.

“Historically, the private E&P companies were typically sold to a public company,” he says. “Now public companies have been selling the companies they want to divest off to private, PE-backed companies.”

Tricoli cites a “textbook example” from  some of Denham’s portfolio companies. A public company put its assets up for sale, which are then bought by a portfolio company.“You see that multiplied where a public company is selling an asset, which is bought by a private company, and the money is being used to fund resource plays,” he says.

Despite the rising amount of PE money coming in, Tricoli says the market is not necessarily becoming more competitive.

“In some respects it’s less competitive now than it has been,” he says. “There’s a lot of money, but the amount of dollars needed in today’s oil and gas businesses is so staggeringly different from even five or 10 years ago. There are so many places to use it. Private equity is playing a more significant role in E&P than ever.”

Before the tech innovations that fueled the energy boom in the U.S., drilling a vertical well would, in general, cost about $2M, Tricoli says. Fast forward to now, and the cost is between $8M and $10M, with many more wells being drilled.