The Good—and Pretty Bad—News for Oil & Gas Investing

The number of oil and gas deals in North America has remained steady, while fund closes have cratered.

In April, it was announced that Kayne Anderson Energy Funds had committed $250M to independent oil and gas company Phoenix Natural Resources LLC. A couple of years ago, a $250M deal wouldn’t merit a mention, but now it stands out in market where aggregate capital flows are dwindling and fundraising has slowed to a crawl.

Those tracking merger and acquisition activity in Texas (the epicenter of a lot of those oil and gas deals) are reporting near silence. But still, there’s optimism. An attorney who specializes in dealmaking among oil companies told the Dallas Morning News that many upstream companies realize they need to shed assets to strengthen their balance sheets. “The private equity firms still have the cash and we will start seeing some big checks being written soon,” he adds.

Let’s hope so. According to data from Preqin, PE-backed oil and gas deals in North America never came close to ceasing in the four quarters of 2015 and in Q1 of 2016, but aggregate values have plummeted. For example, 14 deals were completed in Q3, with aggregate value of $16.5B. In Q1 of 2016 Preqin recorded 12 deals, but the aggregate value had plummeted to $2.8B.

And if current fundraising trends hold, it foreshadows a far less active market in the years ahead. In Q1 2015, four funds closed, with aggregate capital of $10.4B raised. By Q4 there were 11 funds closed, but the aggregate capital raised was only $4.7B. By Q1 of 2016 there were two funds closed, with a paltry $300M of aggregate capital raised.

Looking outside of the hard numbers, there is that optimism that both oil prices and the M&A market for E&P companies have bottomed out and that PE firms will start to loosen their grip on their extraordinary store of dry powder. But then again, even back in late 2014, oil and gas M&A was expected to only have a “natural pause” as the market corrected itself.