Plentiful private equity capital is available for oil and gas companies to invest on US unconventional plays, various PE capital providers have confirmed.
Three Rivers Natural Resource Holdings III LLC, a new Austin, Tex., oil and gas company, in April announced an equity commitment of up to $500 million from funds managed by Riverstone Holdings LLC.
Three Rivers III is the third partnership between Riverstone and the management of Three Rivers, which focuses on oil and gas acquisitions in the Permian basin.
Riverstone, a private investment firm founded in 2000, has raised more than $29 billion of equity capital. Riverstone invests in exploration and production, midstream, and services companies.
Preqin of New York, a firm that tracks private equity funds of all types, said the pace of upstream funding in North America for 2015 already has beaten such funding for all of 2014 (see table).
Meanwhile, the pace of fundraising for other types of private equity slowed in early 2015, Preqin told UOGR.
Preqin statistics do not distinguish between conventional and unconventional investments.
Separately, panelists speaking on capital availability told IHS CERAWeek on Apr. 21 that most private equity capital available for upstream investments currently is being used for unconventional assets.
"We've been surprised by the amount of capital that have flowed into the sector," said Gary Reaves, First Reserve managing director.
Williams Stevens, global co-head of SESG Group, HSBC Bank, told IHS CERAWeek that he believes upstream capital providers are placing more value on oil and gas reserves now than in the past when they relied more on corporate financial performance statistics.
Stevens said he sees many differences in financing structures for unconventional vs. conventional projects, adding that most US oil and gas spending in the last 2 years has been for unconventional.
"For unconventional, you almost have the mindset of a drill fund," Stevens said. "You invest in a process. Of course, you've got to get to a point where production continues at a certain plateau."
Charlie Leykum, founding partner of CSL Capital Management, said initial costs are high for unconventional. A shale well can cost several million dollars. He noted unconventional wells also need more completion services than conventional wells. Additional services mean more costs.
"The unconventional has been where spending has gone," Leykum said. Reaves said the unconventional industry continues to need capital.
Nathan Strik, portfolio manager for Fidelity Research and Management Co., said, "Energy capital is not going to go away." He said oil and gas projects are attractive because, "Capital likes to go where there is collateral."
Some report liquidity trouble
If oil and gas prices remain low for a sustained period, a Standard & Poor's analyst believes some independents could face "a liquidity death spiral."
Thomas Watters, managing director of corporate ratings, recently told reporters attending the S&P Capital IQ Energy Symposium in Houston that, "We could see a wave of defaults by the end of this year."
Small, poorly capitalized producers finding themselves in financial hardship could avoid bankruptcy by being acquired by the major oil companies, Watters said.
"We think there's a lot of cash waiting on the sidelines right now," Watters said. "You can argue that the majors have been late to the shale play, that they're deep pocketed." The majors also could be waiting to acquire key assets from distressed companies at a discount rather than buying the entire company.
Leonardo Maugeri, associate at Harvard Kennedy School's Belfer Center and former executive of Eni, agrees the majors are watching for takeover candidates.
"There is no doubt that it's much, much less expensive to take over a company than develop a new oil project in order to replace reserves," Maugeri told the Wall Street Journal in late April. He sees oil companies with a market capitalization of $10-40 billion as being the most likely takeover candidates.
Liquidity watched
Fitch Ratings Senior Director Mark Sadeghian said, "Liquidity is going to be a defining metric for E&P firms this quarter."
He expects some companies will need to raise equity or find secured financing to sustain the oil-price downturn.
"In the meantime, our eyes will be on capex-not only for companies with reduced free cash flow but also for its impact on production and strategic positioning heading into an eventual price recovery," Sadeghian said in an Apr. 29 note.
Fitch expects oil prices will remain low, relative to June 2014 levels for 3 years. Early this year, Fitch's base West Texas Intermediate assumptions were reduced to $50/bbl in 2015, $60/bbl in 2016, and $75/bbl in 2017.
Most operators cut budgets and expenses as oil prices declined in order to maintain liquidity although not all companies were able to do this.
"Weak oil prices have significantly reduced the rating headroom for many speculative-grade oil and gas companies that went into the slump with stretched credit profiles," a recent Fitch note said. "Continued negative rating actions will be driven by company responses to the weak prices, and the risk that the recovery in the oil price will be slower than Fitch anticipates."
Fitch expects credit rating upgrades for oil and gas companies will prove to be very limited for 1 year.
Barclays Research analyst Thomas R. Driscoll of New York issued an Apr. 29 statement in which he pointed out a valuation gap between exploration and production company stock prices and the forward curve for oil futures.
"E&P share prices appear to be discounting $95/bbl WTI, well above the forward curve," Driscoll said. "There is no historical precedent for E&P shares to discount such a large premium to the forward curve for an extended period of time, and we believe the valuation gap between oil-strip prices and E&P share prices will converge over the next 12-18 months."