Latest State of Oil & Gas Private Equity

Question

Curious to hear how the sector has been holding up? Have heard about numerous funds that weren't dead 12 months ago / still doing deals in late 2018 - early 2019 that are now screwed / will not be fundraising again. This includes a couple of the megafund teams focused on energy. Seems like the flavor of the day for those who are still active is to re-brand as an infrastructure-focused vehicle that can still have a mandate to look at midstream/downstream.

LeonTree · Accepted Answer

The space is fundamentally impaired.

No feasible liquidation events existed for shale upstream investments or oilfield services pre-COVID, and the paper-heavy mergers all got put on hold post COVID.

No lending existed for deals pre COVID, with lenders sometimes hiding behind ESG as the reason, but really the risk-adjusted return profile makes absolutely no sense.

Since 2010 a literal mountain of cash has been lit on fire. One of the great bull runs in history missed O&G... lots of production growth, negative free cash flow.

QuiltEmerson · Answer

I am usually an advocate for the O&G sector and despite being optimistic about the outlook of the industry as a whole, I think that the O&G PE world is as good as dead. To expand on what LeonTree mentioned, the banking community has universally turned its back to the industry and leverage multiples are sometimes so limited that you might as well buy assets all cash. Either that, or the interest rates are so high that it is almost impossible to make a profit.

LeonTree · Answer

Adding to my comment. The combination of the inability to liquidate existing investments and the decline of O&G as a % of the market indices is a (perhaps insurmountable) hurdle.

If you are an LP, you might have dedicated 12% of your portfolio to energy a few years ago, because that was energy's share of the S&P. Now, (I haven't looked at this post-COVID) its 5%. Combine that with the fact that no one has returned capital, LPs are currently overexposed to an underperforming sector.

basketballbanker2 · Answer

For someone currently at an energy fund with prior generalist PE experience, given the challenges (both near and longer term) of the oil and gas space, would you suggest they try to pivot back to joining a generalist PE firm and working in a non-energy sector(s)?

Or do you think a more bullish case could be made that as long as one is at one of the few remaining energy funds that may still have a chance to fundraise (for example, due to relative outperformance compared to other energy funds, larger fund size, etc.) that it could be worth sticking around given there will be less PE capital ded

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Latest State of Oil & Gas Private Equity

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