Oil & Gas investment value creation
How would a sponsor go about creating value in an O&G investment other than cycle timing. Better hedging? Divestment of high-cost basis wells?
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Operatorship (cost management, technical ability etc.) as well as scale are both massive. One management team may be able to select, drill and manage a wellsite significantly more efficiently vs. another operator. Additionally, O&G is largely an old boys club, so established management teams may be able to get favourable terms for M&A where as a new entrant may not want to transact / roll equity with a random PE backed company with no operatorship experience.
Interesting insight, thanks!
Don't put your money back into the ground
Don’t work in the space currently but am a little bit familiar as have worked on oil deals and a few coal things.
Think there are a whole bunch of things e.g. gas lifts that you can do to extend the life of a producing well and/or increase the recovery rates. Maybe the existing owner is small and doesn’t have the access to capital required to invest in enhanced recovery, and can’t access it because no one wants to lend to oil and gas now.
Ultimately you’re buying these assets on a DCF basis so even just buying and running it as it was before can make you money if the asset itself is mispriced, which I suspect a lot of them are for ESG reasons.
If you’re buying producing assets then depending on the age, location, etc there’s often an opportunity to come in and do what’s called a work over where you put $100k or so into a non-producing well and get it going again. Highly unlikely you can do that and create meaningful value though because it’s more one-off stuff but single project returns are very attractive.
The real value creation comes from the technical work/management team. If you have a rockstar technical team that has a track record of extracting value on assets where others can’t then you can trust them to get a little more creative on the development plan and drill new zones or in areas where others have underperformed.
Beyond that the value in a good team is in their ability to time an entry/exit. It’s a simple concept but so many don’t have it. The ones that do have made serious bank. Hedging is debatable, for producing assets it allows you to lock in a return but you also don’t get to take the commodity price ride. My personal view is that you should hedge to cover G&A, opex, min capex program but that’s it. You don’t hit double and triples if you’re hedged out when commodity price rips.
This is a good example of how to get blown up in O&G
OP is talking about PE context. Having a good team and timing are basically the only way to make a nice return.
Im not saying you go for broke and drill tight spacing in tertiary zones but there are a lot of talented teams that find real value in previously underdeveloped areas/zones. You have to be able to trust them but to the portco guy’s point, a lot of times one teams trash is another’s treasure.
In a PE-backed O&G company right now. The real answer is cost. That's it. The large publics (XOM, CVX, COP, etc.) have lots of layers of bureaucracy and processes in place that inflate the true cost of operations. Some have stayed lean despite being very large (FANG, Concho pre-COP acquisition) but really that's how you generate value. The rock is mostly understood in the defined basins (Permian, Eagle Ford, Bakken); you might be able to extract +/- 5% EURs based on your technical team's ability but you're not driving project economics with that mentality. But if you're able to bring down the cost per lateral foot by....15%? That flows straight down to the bottom line.
This is true but only if you can pry assets out of a large and/or mismanaged organization. Even then you don’t really have the buying power to meaningfully drive down D&C to the level of a public operator. Even a lesser quality one.
The bump on LOE can be meaningful though.
I can't opine on other basins, but within the Permian you're not going to be able to just straight up lease anything at this point of any meaningful scale. The only thing you can really do is find decent rock that isn't competing for capital within a larger company's portfolio (i.e. COP that has both New Mexico and Texas Delaware Basin assets, of which their capital spend is mostly geared towards the NM side), so you're able to accelerate value for them by purchasing. Since they've got such a low cost of capital relative to the private guys, you can buy it fairly discounted in my experience and then the convert from PUD to PDP value is mathematically value accretive. Add in the cost efficiencies and LOE and you've got a good asset. All is easier said than done, but in theory, this is how you would attempt to extract value.
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