The wave of consolidation in the U.S. oil and gas sector is a major boon for private equity funds.

The wave of consolidation in the U.S. oil and gas sector is a major boon for private equity funds.
The wave of consolidation in the U.S. oil and gas sector is a major boon for private equity funds.

A few years ago, private equity funds were struggling to convince investors that there was still money to be made in oil and gas. At that time, everyone wanted to invest in ESG.

Two years later, private equity funds exposed to the oil and gas industry are making billions of dollars from their divestments.

Late last month, EnCap Investments sold its portfolio company XCL Resources to SM Energy and Northern Oil and Gas. The total consideration was about $2.5 billion. Also in June, EnCap sold the assets of another portfolio company, this time in the Permian, to Matador Resources for about $2 billion.

EnCap rode the wave of consolidation in the shale patch and its bet that oil and gas investments could be profitable. The bet paid off. The private equity funds that made it are gearing up to take advantage of current industry trends. They better hurry before it’s over.

According to a recent Reuters article, oil majors were facing a tough time finding buyers for their asset disposal plans, used to fund dividends and stay on the good side of investors during a volatile transition. What made matters worse, Reuters editors said, was the fact that private equity was no longer interested in oil and gas. They said private equity was pivoting entirely to ESG.

Meanwhile, news broke that Quantum Capital Group was buying a Rocky Mountain oil and gas producer, for which the private equity firm agreed to pay about $1.8 billion. The sellers were also private equity players, while Bloomberg’s commentary on the deal was that “buyout firms are increasingly eager to invest in the oil and gas sector, which is experiencing a deal boom.”

The boom, the publication said, followed the end of Covid-related lockdowns and the rebound in energy demand. That rebound, as it became clear, could not be met by alternative energy sources, which ensured strong demand for oil and gas, attracting the attention of energy-focused investment firms, and not just in the Permian.

The most prolific shale play has been at the center of M&A activity for years. Most of the big deals in the oil and gas space are in the Permian. Yet EnCap’s XCL Resources operates in Utah’s Uinta Basin, and Caerus, the company Quantum Capital bought from a trio of private equity firms, operates in Colorado. In other words, the consolidation wave is spreading, and private equity is very much part of it.

In the first quarter of the year, oil sector M&A activity hit a record $51 billion after a record 2023 as oil giants looked to get even bigger and had the money to do so after oil and gas prices rose in 2022, extending into 2023.

It looks like the rest of 2024 will be busy with M&A activity as well, and it looks like private equity will be among the biggest players after years of backing independent drillers turned acquisition targets. But they could also become buyers again.

In the same Reuters article that claimed private equity firms were no longer interested in oil and gas, the authors mentioned that major oil companies were looking to offload assets, including in the Permian, to streamline their most lucrative operations. They would need buyers for those assets, and who better to do so than private equity firms after the call that ESG investing was not the sure winner it was made out to be.

In the latest edition of its annual Statistical Review of World Energy, the Energy Institute reported that last year, global oil consumption exceeded 100 million barrels per day for the first time in history. The figure exceeded oil consumption by some 4 million barrels per day, suggesting that the balance between oil supply and demand remains precarious despite multiple reports of a surplus. In other words, oil remains in high demand, as does natural gas.

The United States is the world’s largest producer of both crude oil and natural gas. That makes it a major supplier to the global market, and a profitable opportunity for investors, including private equity investors. As the corporate world begins to quietly shelve its emissions-related projects in the face of increased regulatory pressure, private equity interest in oil and gas may even increase.

Several years ago, private equity stepped in to fill the void left by banks that were beginning to suspend business relationships with the oil and gas industry. Those banks are now left kicking themselves as private equity makes multi-billion dollar investments.

By Irina Slav for

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