Daily Management Review

Financiers Pour Billions Into U.S. Shale Undaunted By Oil Bust


04/17/2017




Big new bets on the resurgence of the U.S. shale industry are being put by investors who took a hit last year when dozens of U.S. shale producers filed for bankruptcy.
 
According to financial data provider Preqin, noting nearly three times the total in the same period last year, private equity funds raised $19.8 billion for energy ventures in the first quarter.
 
Even as the recovery in oil prices CLc1 from an 8-year low has stalled at just over $50 per barrel amid a stubborn global supply glut, there has been a quickened pace of investments from private equity, along with hedge funds and investment banks.
 
Since producers have achieved startling cost reductions - slashing up to half the cost of pumping a barrel in the past two years, the shale sector has become increasingly attractive to investors and not because of rising oil prices. The glut will dissipate as demand for oil steadily rises, investors also believe.
 
As technology continues to cut costs, increasing returns from shale fields can be squeezed, feel the financiers. So shale-oil veterans and assembling companies that can quickly start pumping are being backed by them.
 
"Shale funders look at the economics today and see a lot of projects that work in the $40 to $55 range" per barrel of oil, said Howard Newman, head of private equity fund Pine Brook Road Partners, which last month committed to invest $300 million in startup Admiral Permian Resources LLC to drill in West Texas.
 
The rush of new private equity money indicates broader enthusiasm in shale plays even though data on investments by hedge funds and other nonpublic investment firms is scant.
 
"Demand for oil has been more robust than anyone imagined three years ago," said Mark Papa, chief executive of Centennial Resource Development Inc.
 
Backed by private equity fund Riverstone, Centennial is a Permian oil producer. EOG Resources Inc was made into one of the most profitable U.S. shale producers before he retired in 2013 by Papa, a well-known shale industry entrepreneur.
 
Enough for him to come out of retirement to deliver one of its bigger recent successes was the chance to further develop the Permian, he said. Since Centennial's initial public offering last fall, the value of Riverstone's original $500 million investment has grown nearly four times
 
Putting experienced managers atop a startup charged with acquiring operations or assets, Riverstone this year copied the Centennial model. To run the newly created Silver Run Acquisition Corp II, Jim Hackett - the former head of shale producer Anadarko Petroleum Corp was hired by the equity firm.
 
In the new company, which has a valuation of about $1 billion after going public last month, stakes have bene taken by hedge funds Highfields Capital Management LP and Adage Capital Management.
 
$524 million was invested last fall in Luxe Energy LLC, a shale producer formed in 2015 by former Statoil executives, by private equity fund NGP Natural Resources XI LP.
 
A bet that Luxe could repeat its success of early 2016 was what NGP effectively invested for.
 
(Source:www.reuters.com) 






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