Over the past few years private equity funds have been finding it difficult to attract investors to the oil and gas sector. The buzz
was all about Environmental, Social, and Governance (ESG) investments, with many convinced that this was the future of profitability.
Jump ahead two years, and those private equity funds that held firm in the oil and gas market are now enjoying substantial profits from their strategic exits. At the close of last month, EnCap Investments made headlines by selling its portfolio company XCL Resources to SM Energy and Northern Oil and Gas for around $2.5 billion. Additionally, EnCap sold another portfolio company’s assets in the Permian Basin to Matador Resources for nearly $2 billion in June.
EnCap’s timely investments and strategic exits are paying off, riding the wave of consolidation in the shale industry. Private equity firms that bet on the profitability of oil and gas are now seeing significant returns, though they need to act swiftly before this advantageous period concludes.
The Changing Dynamics of Investment
A recent Reuters report pointed out the difficulties Big Oil majors are encountering in finding buyers for their asset divestitures, which are essential for funding dividends and maintaining investor relations during unpredictable transitions. Complicating matters was the belief that private equity had shifted its focus away from oil and gas towards ESG investments.
However, this narrative was challenged when Quantum Capital Group announced its acquisition of a Rocky Mountain oil and gas producer for about $1.8 billion. The sellers were also private equity firms, with Bloomberg noting that buyout firms are increasingly keen to invest in the oil and gas sector amidst a surge in deals post-COVID.
A Boom in Mergers and Acquisitions
For instance, EnCap’s XCL Resources operates in Utah’s Uinta Basin, while Caerus, acquired by Quantum Capital, operates in Colorado. These transactions illustrate that the consolidation trend is expanding, with private equity firms playing a crucial role.
In the first quarter of this year, oil patch M&A activity hit a record $51 billion, following a record-setting 2023. Big Oil’s drive to grow larger, fueled by high oil and gas prices from 2022 into 2023, has been a key factor. The remainder of 2024 is expected to be equally active, with private equity firms continuing to be significant players, both as sellers and potential buyers.
Reassessing Private Equity’s Commitment
Despite earlier reports that private equity was losing interest in oil and gas, the sector is seeing renewed engagement. As Big Oil majors streamline their operations by selling off assets, including those in the Permian, private equity firms are likely to be prominent buyers. The initial enthusiasm for ESG investing has given way to a renewed focus on the substantial returns available in the oil and gas sector.
According to the Energy Institute’s latest Statistical Review of World Energy, global oil consumption topped 100 million barrels per day last year for the first time. This figure, which exceeded oil supply by about 4 million barrels daily, highlights the delicate balance between supply and demand. Both oil and natural gas continue to be in high demand.
The Future of Private Equity in Oil and Gas
As the largest producer of crude oil and natural gas, the United States remains a key global supplier and an attractive investment destination. With the business world quietly reevaluating emission-related plans under increasing regulatory pressure, private equity interest in oil and gas is poised to grow.
A few years ago, private equity firms stepped in when banks began withdrawing from the oil and gas industry. Today, those banks might regret their decision as private equity reaps substantial profits from investments that initially seemed risky but have proven to be exceptionally lucrative.
