October 19, 2017
Energy private equity had a hot hand in the 2000s. Though battered by the collapse in oil prices from November 2014 on, GPs have lately been touting the opportunity to buy assets cheap.
Our view is that the time to be bold was in 2016, and that prices are now full in the basins that are economically viable. We believe investors must be wary of playing a game where the deck is stacked against them.
Productive new technologies that unleashed new supply, high and mostly stable prices and easy access to credit characterized the energy market from 2008 to 2014. As a result, many new plays were defined; even marginal producers were economically viable. The widespread belief that these trends would continue compelled investors and creditors to pour capital into the sector far longer than they should have. The ensuing collapse was among the worst in recent memory. According to SPI™, our proprietary analytics platform, two-fifths of deals completed between 2009 and 2014 resulted in losses, wiping out more than $11 billion in invested capital.
Considering the value destruction over the past few years and the volatility that has so far defined the current cycle, investors are right to be reluctant: commodity prices, though rangebound, aren’t likely to regain their pre-2014 levels anytime soon; more than 200 bankrupt and distressed companies remain to be restructured; and credit is not as available, especially for smaller energy plays. Not all is lost, however.
The drilling, imaging and extraction technologies that were novelties five years ago have since been refined, driving down the break-even cost and allowing upstream companies to complete new wells faster. Moreover, these companies learned powerful lessons—their operations are leaner, and their capital structures are more conservative. For exploration and production (E&P) companies, discipline is the new rule. Anyone considering investing in energy anytime soon would be wise to be equally selective.
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