Finding the next private equity pivot in M&A

Private equity has played a key role in upstream development and M&A markets, with roles varying over time. In the pre-2018 land rush days, PE-back companies assembled and sold acreage blocks with minimal production—Double Eagle Energy Permian, for example, sold to Parsley Energy in 2017 with just 3,600 boe/d of production in a $2.8 billion deal. And more recently PE-back companies have been part of the wave of exits over the last three years where privates were a key contributor to production growth and built assets that would be immediately accretive to both a public buyer’s inventory and financial metrics. Public E&Ps’ appetite to consolidate those positions and the positions of legacy family companies in the Permian, have been a major driver of M&A markets since 2021 with $123 billion of overall U.S. private E&P sales in the last three years.

The timing of this wave of interest from public buyers was fortuitous for PE firms as funding of new teams by institutional capital hit its peak in 2017, about five years before the latest wave of exits and lining up with the average expected investment time horizon. During the peak of private equity investment from 2014-2018, there were over 500 commitments made by PE firms to teams, with about one-third of commitments going to groups primarily focused on the Permian.

Following 2018, first time new private equity commitments have fallen precipitously with less than 100 since the start of 2020 and just 17 new commitments made in 2023. The decline is partially explained by a more challenging fundraising environment for E&P firms as institutional investors weighed ESG concerns and pulled back from allocations to hydrocarbon investments. However, it is also likely a reflection of a smaller available pool of attractive investment opportunities for private capital as key shale plays have matured and the industry has substantially consolidated.

The Permian in particular, which disproportionately provided wins to private equity, has become challenging to enter. Most of the few remaining private equity owned positions of scale in the basin are legacy holdings that have not yet been monetized. The newest iteration of Double Eagle, with over 40,000 boe/d gross operated production and more than 300 gross operated locations according to Enverus Intelligence® Research, stands out as one of the few newly built positions of scale along with FireBird Energy II, which has assembled more than 200 gross operated locations. Other PE-backed groups have built smaller positions using a variety of strategies including leasing deeper rights and finding isolated smaller DSUs.

Given the available opportunities, PE groups are likely to shift strategies, by targeting longer investment timelines and building companies that operate like private counterparts of public E&Ps. A couple of older investments already point towards this type of model.

Encino Acquisition Partners, initially funded in 2017, is among the companies pushing well past the usual five-year investment timeline. The company just announced it has received an additional $300 million commitment from Canada Pension Plan Investment Board to support its pivot to developing Utica oil wells. Quantum Energy Partners has also been reportedly raising a continuation fund to keep its Appalachian-focused portfolio company HG Energy, also of a 2017 vintage, private. These companies likely provide a blueprint for how much of private equities’ involvement in upstream will be going forward, targeting assets less on the radar of public operators and building positions of scale that can operate as standalone businesses for the long haul. A smaller list of larger companies looks to be the future on the private side of upstream investment, mirroring the trend of public E&Ps.