by Andrea Heisinger
February 10, 2016

How Good Is Your Energy Deal? Depends on the Play

A recent study shows that certain oil and gas plays are benefiting from big cost reductions. This should cheer some well-positioned PE players.

Since the last price peak in mid-2014, oil prices have slid 70 percent to below $30 per barrel. Private equity firms that back companies involved in oil and gas exploration and production have had to adapt.

And yet, throughout the price collapse, energy-focused PE firms have continued to invest in E&P companies. A recent analysis by RBN Energy may have a partial answer as to why they would do this—with drilling activity declining, owners of drilling rigs are being forced to slash their day rates in order to attract the business that’s still happening in the sector. The takeaway: lower costs for those firms still drilling new wells. RBN has found that costs for finding and developing a barrel of oil equivalent in 2016 will be $11, which is a 42 percent reduction from the $19 cost in 2014.

RBN crunched the numbers and came up with profit margins at various shale plays in the U.S., taking into account near-current commodity prices and falling drilling and development costs. The big winners, if RBN’s number crunching is correct, will be oil plays in Anadarko (19 percent profit margin), Permian Delaware (18 percent), Eagle Ford (15 percent), Niobrara (16 percent), and Bakken (14 percent).

In the past several months, I’ve done interviews with both big and small energy-focused PE firms about backing E&P companies in challenging times. Here are how some of those plays are expected to perform.

Marcellus & Utica

In January, I talked to the CEO of LOLA Energy, which is looking at oil and gas E&P opportunities in the Marcellus and Utica shale plays with the help of $250M in funding from Denham Capital. According to RBN, the Marcellus and Utica dry gas plays are expected to yield between 9 and 11 percent profit margins if costs fall the way experts expect. The Utica wet gas plays could yield 10 or 11 percent profit margins, and the Marcellus wet gas plays 4 to 5 percent.


Aethon Energy Management’s founder and partner, Albert Huddleston, told me last summer that it was a “Christmastime environment” for the firm, which had just acquired assets from SM Energy with a co-investment from Redbird Capital as a bolt-on to an existing position in the Haynesville Formation. According to the RBN data, investments in the Haynesville play are looking at a modest yield of 2 percent.

Permian Basin

Back in September, I interviewed Andre Burba of Pine Brook long before oil prices plunged below $30. The firm had just put $300M behind Red Bluff Resources, and Burba was confident in backing an E&P company in a challenging environment. And his confidence may pay off—one of the two areas that Red Bluff will be focusing on, the Permian, is expected to have strong performance, with an 18 percent profit margin.

A recent study shows that certain oil and gas plays are benefiting from big cost reductions in production. This should cheer some PE players who have not shied away from the E&P sector.

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