Financiers heap billions into US shale, fearless of oil bust

Cost reduction

The shale sector has become seriously attractive to investors. Not because of rising oil prices, but rather because producers have achieved startling cost reductions. Slashing up to half the cost of pumping a barrel. (In past 2 years). Investors also believe that oil sector is a good investment. They claim the glut will scatter as demand for oil constantly rises.

This fact gives financiers confidence that they can clench increasing returns from shale fields. Without any price gains, just as technology continues to cut costs.

Following, financiers who took a hit last year when dozens of shale producers filed for bankruptcy, are now making some big new bets on industry’s resurgence.

Private equity funds raised $19.8 billion for energy ventures in the first quartier. It is nearly three times the total in the same period last year. (Preqin)

Therefore the accelerating tempo of investments from private equity comes even as the recovery in oil prices. Much as with hedge funds and investment banks. Also CLc1 from an 8-year low has stalled at just over $50 per barrel amid a stubborn global supply glut.

Facts

Most noteworthy, data on investments by hedge funds and other nonpublic investment firms is deficient. Yet the rush of new private equity money shows broader enthusiasm in shale plays.

“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.” (Howard Newman, head of private equity fund Pine Brook Road Partners.) He himself last month committed to invest $300 million in startup Admiral Permian Resources LLC to drill in West Texas. (Reuters)

“Demand for oil has been more robust than anyone imagined three years ago.” (According to Mark Papa, chief executive of Centennial Resource Development). Papa referred to the beginning of an international oil price crash in 2014, and reminded it took many firms to the edge of bankruptcy.

Private Capital

Centennial is a Permian oil producer backed by private equity fund Riverstone. Mark Papa built EOG Resources Inc (EOG.N) into one of the most profitable U.S. shale producers. This year Riverstone copied the Centennial model, putting experienced managers atop a startup charged with acquiring operations or assets. The equity fund hired Jim Hackett to run the newly created Silver Run Acquisition Corp II (SRUNU.O). (Reuters)

Private equity fund NGP Natural Resources XI LP invested $524 million last fall in Luxe Energy LLC, a shale producer formed in 2015 by former Statoil (STL.OL) executives.

Another NGP’s investment was effectively a bet that Luxe could repeat its success of early 2016.

Then, NGP contributed about $250 million to Luxe, which used the money to acquire land in the Permian – and sold it seven months later for a double-digit profit.

In conclusion, this year’s drilling rush could be tested if global supplies grow too fast or if demand cools. Finally, the U.S. drilling rig count is rising at its fastest pace in six years and U.S. crude stockpile are close to 533 million barrels – near an all-time high and enough to supply the United States for 25 days.

“There is a ton of private capital to invest in the U.S. oil industry,” said Gerrit Nicholas, co-founder of private equity fund Orion Energy Partners.