Independents and service companies aren’t the only industry members changing course due to the commodity price collapse. Private equity firms’ business plans are likewise upended. They must delay portfolio companies’ exits—normally accomplished after three to five years—and await valuations capable of generating their expected 20% to 30% rates of return. Plenty of money is on the sidelines, but precious few projects command capital at today’s prices.

Mike Stolze, vice president of SFC Energy Partners, a Denver-based private equity firm, described how the company has responded to the downturn at a recent Denver Petroleum Club event. SFC manages two private equity funds with about $1 billion in assets and is currently investing SFC Fund II’s $600 million raise. About two-thirds of Fund II is committed, but just 40% is invested.

The firm typically commits $50 million to $100 million per portfolio company, and its strategy for the past three to four years has been to pursue conventional oil assets with “compelling redevelopment opportunities,” Stolze said. These allow its portfolio companies to increase value through their expertise in waterflooding, enhanced oil recovery, downspacing and horizontal drilling.

“Conventional reservoirs have lower finding, operating and breakeven costs than the shales and tight oil. Given that it’s a commodity business, we want to find lower-cost resources that can produce attractive returns in a low-oil-price environment,” Stolze said.

In late 2014, the firm was preparing two companies for sale. Falling crude prices spurred it to take one off the market, and the prospective buyer of the other withdrew after OPEC failed to curtail production.

Throughout 2015, SFC reviewed its portfolio companies to ascertain which projects could command capital at $30 to $40 oil. The firm looked at ways its companies could reduce costs to live within cash flow. By year-end, “we had put most of our portfolio companies in hunker-down mode,” Stolze said. As an example, the sole operations by SFC portfolio companies in fourth-quarter 2015 were two fracking jobs in the Permian Basin.

On the flip side, SFC’s newer portfolio additions have significant unfunded capital commitments available for acquisitions.

One of these is the Canadian company Rampart Oil Inc. At the end of 2015, SFC merged Rampart with another of its Canadian companies to reduce G&A and other costs. Then, in early January, Rampart agreed to acquire a producing waterflood in Alberta from a major oil producer—the largest acquisition by an SFC portfolio company to date.

SFC’s analysis indicates the new asset can generate the necessary returns. The deal was made at an “attractive valuation” in light of comparable metrics in Canada, Stolze said. The fields, currently producing 2,000 bbl/d, are in the early days of development, in a prolific reservoir, and offer plenty of running room to add reserves and production at a low capital cost. Vertical drilling, waterflooding and fracking are all options to cost-effectively boost production.

Some Midcontinent plays, like the Stack, also remain standing at today’s prices. In mid-September, SFC committed about $130 million—it funded $90 million and its co-investors $40 million—to a Tulsa, Oklahoma-based management group. “It’s a high-powered team that has been given a big capital commitment to be opportunistic,” Stolze said. The members are alumni of Samson Resources and Nadel & Gussman.

SFC also recently signed a term sheet to commit $40 million to a start-up group from Houston with “subject-matter expertise” in Gulf Coast conventional oil fields, Stolze said. “These assets have lower per-unit drilling costs, lower geologic risk and a lower entry cost. With $40- to $50 million, you can do quite a bit in that environment.”

These deals suggest that from one angle, the glass may be half-full for those affected by the downturn. While it’s difficult to find projects that work at today’s crude prices, “intuitively, you want to build companies when commodity prices are down. That’s when valuations are lower for assets, and that’s when you want to put money to work,” Stolze said. Starting up in a downturn takes some of the downside risk out of a business plan.

Another motivator for entrepreneurial types: The incentives to stay at a public or private company during the boom times have waned, Stolze noted. “Individuals that may have considered going out on their own before but didn’t because they had a big salary, lucrative stock options or big bonuses to consider—those have gone away or have been greatly reduced over the past 18 months. The opportunity cost of going out on your own today is lower.”

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