Renewed investor interest in oil and gas brings plenty of dry powder—but assets for sale remain elusive.

Private equity shops are raising billions of dollars earmarked for oil and gas spending; lenders are newly flexible to lenient terms of agreement; and natural gas prices are on an upward trajectory.

But the deals aren’t flowing as expected. The post-consolidation sector-wide divestiture trend has yet to emerge.

Inside the last few years, some $200 billion worth of consolidation has reset the shale landscape, said Alan Smith, executive chairman at Haynesville-focused Rockcliff Energy III and an operating partner at Quantum Capital Partners. 

“I think all of us thought that there's going to be pretty significant fallout of some assets as a result of all that consolidation,” Smith said during a panel on March 20 at Hart Energy’s DUG Gas Conference & Expo in Shreveport, Louisiana.

Also slowing the expected divestiture dynamic is the importance of inventory.

“Some of the Permian guys, for example, they're pretty stingy with letting go of those assets and those opportunities,” Smith said.

That’s not to say that no assets are changing hands. But it’s a piecemeal process—not the chunky blocks of acreage needed to build a corporate foundation.

“There’s just not a lot of those available. So we're having to be a little bit more creative and realize that there are a lot of folks holding literally hundreds of thousands of acres out there,” he said.

“How do we help them bring that forward? At [Rockcliff], we have paid a lot of tuition, spending $3.5 billion and drawing over 300 Haynesville wells that we can really bring a lot of experience to the table.”

Priced for perfection

Smith referenced advice from the book Zero to One, authored by billionaire co-founder of Paypal, Peter Thiel.

“First of all, don't get in a commodity business. Well, I screwed that up 30, 40 years ago,” he joked from the stage. “But he also said [that] because you're going to be competing for obvious prizes that are priced for perfection,” he said. “You either go home or you better figure out how to differentiate yourself.”

Natural gas pricing is “the best it’s felt in a long, long time,” said Matt Chase, a senior vice president of BOK Financial.

It’s a big opportunity to capitalize on. The demand is there and underlined by growing LNG export capacity, he said.

Quantum and EnCap have raised new multi-billion dollar funds during the last six months, indicating there is new dry powder available as well as experienced teams that are in the market, he said.

‘We’re hopeful to see assets that were locked up for a long time able to shake loose now with the support of the commodity price,” Chase said.

“I think the call on gas is going to be tremendous here over the next five to 10 years.”

Oaktree Capital has also been active in backing shale players for more than five years, investing across the capital stack, said Ajay Jegadeesan, a senior advisor at the Los Angeles-based private equity firm.

“We have the flexibility to invest in both debt and equity and anything in between,” he said. “We do see a lot of opportunity in this space … with the buzz about natural gas that brings to us in 2025 and beyond.”

Lenders are considering non-op opportunities, which feature a different cost of capital than reserve-based lending (RBL) agreements, he said. In addition, secondary markets are opening via continuation vehicles, a relatively new structure in fossil fuels.

Transactional relationships

Dealmaking now has evolved with the industry landscape, Smith said.

“You’re certainly thinking about portfolio construction—how much oil, how much gas, how much Permian, how much Appalachia—but the reality is, you're really looking for great entrepreneurs, folks that have paid the tuition and learned the space, have some competitive advantage, and they have the instincts, the capital allocation skills that they've learned over time.”

Smith said there are teams that have proven themselves and successfully managed capital budgets and met other thresholds.

“But there’s not that many that treat the capital like it's their own money,” Smith said. “When we do make an investment in a team, we really like to see them come alongside with a chunk of their net worth—certainly not all of it, but a decent chunk—so that they really have that skin in the game alongside us.”

BOK uses a PDP-focused source of capital, Chase said.

“We’re the lowest-cost source of capital and we need that PDP as collateral and cash flow for repayment,” he said. “The management team, the relationship aspect of it is very important, both for the team and the equity that's behind them.”

During the 2010s—the high growth years—lending carried arrangements were more rigid transactions “between the borrower and the lender because the deals dated for two or three years, and then they sold.” Chase said. “That's changed of course now and so there's much more of a partnership aspect to it.

“I think both the borrower and lender recognize that, so everybody's holding assets longer and the company is around longer, so there's the relationship aspect of it that is very important.”

Divestment delayed

Post-consolidation deals are happening, but not at the pace and size needed for portfolio building. The opportunity for deal-making is manifesting at a slower rate than anticipated, which means lenders must be flexible and creative to put capital to work, Jegadeesan said.

“We’re looking to partner with the right teams, the right sponsors to participate in these GP-led continuation vehicles,” he said. “I think the name of the game is adapt and find creative ways to deploy capital.”

Being flexible means lenders must look at different angles on the capital stack “and see where we can be good partners for people who need capital.”

The RBL space has contracted dramatically in recent years. Before the pandemic shook most economies, some 60 banks played in the RBL space. But amid the ravages of COVID-19 and the rise of ESG, the RBL space was gutted. Within 24 months, the number of RBL providers plummeted to less than a dozen, Chase said.

“Unfortunately for operators in this business, you not only have to deal with the volatility of the commodity, but, at least for the last five years you've had to deal with volatility of your banking partners,” Chase said.

The dynamic “made it very, very challenging to put deals together and syndicate transactions, but it's come back now” with some 30 banks active as RBLs.

“It allows you to syndicate a [$300 million] to $500 million credit facility a lot easier, but obviously it also creates more competition,” he said.

The competition among banks creates friendlier terms for borrowers. Pricing is down; hedging requirements and advance rates are more flexible.

“The challenge aspect of things is, it really does continue to revolve around the consolidation, and we’ve not quite seen” divestitures of non-core assets post-consolidation.

“Yet there's more players, more banks coming back in so that's where the challenge lies—in deal flow,” Chase said.

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