Post Oak Energy Capital is making moves in the Permian Basin, backing a new team focused on the Delaware Basin, Ichthys Energy Partners. Post Oak also recently closed an equity commitment with a new company in the Haynesville Shale.

However, as private equity begins the process of recycling inventory likely to be cast off from large M&A transactions in the past couple of years, executives at Hart Energy’s Energy Capital Conference (ECC) said that raising new funds for oil and gas development has become increasingly difficult.

Post Oak’s current fund is backing Ichthys, whose leadership was spun out of Permian Resources, said Frost Cochran, managing director at Post Oak. Dallas-based E&P Ichthys is led by co-founders Michael Poynter, CEO, and Will Weidig, CFO.

Cochran told Hart Energy the team is a group of “young guys who are just getting started with their first company, but they're focusing in the area that they know best, which is the Permian and specifically more, the northern Delaware.”

Post Oak also recently closed an equity commitment with Quantent Energy Partners LLC, which completed an initial acquisition of natural gas assets in the Haynesville Shale in early September.

“In the case of Quantent … they captured an asset in the Hayesville … offsetting an existing asset we had in the Hayesville,” he said. The management team “was the execution team with that prior asset we worked with. So it's really a second iteration with that team on a similar asset.”

However, Cochran said Post Oak remains largely focused on the Permian Basin, he said Oct. 4 at ECC in Dallas.

Post Oak has also had a banner year in minerals, deploying about $475 million, “which is way about our average annual run rate, but it’s in and around the basins we operate … predominantly Permian.”

Post Oak typically makes equity commitments between $75 million and $150 million. Cochran said the Permian Basin represents 50% of the firm’s exposure, with the Eagle Ford, and Haynesville and Bakken taking smaller slices of the PE pie. To a lesser extent, the firm also invests in the Appalachian Basin and a couple of other bases where the breakevens are low but very much focused on conventional oil and gas strategies.

The Ichthys team is slightly unusual for Post Oak in that the company has yet to make an acquisition.

They’re “just getting started with their first company, but they're focusing in the area that they know best, which is the Permian and specifically more the northern Delaware. And the team is fresh, so it's a fresh line of equity for them. They don't yet have assets. A lot of our startup teams actually do have a captive asset when they start, but it's an area that has a lot of current activity.”

Cochran said that after consolidation in the space at larger scale, there are still opportunities for smaller startup teams, even in the Midland and the Delaware basins.

Post Oak said continued industry consolidation is generating attractive opportunities for motivated entrepreneurs. And Cochran noted that some of the companies being sold in the wave of consolidation are backed by Post Oak and other firms such as Pearl Energy Investments.

Post Oak and Pearl are participating as “large shareholders and a consolidator in the form of Permian Resources,” said Cochran, who serves on Permian Resources’ board of directors. “But at the same time, we've got to start up new teams as well because we have to recycle that capital and show that compound opportunity for our partner base.”

Cochran said private equity has to constantly source new young teams “who have the skill sets and capabilities … with some support from us from the capital side. And whatever we can do to try to match assets with teams, we do as well,” he said. “But in the same basin we’re selling things, we have to be starting new companies. It’s just the walking and chewing gum at the same.”

Billy Quinn, managing partner at Pearl Energy, agreed. With the consolidation that has happened, “this is the same song, different verse.”

“We’ve seen this in our business before and for us what we have that fits into selling into that, we’ve looked to exit if it’s made sense, but on the backside of that, all this consolidation, begets more A&D because all the consolidation,” he said. “Exxon buys Pioneer, and the next thing you know they've got billions of dollars of assets coming out the back door that were not meaningful to them before and are less meaningful to them now.”

‘Hurricane force winds’

However, making acquisition and backing teams requires capital, which private equity and asset management executives said an increasingly difficult chore.

Quinn, alongside Cochran and Eric Mullins, chairman and CEO of asset management company Lime Rock Resources, all agreed that fundraising, particularly since COVID-19, has become something of a slog, though gradually it’s improved.

Quinn noted that as the company launched its third bund in the fall of 2021, “we put the boat out in the water into hurricane force winds. It was crazy,” he said. “We raised $720 million, but it took the better part of 15, 16 months.”

Quinn said that, at the time, two-thirds of Pearl’s regular investor were either officially out or on the sidelines. 

Hardline ESG, non-fossil fuel investors remain out.

“Everybody in the middle, it just depends on the institution,” Quinn said.

While some are returning, others are still on the sidelines. Another factor: there’s more money available today for investment than three years ago, Quinn said.

“Having said that, it's still incredibly selective,” he said. “It's not easy raising money and the return threshold to raise money in our business is much higher. So these institutions, when they go back, there needs to be a differentiated rate of return that you're providing them.”

Mullins agreed with Quinn’s assessment, adding that he estimates there’s roughly, 5,500 pension funds, college endowments and foundations in North America.

Lime Rock, which is raising its sixth fund, started to feel pressure when raising its fifth fund, Mullins said.

The firm targeted a $750 million fund in 2020 before COVID. Mullins said investors were interested prior to the pandemic.

“When we came back, the whole environment had changed. Just like Billy said, the sentiment on some boards, on some committees about climate change and about ESG and not investing in fossil fuel was really [present], and we ended up raising $400 million plus another $150 million in a co-investment vehicle,” he said.

Mullins said half to two-thirds of the “universe of historical investors” refuse to invest in fossil fuel private equity funds. The result was that firms were all calling the remaining one-third of investors still willing to put money into hydrocarbons.

“So I think everybody was just being very cautious and patient in terms of making decisions to come into funds,” he said. “So it’s been a real headwind, and I'd say it's continuing.”

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