Q&A: Petrie Partners Co-Founder Offers the Private Equity Perspective

Mike Bock, co-founder of Petrie Partners, shares his perspective on how deals will be made in oil and gas this year in an exclusive interview with Oil and Gas Investor.

Deon Daugherty, editor-in-chief, Oil and Gas Investor: What do you expect to emerge as the top trends for energy finance in the short-term and then across 2025?

Mike Bock, co-founder, Petrie Partners: There have been a lot of changes in the macro, or at least, there are going to be changes in the macro, with a change in administration. [President Donald Trump] has the ambition to get things rolling as soon as possible. Chris Wright (nominated as energy secretary) is someone we know in Denver and expect to do great things dealing with policy. But those things take a while.

The trends are still challenging on the equity side. We saw a decline in private equity on offers for new or smaller private companies. At the same time, we saw a narrowing window for public companies as well to tap equity capital… to position for better free cash flow and economies of scale and better efficiency.

I think it is still challenging in the public market around equity capital. There is a little more optimism about realizations and a few things around the margins are helpful, but for straight equity [deals], there are still some challenges.

BKV [Corp.]’s IPO, if you look at that deal, they had a lot to offer investors. For example, their carbon sequestration business opened up their offering to investors that were outside the pure upstream space.

We’ve seen some financing innovations to slice and dice access to financing—it’s a very capital-intensive business—over the years and that may continue. In drilling JVs, we had a client that was looking at equity and the next option was to scale down to a non-op piece of assets and raise some cash, then raise some equity and continue to operate a smaller piece that will be replenished by a sell-down with a partner to front costs of the drilling. It’s a shrink-to-be-better approach, and that’s capital that’s available.

There are two distinct ways of having a drilling JV. One is, a strategic player takes a non-op interest in the assets and they’ll maybe carry you on some portion of drilling, paying a third for quarter or 100% for a three-quarter interest. Operators benefit from that structure because they are paying off interest. That’s perpetual—they can keep that investor forever.

Then there is a finite structure—not forever, it’s just a return—they’ll pay 80% for 70% and when they achieve their return, it reduces their interest in the asset; or they pay 100% for 90%, then achieve greater invested rate or return on investment, and then they’ll revert to a quarter on assets or something like that.

We’ve seen both types of deals, and that will probably continue.

The other trend we’ve seen is a switch in the private equity space. Because of the pullback in private equity, some funds didn’t continue or failed. We’ve seen some successes with EnCap [Investments] and Quantum [Capital Group], and some were excellent like Carnelian [Energy Capital] and Post Oak [Energy Capital], but a big segment of the private equity space didn’t survive.

Private equity funds still exist, but some are managing down investments that are long in tooth and maybe are not in the greatest market to liquidate. We’re seeing continuation vehicles activity. If you look at the capital for that side of that business, it’s kind of industry agnostic, but there is a lot of demand for secondary funds that deploy capital in this way.

We’re working on one now with some of the folks who are interested. Two years ago, [the market] was a half-billion [dollar market]. Then six months ago, it was $1 billion, then it’ll be $2 billion, so there’s a lot of demand from LPs for those secondary funds to invest in opportunities.

Energy has become a focus because of stranded portfolio companies. That trend will continue.

Some portfolios got healthier and there is still a decent demand that will break loose some of those opportunities. Some equity that is restructuring some stranded portfolio companies in the private equity space across 2025, too.

DD: What is the status of energy companies’ access to capital this year? Will public markets be more receptive, especially to upstream and infrastructure financing?

MB: I think in upstream, it’s still going to be a struggle. It’s gotten to a point where energy is a small enough piece of the market picture as a part of the S&P 500 that generalist portfolio managers don’t spend a lot of time there. They’ll pick a few stocks here and there, and I don’t see it getting a lot better this year.

On the infrastructure end, it’s a different story. Given the risks and rewards of that business, there are a lot of funds out there. Investors like infrastructure, the lower return but also lower risk. Like in the secondaries space, it’s a lot of capital and rolls on to demand; energy is a good candidate for infrastructure investing.

Venture Global coming to the [IPO] market—that’s a huge infrastructure play—and I think it looks better for infrastructure financing.

As we ramp up and consider all means of export at our disposal, there’s a lot of opportunities for infrastructure that laps over to the energy transition space with carbon sequestration, carbon capture. I think that’s an area where there’s projects and capital available.

DD: Which particular basins or regions are most interesting to investors in oil and gas?

MB: Many are basin agnostic. But I think from an overall perspective, the Permian continues to be a focus for investors. This consolidation wave has been pretty Permian-focused. Diamondback [Energy] built a large business just making acquisitions in the Permian, and I think that’s still the case [going forward]. We’re also seeing development in the Uinta, a lot of transactions activity. So, there’s going to be a point where people have to look outside of the Permian, but we’re not there yet.

DD: What are the challenges this year for companies that require outside finance, whether through public or private investment?

MB: I’m really interested in seeing what we’ve got with a more relaxed regulatory environment, greater access to property and potentially more incentive to develop offshore in the U.S.

I’m interested in seeing how that coincides with the trend of last five years of public companies saying they won’t not grow for growth’s sake. If everyone goes all-in on drilling, that will significantly lower prices and it doesn’t square with promises to shareholders to be really disciplined. I think there is the ambition to do one thing, but I think the market will be the decider, and capital formation is a part of that.

If prices drop, free cash flow diminishes, and the drilling pace diminishes. But I’m interested to see play out with the promises made around capital discipline.

DD: How do you expect available capital to differ this year compared to 2024?

MB: Another trend—not a new one, but it’s building momentum—we’ve seen some ambition to acquire PDP assets and then refinance using asset-backed securities given the interest rate arbitrage. We’ve seen PDP not fetch as much as they have historically with discounts in the mid- to high teens, whereas in the past, it was low double digits to low teens.

DD: Where is capital needed the most?

MB: There are big projects and there are a lot of incentives to develop them; I think it’s needed the most in the upstream because that’s where it’s lacking. You’ll see more consolidation for better economies of scale, but I think broadly, the next wave is through divestiture.

Not all of these assets belong together, and [companies] will be looking to divest. We’ve seen major companies with big mergers so we should see that happen in reverse.…. Assets are moving down the food chain and I think for those assets to land in the right homes, there has to be more equity formation among smaller private companies and innovation to make those tired old assets work better. I think that’s where it’s needed the most; that’s where it’s less available, too.

DD: Do you expect to see new small E&Ps come together?

MB: I hope so. There are a lot of good management teams that have had several successes and they’ll be capital partners.

It’s not over for energy investing, given the lack of supply of capital, and you can drive really good bargains, so I think some hope there they’ll partly fund another generation of private companies that build assets from acquisition and exploit that and fund a market for the production ultimately. That’s how we’re hoping it plays out.