Private Equity: Where Oil Specialty Funds Go Next
Although oil prices have risen today, the price of oil remains at historically low-price levels. This is an opportunity for deep-pocketed private equity firms that own a diversified portfolio of companies.
However, it is a calamity for those funds that specialize in energy investing.
The Price of Oil Globally
The decline in oil started with a price war between Saudi Arabi and Russia, and we accelerated by the global shut down. Gasoline demand is way down around the world as everybody is at home until the economy reopens. Some governors here in the United States are planning to reopen states. However, it will be several months before we see gas demand start to rebound.
Most domestic energy companies have breakeven prices of $50 a barrel or more right now. The Spot market price is currently just $14.09, and June futures contracts are even lower than that a5 about $13.60. Companies are hemorrhaging cash right now, and a lot of them are not going to survive without substantial assistance from the government or a rapid increase in price and demand.
Energy PE Firms
Private equity firms Quantum Energy Partners and NGP Energy sent a letter to the Texas Railroad Commission to make a plea for a decline in production to get prices moving higher again. The commission delayed voting on the proposal until its next meeting on May t.
That’s horrible news if you are the private equity owner of US-based energy companies. Your fund’s returns are going to take a huge hit. You will be tied up in restructuring or a liquidating, a failed company, and your reputation (critical for fundraising) is going to take a huge hit.
Analyst Paul Sankey of Mizuho Securities thanks that about 70% of domestic shale companies will need up seeking bankruptcy protection.
While that is awful for existing private equity owners of oil and gas companies, it is an outstanding opportunity for PE funds and distressed debt investors that understand the oil business and have lots of dry powder.
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