Private Equity... Is It For All?

[BlackLine Resources + 12]

Private equity... what's the situation today with the prices that have smartly moved from sub $30 per barrel to near $70 and OPEC actually sticking to its word? There have been spectacular exits that have generated substantial returns which is obviously the goal of PE investors.

PE firms have seen management teams from disparate companies rolled into one, whereupon one team can more efficiently manage the assets of two or three others.  One advantage of having a portfolio of several E&Ps operating in different areas is knowledge share.  Of course this is to try and maximize the investment capital and spread the risk internally.

When prices are low, conventional wisdom suggests to acquire assets and when they're high, the focus should be on drilling to create value.  So at this critical juncture, with prices stabilizing in a range bound pattern, are PE firms moving on that premise?  The answer would be of course, "Yes!"   PE firms are motivated to take money off the table, that's the purpose, its what they've promised their investors... How many are sticking it out, trying to squeeze the last dime out of the strip prices?  Time will tell, and the day of reckoning could be just around the $80 per barrel mark. 

For every one successful PE backed companies the are 5 who may be struggling.  There's a lot of management teams out there and not all of them will have the right acreage or top wells that make them attractive for an exit or find a private suitor.

How can these companies that are not as strong going into a PE backed situation make it worth their while before lopping off a significant chunk of equity to play the game and find out later they have not generated the returns nor the interest of the market?  Prior to hammering out a deal with the PE firm, the producer should look at leveraging existing production and generating the capital they need, without an equity slice, that's non-recourse with no bank interest to contend with.

The answer may be that these operators should take a strong look at what a Volumetric Production Payment, (VPP), may afford them. Sell forward the production at a reasonable discount, get that valuable acquisition  / CAPEX capital with a stated delivery schedule and at the end of the term, the production goes back to the producer. 

In good times and not so good times, having the right management team who can maximize their assets is the formula that can make all the difference.