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Is The Private Equity Oil Rush Back On?

Rig

Private equity funds are back in the oil game with piles of cash to spend, emboldened by oil prices of around $50 a barrel, even though WTI has in the meantime slipped below this psychologically significant threshold.

The latest private equity news is about Argus – a group of three energy-focused firms, which are looking for acquisition opportunities among smaller E&P and oilfield service players. The funds – Intervale Capital, Bayou City Energy, and Cibolo Energy Partners – have so far raised more than $2 billion and plan to expand this to $4 billion over the next three years.

One of the founders of Argus told Bloomberg that for those who have cash now is the perfect time to buy – assets and companies are relatively cheap and the industry will inevitably recover by 2020. In fact, Charles Cherington expects “a boom” in U.S. oil by 2020.

Indeed, this year has seen a definite uptick in deals in the energy sector thanks to higher prices, with already established and new PE funds committing about $1.5 billion in funding for energy industry players.

Among these were several new private equity funds, which emerged on the oil scene in the first months of the year, committing some $650 million to investments in exploration and production.

Two established funds, Pine Brook and Riverstone Holdings, together committed $600 million to investments in the star of the shale patch – the Permian – via Texas-based Admiral Permian Resources. A third fund, Natural Gas Partners, made a commitment of $254 million to Luxe Minerals, which has a solid presence in the Permian.

IPOs are back, too.

Earlier this month, research from Simmons & Co revealed that there are 20 oil and gas listings in the pipeline for this year. This comes after two years with almost no IPOs in the industry and is widely seen as a sign of the energy industry’s ongoing recovery. There are some analysts who doubt this, however. According to them, the IPOs signal that investors who kept some of these companies afloat with cash injections during the downturn are now seeking to get their money back, while prices are reasonably high. Related: Energy Market Deregulation: Be Careful What You Wish For

Yet, the new entrants in the energy-focused PE field are proof that optimism is rife--but at the same time acquisition opportunities are being carefully segmented.

In Argus, for example, Intervale Capital will focus on the oilfield service segment and the “technological differentiation” they could offer the fund. In an environment of growing automation, technological differentiation can be seen as the ultimate competitive edge, ensuring an investment becomes lucrative.

The second member of the trio, Bayou City Energy, will be looking for acquisition targets in exploration and production, like most PE funds in the U.S. oil patch, and the third member, Cibolo, will provide debt investment in P&Es.

So, what’s next? It seems that a lot of smaller energy companies in the U.S. are now backed by private equity cash, and private equity investors are a pragmatic lot for the most part. Cherington, for example, expects prices to fall again this year. This will likely prompt a wave of consolidation deals that will bring down costs and improve returns. It will also bring in new PE players in, as companies for sale become even cheaper. In short, now is the time to buy.

By Irina Slav for Oilprice.com

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