Future of O&G PE?

I just left an O&G PE fund after a year as an associate for an infrastructure fund. It's hard to predict the future of O&G PE, but here were my concerns: 

1. Alot of investors have left the space. Fundraising for an O&G fund is difficult as a majority of institutional investors have mandates against it. It's still doable, especially if the fund is also pursuing energy transition opportunities, but it is more difficult than it was pre-2020. Alot of investors have left, and just simply aren't coming back. 

2. Niche industry. Because so much capital has left the space, the number of funds that focus on O&G is smaller today than it ever has been. I was concerned the lateral market would be difficult for me the older I got and didn't want to limit myself to O&G. A&D deals are very unique. Simple in some ways, complicated in others. You have industrials experience, which diversifies you a bit, but I would make sure it's an industry your comfortable committing to because it can pigeonhole you if you become too senior. I may have been overthinking it, but it was definitely always in the back of my mind. 

3. Consolidation. There has been a massive amount of consolidation in the past year in the energy industry. I was concerned that less competition would be harmful to private companies. Most of these recently merged companies have plenty of inventory and won't be pursuing an aggressive acquisition strategy over the next few years. We are not currently in a growth period for O&G. 

There are different opinions about the future of O&G PE. Tier 1 inventory is running out. But the argument can be made that Tier 2 inventory will become Tier 1, Teir 3 will become Tier 2, etc. Even still, it's hard to imagine the returns for onshore O&G PE will be as high as they were over the last decade / Shale boom. Do I think it's going anywhere? no. Do I think we will see the types of returns we saw over the last 15 years? also no. 

It's honestly a fascinating industry and I was very sad to leave. If you will get exposure to the transition side of the industry, that would be a more transferrable skill. I personally wasn't getting exposure to anything other than A&D and didn't have a very good grasp on where the industry was heading. If you're fine taking that risk and are interested in having a long-term career in O&G, then it could be good. If you don't know, then you may want to explore more generalist-type roles. 

I don't see why private equity buyers of upstream assets shouldn't find success in this environment, albeit unlikely at very large scale. But LMM - MM is the sweet spot for this market anyway so it doesn't really matter. Cash flow is cash flow no matter what institutional allocators say about ESG and producing assets can do 10-20% unlevered returns with the right purchase price and de-risked development opportunities exist. 

Look for ALVERADA fund and drop us an email there (the one at the top of the page). This is better than discussing here

The outlook, at the very present moment, certainly isn't exciting.  A lot of that due to fundraising challenges I think.  A lot due to consolidation as someone above mentioned (less buyers, less PE to PubCo deals, also bigger pubcos that aren't really interested in something sub $1B)

But in my opinion there will always be a place for oil & gas PE.  The stuff is not going anywhere despite the idiot "sky is falling" climate nuts.  It absolutely will not look the same as it did, say, 2010-2020.  Rush to buy acreage, develop it a bit, flip to a public (or bigger PE),

IMO going forward it will require more creativity and smaller deals.  Maybe even a little more commodity price speculation (a LITTLE).  I'm not really sure the mega funds really have a place anymore, not that they even really want it.  So.. a nice place to land would be a small shop with a bunch of smart guys that have had success -- checks both boxes of being able to be nimble and navigate a dynamic environment + fundraising.

1. This is an opportunity to move over to the buy side. Will be able to pick up new skills and build a new network. Great Segway into an MBA program, sell side -> buy side -> MBA -> your choice. If you don’t have an interest in doing an MBA, chances are you could hopefully pivot to another fund seeing you (hopefully) have industry experience with industrials and would then also has the knowledge base of a private equity associate.
   
   
2. There’s a renewed interest in oil and gas as many LP’s have realized, coming out of covid, that renewable energy and the clean energy transition as whole will take a lot longer than many were made to believe in 2020. People are generally looking away from ESG as it’s a fad that came and went. Take green bonds for example. Likewise, Investors are recognizing there is again money to be made in energy, several tailwinds but a big one to look at would be the US need for energy independence based on geopolitical tensions rising globally.
   
   I recognize this is contrary to many of the comments but just what I’m hearing in market from LP’s. Keep in mind I’m also in energy and based in Texas so pretty biased in that regard. Some of it boils down to the political stance of the LP as well.
   
   
3. Keep in mind E&P can become very technical once you get past NAV modeling and a high level understanding of drilling. Geology, hedging and differentials, production strategy (for example: what type(s) of artificial lift are the current operators using? They use a nitrogen injection system as part of a double displacement process because this is an older field that still has conventional assets in place), off take agreements, COPA’s etc. This knowledge set is not very applicable outside of energy.

And just like that we see a multi-billion dollar PE to PubCo deal lol

Musical chairs.. not many left!

DALLAS--(BUSINESS WIRE)--Jun. 12, 2024-- Matador Resources Company (NYSE: MTDR) (“Matador” or the “Company”) today announced that a wholly-owned subsidiary of Matador has entered into a definitive agreement to acquire a subsidiary of Ameredev II Parent, LLC (“Ameredev”), including certain oil and natural gas producing properties and undeveloped acreage located in Lea County, New Mexico and Loving and Winkler Counties, Texas (the “Ameredev Acquisition”). The Ameredev Acquisition also includes an approximate 19% stake in Piñon Midstream, LLC (“Piñon”), which has midstream assets in southern Lea County, New Mexico. The consideration for the Ameredev Acquisition will consist of a cash payment of $1.905 billion, subject to customary closing adjustments. Ameredev is a portfolio company of EnCap Investments L.P. (“EnCap”).