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Undaunted by oil bust, financiers pour billions into US shale

Undaunted by oil bust, financiers pour billions into US shale thumbnail

Investors who took a hit last year when dozens of U.S. shale producers filed for bankruptcy are already making big new bets on the industry’s resurgence.

In the first quarter, private equity funds raised $19.8 billion for energy ventures – nearly three times the total in the same period last year, according to financial data provider Preqin.

The quickening pace of investments from private equity, along with hedge funds and investment banks, comes even as the recovery in oil prices from an 8-year low has stalled at just over $50 per barrel amid a stubborn global supply glut.

The shale sector has become increasingly attractive to investors not because of rising oil prices, but rather because producers have achieved startling cost reductions – slashing up to half the cost of pumping a barrel in the past two years. Investors also believe the glut will dissipate as demand for oil steadily rises.

That gives financiers confidence that they can squeeze increasing returns from shale fields – without price gains – as technology continues to cut costs. So they are backing shale-oil veterans and assembling companies that can quickly start pumping.

“Shale funders look at the economics today and see a lot of projects that work in the $40 to $55 range” per barrel of oil, said Howard Newman, head of private equity fund Pine Brook Road Partners, which last month committed to invest $300 million in startup Admiral Permian Resources LLC to drill in West Texas.

Data on investments by hedge funds and other nonpublic investment firms is scant, but the rush of new private equity money indicates broader enthusiasm in shale plays.

“Demand for oil has been more robust than anyone imagined three years ago,” said Mark Papa, chief executive of Centennial Resource Development Inc (CDEV.O).

Papa referred to the beginning of an international oil price crash in 2014, which took many firms in the shale sector to the brink of bankruptcy.

Centennial is a Permian oil producer backed by private equity fund Riverstone. Papa, a well-known shale industry entrepreneur, built EOG Resources Inc (EOG.N) into one of the most profitable U.S. shale producers before he retired in 2013.

The chance to further develop the Permian, he said, was enough for him to come out of retirement to deliver one of its bigger recent successes. The value of Riverstone’s original $500 million investment has grown nearly four times since Centennial’s initial public offering last fall.


Riverstone this year copied the Centennial model, putting experienced managers atop a startup charged with acquiring operations or assets. The equity fund hired Jim Hackett – the former head of shale producer Anadarko Petroleum Corp (APC.N) – to run the newly created Silver Run Acquisition Corp II (SRUNU.O).

Hedge funds Highfields Capital Management LP and Adage Capital Management have taken stakes in the new company, which has a valuation of about $1 billion after going public last month.

Private equity fund NGP Natural Resources XI LP invested $524 million last fall in Luxe Energy LLC, a shale producer formed in 2015 by former Statoil (STL.OL) executives.

NGP’s investment was effectively a bet that Luxe could repeat its success of early 2016.

Then, NGP contributed about $250 million to Luxe, which used the money to acquire land in the Permian – and sold it seven months later for a double-digit profit.

This year’s drilling rush could be tested if global supplies grow too fast or if demand cools. The U.S. drilling rig count is rising at its fastest pace in six years and U.S. crude stockpile are close to 533 million barrels – near an all-time high and enough to supply the United States for 25 days.

But some investors say even a decline of $10 in the oil price would not dissuade them.

“There is a ton of private capital to invest in the U.S. oil industry,” said Gerrit Nicholas, co-founder of private equity fund Orion Energy Partners.

Nicholas said he is comfortable lending even if oil prices fall to $40 per barrel.

Orion this month helped finance the expansion of a Florida oil-storage terminal, a move predicated in part on growth in U.S. oil exports. Since the U.S. lifted its oil export ban last year, crude exports have climbed to about 746,000 barrels per day, according to U.S. Energy Information Administration data.


The oil industry has seen boom-and-bust cycles since the first well was drilled about 160 years ago, and industry and government have sought to tame the volatility for just as long.

Texas regulators set output quotas from the 1920s through the 1970s, a practice that served as a model for the creation of the Organization of the Petroleum Exporting Countries (OPEC).

The U.S. boom has caused concern among OPEC member nations ahead of its meeting next month in Vienna, where they will consider extending oil production cuts that first took effect in January. Investors believe the cartel’s members will extend the cuts because it is in OPEC’s financial interest to prevent a steep drop in oil prices.

That likely will keep money flowing to nimble U.S. oil producers and the companies that provide them with services and equipment. Investors see the United States as the new swing producer, having the ability to quickly increase supply in response to any sudden increase in demand.

“The U.S., with its substantial inventory capacity and swing oil producer status, should see strong onshore activity for the next few years,” said Charlie Leykum, founder of private equity fund CSL Capital Management LLC, in an interview.

CSL has invested in several oilfield service business in the past year. It partnered with Goldman Sachs (GS.N) and Baker Hughes Inc (BHI.N), for instance, to create a shale services company.

Centennial’s Papa expects the flood of fresh capital to push U.S. production up 23 percent to 11.3 million barrels a day (bpd) by 2020, based on strong demand for oil.

“We’re still in a hydrocarbon-based economy,” said Papa.

For a graphic on private equity investment in U.S. energy, click here

(Reporting by Ernest Scheyder; Editing by Gary McWilliams, Simon Webb and Brian Thevenot)

20 Comments on "Undaunted by oil bust, financiers pour billions into US shale"

  1. Cloggie on Tue, 18th Apr 2017 12:01 pm 

    Different people, different decisions. Saudi-Arabia recognizes a train wreck when it sees one and has announced it wants to invest $30-50 billion in renewable energy and lift its share from less than 1% to 10% in 2023.

  2. Dredd on Tue, 18th Apr 2017 12:22 pm 

    “Investors who took a hit last year when dozens of U.S. shale producers filed for bankruptcy are already making big new bets on the industry’s resurgence.”

    Some folks need a tax write-off …

  3. Dredd on Tue, 18th Apr 2017 12:24 pm 

    Others like to be punished and hurt (e.g. sadomasochists).

  4. onlooker on Tue, 18th Apr 2017 1:19 pm 

    Good one Dredd. Who is the one that said
    ” A Sucker born every minute”

  5. q on Tue, 18th Apr 2017 1:47 pm 

    Money created from nothing must find some resting place.

  6. Plantagenet on Tue, 18th Apr 2017 1:52 pm 

    People who sold shale oil stocks and bought Tesla have done very well in the market.


  7. Go Speed Racer on Tue, 18th Apr 2017 2:02 pm 

    Da Fool an hiz Munee iz soon departed.

  8. deadlykillerbeaz on Tue, 18th Apr 2017 3:19 pm 

    When you buy a publicly traded stock, you are taking a risk, you are gambling. There are no guarantees, none. You are swimming with sharks. If you lose some money, there is no one to blame other than yourself.

    Makes me cry in my beer. Depressing to lose money in the market, you just never get over it.

    I buy a stock now and then to make some money. When it doesn’t and the stock loses 98 percent of its original price when it was going good, you are left holding the bag.

    You begin to think the entire world is against you, somebody made this happen on purpose, you become suspicious, you think you are being taken to the cleaners, swindled. You go ape shit nuts for a couple of days then you realize that it doesn’t do any good to get mad at anything. You calm down, the hysteria subsides, the rational mind takes over and makes it all better. You’re still a bit angry though.

    However, it was your choice to make the investment. Nobody else forced you make the stupidest stock buy on the planet over all time, that’s what happens when you buy an oil stock.

    It all looks good on paper, but what happens is much different.

    Buy utilities and forget about oil company stocks.

    You won’t regret the decision.

  9. twocats on Tue, 18th Apr 2017 6:25 pm 

    this isn’t an article about mom and pop investors. these are the big fish, the whale sharks, gliding serenely through the water with all the sucker fish attached. These guys are probably the only ones that will actually make money in this next round.

    in fact its statements like this…
    “Then, NGP contributed about $250 million to Luxe, which used the money to acquire land in the Permian – and sold it seven months later for a double-digit profit.”

    that tells you that many of the sharks have already eaten. there’s maybe not much left at all, and the production has barely started to increase. It’s all losers going forward from here investment wise.

  10. joe on Wed, 19th Apr 2017 1:02 am 

    Sitting at a paltry 1% the reason that tight oil is economical to mine is that you only need to go to the bank and they only need to add 1 or 2% to your ‘capital investment’ so its easy for them to fund. Take out the almost 1 trillion F35 program, the cost of two or three failed wars and the half of already existing debt and thats probobly around the figure that the US has wasted on low interest loans to offset peak easy oil.

    Make America Great Again.

  11. Midnight Oil on Wed, 19th Apr 2017 7:50 am 

    Adam, Vt, Cog Marmico MUST be ALL in!
    Yes, the World has plenty of hydrocarbons still to be burned!
    Not to worry…✌ the debt will NEVER have to be paid back…right guys?

  12. rockman on Wed, 19th Apr 2017 10:25 am 

    It may sound counterintuitive but historically it’s been proven true time and again: investors make better returns during low oil price periods then during times of high prices. This is especially true when prices are near record highs. Again, referring to the investors and money lenders…not all the companies. As mentioned many time Petrohawk was probably the most successful Eagle Ford Shale players: it tied up hundreds of thousands on acres on the cheap, drilled some “seed wells” and then sold the company for $12 BILLION when thevhype was in high gear.

    Back to profitability: it has never and will never be a function of just the price of oil. It has always been determined by the differential between the oil price and what it cost to get the oil flowing. And while lower drilling/frac’ng cost do help the bottom line they are not the primary cause of improved economics today.

    First, the “promote”: companies do not sell drilling deals at cost. Various approaches but a common one is the “carried interest”: the investors pay 100% of the lease, drilling and completion(including frac’ng) costs and receive less the 100% of the net revenue. A light promote…they earn 90%. A heavy promote…50%. And in heavily promoted deals the investor will also pay a big “overhead fee” of hundreds of $thousands.

    And what determines how heavy the promote? Greed. Greed that booms when oil prices are high and hype is relentless. Especially hype dished out by the MSM. This is also a factor with how loose money lenders get when they can charge high interest rates. High rates companies can afford because of all the easy monies available from promoted investors. So tough times with lower oil prices = lighter promotes.

    Another reason investors can see better returns every with lower oil prices today: existing infrastructure: drilling close to existing producing wells. Which also tends to make better prospects available to investors then during a boom. Often companies will use investors money to test unknown areas ON JUST A PORTION OF THEIR LEASES. If the results are mediocre then sell the rest to other investors. If it proves a really sweet spot the company keeps more (even maybe all) of the undrilled acreage. We call that “riding the investors dollar”. Yes: we actually talk like that about investors amongst ourselves. For instance a foolish investor sucked in by the hype = a “mullet” = a family of fish found worldwide that serves as an important source of food.

    Bottom line: today higher potential profits and lower risks for investors and money lenders BECAUSE of lower oil prices and not DESPITE those lower prices. Told the story before: the best rate of return the Rockman had delivered to a company was drilling a NG play in the mid 80’s when it sold for the lowest price it had in many years. And because their was a lot of “stupid money” out there at the time the company was still able to promote the sh*t out of its investors. And how could it do that? The Rockman had a 100% success rate and a very low finding cost.

    Hmm…sounds a lot like the current chatter about the Permian Basin. LOL.

  13. Midnight Oil on Wed, 19th Apr 2017 10:34 am 

    Yes, Rockman, those Middle Eastern Investors are just tickled pink with those returns they are seeing now on their investments!
    You must be a fan of Pretzel Logic!

  14. Kenz300 on Wed, 19th Apr 2017 1:27 pm 

    The money would be better spent investing in Wind Power,, Solar and batteries.

  15. Anonymouse on Wed, 19th Apr 2017 1:33 pm 

    Well, good to know its greed of ‘consumers’ pouring billions into all those not-quite-oil’ strip-mining projects, and not the uS oil cartel and the parasite, sorry ‘investor’ class at work.

  16. rockman on Wed, 19th Apr 2017 3:51 pm 

    MO – “…those Middle Eastern Investors are just tickled pink with those returns they are seeing now on their investments!”. Actually the few ME/foreign investors I still know are very pleased with their EFS investments. They all sold out their positions (mostly to US pubcos) at the height of the boom.

    Like so many “civilians” you have the childish view that money is “lost” in such plays. It isn’t pushed into a big pile and set on fire. LOL. It’s transferred from one group of investors to another group of investors. Just as has been going on during the bust where we may be seeing a bigger fossil fuel wealth transfer in history.

  17. Midnight Oil on Wed, 19th Apr 2017 4:23 pm 

    Too bad Rockman you are limited in your Adult thinking that as long as you aren’t the one holding the bag, it don’t matter….geez
    “Time to payout should indeed be all that matters, that and ROI. I personally have never been able to work off cash flow unless my ROI’s are 3:1 over the life cycle of the well. Imagine a situation where it takes 5-6 years to reach payout, 65% of your total UR has then been realized, the other 35% takes 18 more years to occur, that at rates of less than 25 BOPD, and the best, the BEST you can hope for is 1.5:1 ROI. Factor in risk (as in the price of oil collapsing 70%) and anybody with any cranial capacity whatsoever would sooner bury the $9M cost of drilling the well in the back yard with the dog bones.

    People in the oil business understand that does not work. People not in the oil business focus of the romance of 3% of all the shale oil wells EVER drilled in America and ignore the other 97%.”


  18. bobinget on Thu, 20th Apr 2017 1:12 pm 


    At current prices…Individual wells in the shales can be very profitable…encouraging increased drilling/oil production in the US/shales…


    At current prices…many/most of the companies…including some of the best…that are drilling these profitable wells are losing money…

    Damned if they do…damned if the don’t….By drilling these profitable wells in the shales… which they have millions/billions already invested…in leases/infrastructure/people etc and increasing oil production…they are holding oil prices down…which insures their companies will continue losing money…


    Assuming the world as we know it continues…the Fed/CB’s keep printing etc…and knowing at $50 bbl…the world is going to be short of oil…meaning much higher prices etc…etc…

    Look at CVX…the best/one of the best…with highly profitable downstream assets…is going out of business at current prices…borrowing money…increasing debt…sold ’16 production at $44 bbl…56% oil…-$12B cash flow after dividends…their plan includes selling assets to BREAK EVEN in 2017…BUT, I have no doubt their 2017 shale wells they drill in the Permian will be profitable…and like wise with the likes of EOG…NFX etc…etc…company losing money…individual shale well profitable…

  19. bobinget on Thu, 20th Apr 2017 3:04 pm 

    * March crude imports 9.17 mln bpd, previous record 8.57 mln bpd

    * Beats U.S. as top crude oil importer for March, year so far

    * Indicates strong stockbuild of nearly 1.7 mln bpd – IHS

    * Pace to slow on maintenance, lack of storage space -IHS (Adds quote on teapots’ rush to use quotas, background on maintenance, fuel quotas, comparison with U.S. crude imports)

    By Chen Aizhu and Meng Meng

    BEIJING, April 13 China’s crude oil imports surged to an all-time high in March to nearly 9.2 million barrels per day (bpd), customs data showed on Thursday, far surpassing expectations and overtaking the United States as independent refiners ramped up their purchases.

    The March imports came in at 38.95 million tonnes, or 9.17 million bpd, according to the General Customs Administration. That compared with 8.286 million bpd in February and far exceeded an earlier record of 8.57 million bpd in December.

    Both the March and the first-quarter import levels were above those of the United States according to data from the U.S. Energy Information Administration (EIA), making China the world’s top crude oil buyer so far this year.

    The shipments were in part driven by independent oil refiners’ rush to purchase oil after they received fresh 2017 quotas around mid-January.

    “This rush of buying were mostly for March arriving cargoes. In our case, the amount of crude oil we bought for March exceeded the total for the first two months,” said a trading manager with Shandong Dongming Petrochemical Group, the country’s largest independent oil processor.

    Last year, most of China’s more than 900,000 bpd increase in its crude oil imports was due to independent refiners that had newly received permits for bringing in shipments.

    China last week also granted crude import quotas to newly qualified independent refiners to purchase from the international market for the first time.

    “The 9.2 million bpd of crude imports is definitely a shocking number. That means China built close to 1.7 million bpd of crude inventory in March, way off the chart from any perspective,” said Harry Liu, an analyst with consultancy IHS Markit.


    Outlook 2017: India’s oil demand growth rate to eclipse China’s yet again
    Singapore (Platts)–12 Jan 2017 1205 am EST/505 GMT

    Demonetization impact on oil demand to be short-lived
    LPG and transport fuels demand to rise
    New petrochemical projects a boon for naphtha demand

    The dramatic rise in India’s oil demand shows no signs of faltering, leading analysts to say that the country will remain a driver of Asian growth in 2017.

    Consumption is expected to rise 7-8% this year, outpacing China’s demand growth for the third consecutive year.

    The cash crunch following New Delhi’s move in early November to demonetize more than 80% of its currency is expected to temporarily dampen the country’s appetite for oil products in the first quarter, or maybe a little longer.

    But gains in oil demand that the country is set to achieve from the “Make in India” initiative — which aims to raise the share of manufacturing in GDP over the next few years — will more than offset the negative effects of demonetization, analysts said.

    The government’s clean fuel drive, sharp anticipated growth in transport demand and air travel, and the country’s insatiable growth for petrochemicals will act as a boon for gasoline, jet fuel, LPG and naphtha, helping oil products to post close to double-digit growth in 2017 — similar to that seen last year — if not higher.

    “For the third year in a row, India’s oil demand growth will outpace China’s demand growth,” Platts Analytics said in a note, adding that it was expected to grow at about 7% to 4.13 million b/d in 2017, compared with 3% in Chinese oil demand to 11.5 million b/d.

    India’s demand for oil products in November rose 12% year on year to 16.6 million mt, or 4.35 million b/d, data from the Petroleum Planning and Analysis Cell showed.

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