US Oil Shale industry exploding
  • Wed, 04/19/2017 12:19 AM

Investors who suffered last year with over a dozen US shale producers filing for bankruptcy, are now placing big new bets on the industry's resurgence. The financial data provider Preqin showed the private equity funds raising three times that of last year at $19.8 billion for energy ventures. Rising investments from private equity, hedge funds and investment finds boost despite the recovery in oil prices CLc1 from an 8-year low stalling to just over $50 per barrel amid a stubborn global supply glut.

The shale sector is attracting investors not because of rising oil prices but because producers have achieved startling cost reductions – to about half of that of pumping a barrel in the past two years. Investors are optimistic of the glut dissipating as the demand for oil will rise. The confidence of squeezing increasing returns from shale fields without price gains comes from cost cutting, thanks to technology. This attributes to their fresh backing. Howard Newman, head of private equity fund Pine Brook Road Partners said that shale funders see a lot of projects in the $40 to $55 range. 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.

Mark Papa, chief executive of Centennial Resource Development Inc (CDEV.O) admitted to a more robust oil demand. Centennial is a Permian oil producer backed by private equity fund Riverstone. He had retired in 2013 but the opportunity to develop Permian had made him come back in the game. The value of Riverstone's original $500 million investment has grown nearly four times since Centennial's initial public offering last fall.

Copying Centennial model, Riverstone has also put 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). Even hedge funds Highfields Capital Management LP and Adage Capital Management have placed stakes in the new company which values currently at about $1 billion after going public last month.

Last fall, private equity fund NGP Natural Resources XI LP invested $524 million in Luxe Energy LLC. It was a bet on Luxe repeating its success of early 2016. Luxe utilized the $250 million contributed by NGP to acquire land in Permian - and sold it seven months later for a double-digit profit. This year's drilling rush can face the test if global supplies grow too fast or if demand cools. The US drilling rig count is the fastest in six years with US crude stockpile being close to 533 million barrels-highest in 25 days. Even a decline of $10 is not dissuading investors. Gerrit Nicholas, co-founder of private equity fund Orion Energy Partners speaks of being comfortable lending even if oil prices fall to $40 per barrel.

This month, Orion helped finance the expansion of a Florida oil-storage terminal to boost growth in US oil exports. The US boom is concerning OPEC member nations ahead of its meeting next month in Vienna. They can consider extending oil production cuts that first took effect in January. Cartel members are expected to extend cuts as it is in OPEC's financial interest to prevent a steep drop in oil prices. This in turn can supply steady finance to nimble US oil producers and the companies providing them with services and equipment. The US is now being seen as the new swing producer.


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