Panel: Private equity nearly saturated in upstream market

HOUSTON – Private equity firms will continue to throw capital at U.S. independent producers despite tell-tale signs that the number of high-quality investment opportunities is shrinking, a panel of private equity investors said Wednesday.

“Are we at the point of saturation? Yes, or we’re very close to it,” said Mark Honeybone, a partner at private equity firm Energy Spectrum Capital, during the Mergermarket Energy Forum at the Houstonian Hotel in West Houston on Wednesday.

That won’t deter private financiers, he added, even though “there are more participants than there are opportunities. You’re beginning to see a spectrum in the quality of management teams” that private equity firms are backing financially, he said.

Washed out

Some recent announcements about private equity-backed companies have made Honeybone do a double take. Some of the funded management teams aren’t ones that his firm would support, he said.

At some point, there will be a reconciliation: A growing number of private equity-backed firms won’t get traction in the U.S. oil patches, Honeybone said.

“Those will be losses that the funds absorb,” he said. “That will hopefully be washed out by the successes.”

But as the U.S. energy surge continues, private equity firms likely will shift their resources to midstream pipeline and infrastructure companies as demand for capital among the upstream oil producers falls, he said.

Gold rush mentality

Private equity firms funneled billions of dollars into the upstream oil and gas sector after the North American oil and gas boom began a few years ago. More than 90 funds are now looking to harvest some $70 billion from their investments, according to data compiled by Bloomberg.

Even among pipeline operators and other midstream companies, there has been “a bit of a gold rush mentality that’s going on that is similar to what’s happening in the technology industry right now,” said Sean Dolan, managing director at private equity firm Alinda Capital Partners.

Growing demand for a pipeline network between remote shale plays and U.S. markets has pushed the market capitalizations of Kinder Morgan and other U.S. pipeline companies to three times its share of the energy industry’s overall value in recent years, according to Deloitte.

The midstream sector has seen a tremendous surge in interest from financial players who have taken companies public in a few high profile initial public offerings in recent years, but that market may soon begin to see the strain of growth as well, Dolan said.

“There’s a select group of high quality management teams who have no problem getting capital if they want it,” Dolan said. ”But I think there are a lot of new entrants that will find it difficult to get the traction. They won’t be able to get any infrastructure built because there’s so much saturation in the sector.”