Private equity setting sights on discarded natural gas assets

Fully cultivating U.S. shale plays will cost the oil and gas industry $2.75 trillion over the long haul and private equity firms have begun jockeying to foot more of the bill, money managers said Thursday.

The dollar amount pegged to massive drilling and development in those regions is “only going to get bigger,” but it’s an opportunity for private players to make money in places Wall Street isn’t looking, including gas-rich land, said Wil Vanloh, president and CEO of Houston private equity firm Quantum Energy Partners, during an oil and gas conference hosted by Bloomberg.

Vanloh and other money managers spoke during a morning panel on the growing role of private money in oil and gas at the Houston Museum of Natural Science.

With the advent of horizontal drilling, which unlocked large reservoirs across the country, U.S. independent producers spent billions scooping up land between 2007 and 2012. But over the past 18 months, exploration and production companies have shifted their focus to drilling the land they bought, and some have been forced to sell off other older, conventional-drilling assets to reinvest in plays that are both more expensive and more lucrative.

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Private equity-backed firms have been waiting in the wings to snatch the legacy assets, said Carl Tricoli, managing partner at Denham Capital Partners, during the conference.

So far this year, private equity firms have pumped between $50 billion to $60 billion into oil and gas, acquiring assets through companies and management teams they back, the money managers said. And the private investors have been three or four times more likely to be spotted making bids on land and assets than last year.

“It’s a big buffet,” Tricoli said. “There’s a lot of capital required.”

Horizontal wells cost $8 million to $12 million apiece, much higher than the $1 million to $2 million price tag on conventional, vertical wells. And producers have had to drill more wells per acre of land in horizontal-drilling areas, Tricoli said.

This year, private equity firms – focused on returns and agnostic about fuel – have a new passion: natural gas. U.S. producers have steered away from the commodity after a supply glut destroyed prices, but private equity firms see natural gas as a better risk-return proposition.

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The price of gas can’t fall much lower, unlike elevated oil prices, and those gas-related assets are selling for “pennies on the dollar,” Vanloh said. “We’re trying to go where Wall Street is not.”

Publicly traded firms have bent the knee to investors seeking easy returns from oily plays, while private equity players have bought natural gas assets low, increased production and sold for a higher price. If natural gas prices rise, that’s just a bonus, Tricoli said.

“We actually like gas as long as you can produce it economically,” Tricoli said.