University of Texas Roundtable on the Role of Private Equity in the Financing and Restructuring of Oil and Gas Companies

14 Pages Posted: 1 Nov 2017

See all articles by Chris Manning

Chris Manning

Trilantic Capital Partners

Bill Montgomery

Quantum Energy Partners

Bryan Sheffield

Parsley Energy

Jim Hackett

Riverstone Holdings LLC

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: Summer 2017

Abstract

In this second of two University of Texas roundtables, four highly successful veterans of the U.S. energy industry, with considerable experience running both public and private companies, discuss recent developments in this rapidly evolving industry. Among the most remarkable—and a major focus of this discussion—is the dramatic expansion of the output and productivity of the Permian Basin of West Texas, and the role of private equity in accomplishing it. Although the Permian has been a major source of oil and gas since 1920, the combination of massive horizontal drilling and hydraulic fracturing has contributed to a tripling of production volumes from about 800,000 barrels per day to 2.5 million during the past ten years. In fact, the productivity gains are said to be so great that, even with the huge run‐up in the cost of acquiring acreage (to as high as $40,000 per acre), today's producers are projecting annual operating returns of 20% even if oil prices fail to rise above their current level of about $50 a barrel. What's more, there appears to have been a fairly clear division of labor between private and public companies in this recent development of the Permian. With most of the high‐priced acreage now being acquired by larger public companies, the primary role of private equity has been to identify and make good on opportunities to increase the productivity and value of smaller operations that can then be sold to public companies—companies that have the size and access to capital to benefit from the economies of scale produced by combining them with their other operations. Thanks to their earlier position in the value chain, investments by private equity groups have generally not only produced higher payoffs, on average, but involved larger operating and financial risks. And this difference in risk profile is reflected in a notable difference in hedging practices between public and private equity‐controlled companies. This difference was summed up as follows by a private equity partner who has also run several public oil and gas companies:. To a much greater extent in private equity than in public companies, we think of our projects and companies as delivering value that is largely independent of changes in oil prices. Hedging is our way of saying we don't want to take oil price risk if we don't have to. We do not count on price increases to make our required returns. The returns come from operating the company successfully without the help of commodity prices.

Suggested Citation

Manning, Chris and Montgomery, Bill and Sheffield, Bryan and Hackett, Jim and Titman, Sheridan, University of Texas Roundtable on the Role of Private Equity in the Financing and Restructuring of Oil and Gas Companies (Summer 2017). Journal of Applied Corporate Finance, Vol. 29, Issue 3, pp. 42-53, 2017. Available at SSRN: https://ssrn.com/abstract=3061253 or http://dx.doi.org/10.1111/jacf.12248

Chris Manning

Trilantic Capital Partners

375 Park Avenue, 30th Floor
New York, NY 10152
United States

Bill Montgomery

Quantum Energy Partners

5 Houston Center 1401 McKinney Street, Suite 2700
Houston, TX 77010
United States

Bryan Sheffield (Contact Author)

Parsley Energy

Austin, TX
United States

Jim Hackett

Riverstone Holdings LLC

712 5th Ave #36
New York, NY 10019
United States

Sheridan Titman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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