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PE Firms Hover By Oil Patch, Gathering Dry Powder

John Shipman, Senior Financial Writer | July 26, 2017

Dealmakers are seeing an ongoing build-up of capital poised to flow into the oil and gas sector, as the industry continues to stabilize amid the fallout from a crushing three-year downturn in crude prices.

The main sources of cash are private equity firms and other non-bank lenders, while commercial banks maintain a cautious posture toward the energy sector, still nursing wounds inflicted by the oil price bust.

“As the banks have retreated, alternative lenders and private equity funds have amassed expansive war chests to deploy into the oil and gas industry, trying to take advantage of this distress and evaporation of traditional bank lending markets,” said Clay Bryan, managing director at Cappello Global LLC. “We’ve also seen family offices jump in here and try to take advantage of this dislocation,” he added. Bryan’s comments came as a panelist during Merrill Corporation’s recent webinar, Effective M&A: Opportunities in Oil & Gas.

While PE funds are marshalling cash to invest in the oil patch, stubbornly low crude prices, increasing supply and some still-high equity valuations have led them to exercise restraint, Bryan noted. “There remains pent-up demand due to the amount of capital on the sidelines that either has to be deployed or returned to LP investors,” he explained. “There is a huge motivation to find opportunities to deploy capital.”

The Wall Street Journal recently reported that BP is said to have approached potential buyers – which include private equity firms -- of its oil-and-gas production assets in the North Sea. The paper said the discussions were in early stages, and also noted BP has been examining its assets, particularly in regions like the North Sea where it’s expensive to operate.

The ability of companies to adapt to the lower crude price environment is playing a role in attracting fresh financing, the Merrill webinar panelists indicated. “The oil and gas industry in this country is incredibly resilient, and incredibly nimble,” said Ian Fay, managing director at Headwaters MB where he leads the upstream practice. “You’ve seen that come out through the downturn with companies becoming more efficient, primarily through the use of technology, and being very sensitive to the changing price of WTI in particular. That’s been driving a lot of activity.”

As for the outlook, “We think this dry powder that’s on the sidelines will be aggressive,” Cappello Global’s Bryan said. “But it is a process, and it’s not happening overnight.”

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