U.S. Shale Investors Indulge in Creative Vehicles

U.S. Shale Investors Indulge in Creative Vehicles

Investments in U.S. shale are soaring once again after 2014’s collapsing oil prices led bank lenders to retreat from funding oil production. Despite scattered concerns around returns, surging optimism has led investors to dole out cash for drilling and output –taking advantage of creative investment avenues like hedging, private equity, special purpose acquisition companies (“SPACs”) and drilling joint ventures (“DrillCos”).

Extended OPEC Cuts Incite U.S. Production

Not everyone has sanguine visions of global oil inventory and investment. OPEC recently extended production cuts through 2018 in an ongoing effort to boost crude prices, while Schlumberger Executive VP, Patrick Schorn, recently told investors, “The ability of tight oil to influence global supply dynamics, and therefore price, will diminish over time.”

But an additional year of OPEC cuts has effectively given the U.S. the go-ahead to increase production. U.S. crude output is currently over 9.7 million barrels per day (“mbpd”) (6.18 mbpd shale oil), and the International Energy Agency (“IEA”) estimates that renewed capital pools will help lift the U.S. to achieve 80% global production gains over the next seven years.

2017 O&G Firms Initial Stock Offerings Raised Additional $1.4B

While some conservative investors are asking drillers to take it easy, many upstream investors are padding the fracking cash flow. In 2017, Thompson Reuters data shows U.S. oil and gas firms’ initial stock offerings pulled an additional $1.4 billion than in 2016.

PE Firms Raise $20B+ For 2017 Energy Sector

Private equity (PE) is a popular vehicle for today’s shale investors. In Q1 – Q3 2017, PE firms put $20 billion into the energy sector (up 35% from total 2016 PE energy investments).

E&Ps Hedge Record Shares of Ongoing Production in Q4 2017

Investors are also financing drilling through production hedging, allowing producers to buffer against potential future price declines. Analysts report that 40 US-focused E&Ps hedged “a greater share of their ongoing oil production volumes in Q4 2017 than any previous seven quarters, if not longer.” Those 40 E&Ps increased capital spending by 66% in 2017.

Shale Firms / Investors Seeking SPACs

Investors are increasingly using special purpose acquisition companies (“SPACs”), attracted to their highly-reputable managers and the respected PE sponsors seeking to expand their equity capital sources. SPACs look to acquire oil firms, offering cash and numerous safeguards to IPO buyers. The largest IPO in Q1 2016 was the oil and gas-focused SPAC, Silver Run Acquisition Corp. This October, Black Ridge Oil & Gas, Inc. announced the pricing of its sponsored special purpose acquisition company, Black Ridge Acquisition Corp. (“BRAC”) IPO.

DrillCos Offer Short-Term Investment Alternative

Drilling joint ventures (“DrillCos”) are another innovative investment vehicle, combining investor cash with the producer-owned drillable land. DrillCos allow producers to increase productivity while offering investors 100% of the production cash flow until they earn a 15% return (at which point the investor's stake becomes around 10% of the remaining production).

In the last two years, Exco Resources Inc, Legacy Reserves LP, EOG Resources Inc., and Alta Mesa have raised at least $2.1 billion using DrillCos and investors like The Carlyle Group, Blackstone Group, and KKR & Co. In May 2017, EOG Resources Inc. made a $400 million agreement with Carlyle to finance Oklahoma wells. Of course, DrillCos contain some inherent risk for both shale producers (who must provide extensive details about their land) and investors (whose returns could fall with prices).

Investment Returns Bolstered by Efficiency

For investors worried about returns, producers are hyping recent price increases, technological improvements in efficiency, decreased costs, and their willingness to drop unproductive land. Improvements in collective oil demand and the extended OPEC cuts are clearing upside potential.

From the conversations we’ve been having with investors, more and more are willing to look past global inventory concerns and prices. Today’s executives are looking for solid company balance sheet figures rather than promising valuations. U.S. shale producers are moving forward, and investors are following.


Attorney Jimmy Vallee is an energy Mergers & Acquisitions lawyer, oil and gas industry commentator, and frequent resource for media outlets including USA Today, U.S. News & World Report, Oil & Gas Monitor and others. His new book, Giant Shifts: Energy Trends Reshaping America’s Future, released in May, 2017 hit #1 in two Amazon categories the week of its launch.
Connect with Jimmy at [hidden email]
Noted Energy Futurist” – Mensa AG 2016

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