Billions bet on US shale as cost cuts fuel revival
Investors who took a hit last year when dozens of US shale producers filed for bankruptcy are already making big new bets on the industry's resurgence.
In the first three months of this year, private equity funds raised $19.8bn (€18.6bn) for energy ventures - nearly three times the total in the same period last year, according to financial data provider Preqin.
The acceleration of investments from private equity, along with hedge funds and investment banks, comes even as the recovery in oil prices from an eight-year low has stalled at just over $50 per barrel amid a stubborn global supply glut.
The shale sector has become increasingly attractive to investors not because of rising oil prices, but rather because producers have achieved startling cost reductions - slashing up to half the cost of pumping a barrel in the past two years. Investors also believe the glut will dissipate as demand for oil steadily rises. "Shale funders look at the economics today and see a lot of projects that work in the $40 to $55 range" per barrel of oil, said Howard Newman, head of private equity fund Pine Brook Road Partners, which last month committed to invest $300m (€281m) in startup Admiral Permian Resources LLC to drill in West Texas.
"Demand for oil has been more robust than anyone imagined three years ago," said Mark Papa, CEO of Centennial Resource Development.
He referred to the beginning of an international oil price crash in 2014, which took many firms in the shale sector to the brink of bankruptcy.
Centennial is a Permian oil producer backed by private equity fund Riverstone.
Mr Papa, a well-known shale industry entrepreneur, built EOG Resources into one of the most profitable US shale producers before he retired in 2013.
The chance to further develop the Permian, he said, was enough for him to come out of retirement to deliver one of its bigger recent successes. The value of Riverstone's original $500m (€469m) investment has grown nearly four times since Centennial's initial public offering last fall.
Riverstone this year copied the Centennial model, putting experienced managers atop a startup charged with acquiring operations or assets.
The equity fund hired Jim Hackett - the former head of shale producer Anadarko Petroleum Corp - to run newly created Silver Run Acquisition Corp II.
Hedge funds Highfields Capital Management and Adage Capital Management have taken stakes in the new company, which has a valuation of about $1bn after going public last month.
Centennial's Papa expects the flood of fresh capital to push US production up 23 percent to 11.3 million barrels a day (bpd) by 2020, based on strong demand for oil. "We're still in a hydrocarbon-based economy," he said. (Reuters)