Increasing consolidation in the U.S. shale industry makes it harder for private-equity firms to expand oil-and-gas assets even as it opens opportunities to snap up oil fields that large energy companies look to sell after big mergers.
In one example of such opportunities, NGP Energy Capital Management-backed producer Ensign Natural Resources II acquired about 43,000 net acres in South Texas from energy company ConocoPhillips through a $1.2 billion transaction, a recent investor letter viewed by WSJ Pro Private Equity shows. The value of NGP's July deal hasn't been reported previously.
The NGP acquisition came about as energy giant ConocoPhillips sought to sell assets after buying peer Marathon Oil nearly two years ago in a $22.5 billion transaction. ConocoPhillips recently said it has met its $5 billion divestment target.
Moves by large, publicly traded energy companies to expand faster and secure prized assets ahead of rivals launched a wave of multibillion-dollar mergers and acquisitions across the U.S. oil-and-gas sector in recent years. Such deals totaled nearly $400 billion in the three-year period ended in March, with $38 billion recorded during this year's first quarter alone, according to data analytics company Enverus. Much of the activity is concentrated in the prolific Permian Basin, a sprawling region that covers portions of West Texas and southeastern New Mexico and accounts for nearly half of U.S. crude production.
Specialist private-equity firms took advantage of the deal frenzy through some profitable asset sales, often from their largest holdings. Now, they find it more difficult to assemble new, sizable operations in oil fields increasingly dominated by energy giants, especially the Permian, according to fund managers and industry consultants.
"There are fewer private equity-backed teams in the basin than there used to be," said Frost Cochran, managing director and founding partner of Houston-based Post Oak Energy Capital.
Yet, industry consolidation also presents private-equity firms with openings to buy unwanted assets from major players making M&A moves.
Oil-and-gas companies typically trim their holdings following large mergers by selling less important assets to pay down debt. Holdings such as oil fields often become targets for private-equity firms, which see opportunities to acquire these assets and make them more appealing to future buyers, fund managers and consultants say.
"Public companies consolidated to grab Permian acreage, and now they need to rationalize their portfolios by divesting noncore assets," said Adrian Garcia, a managing director of energy-focused fund-of-funds manager Venture Investment Associates. "One strategy for private-equity firms is buying those noncore divestments from the large consolidators."
The fields and related assets that Conoco sold in South Texas's Eagle Ford Shale formation were attractive to NGP-backed Ensign because its predecessor business operated nearby fields, NGP said in its investor letter. That older business sold its assets to Marathon for $3 billion about four years ago. Energy-focused fund sponsors like NGP often back the same oil-field-management teams multiple times as they transition between operations.
Private-equity firms can benefit from sales of noncore assets even when a company they hold isn't the buyer. In the $1.2 billion acquisition of Ohio Utica shale oil fields operated by Antero Resources early this year, the buyer, Infinity Natural Resources, sold preferred shares to Quantum Capital Group and Carnelian Energy Capital. The Houston-based private-equity firms helped finance the Antero deal through their combined $350 million investment.
New opportunities appear to be in the offing for private-equity firms. Devon Energy is reportedly seeking to sell significant assets following its roughly $58 billion merger with Coterra Energy in May, which expanded its already large footprint in the Permian. The company has seen a flurry of interest in the prospective asset sales, according to its leaders, a sign that potential private-equity buyers might face stiff competition.
"Every intentional buyer, every [joint-venture] partner, every bank, everything that you can conceptually think of is certainly coming our way," Devon Chief Executive Clay Gaspar said during an Aug. 5 earnings call with securities analysts. "There is no shortage of incoming phone calls."
Also, not all private-equity firms have the wherewithal to compete for such deals, Venture Investment's Garcia said.
"Large private-equity groups with war chests are the only ones who can participate in billion-dollar divestment processes," he said. "Small managers don't have the horsepower."
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