Money Talks: Volatility Sharpens the Focus at Tailwater E&P

Hart Energy queried private equity firms focused on the oil and gas sector across the U.S. oil and gas investment space for perspective on navigating the industries opportunities—and challenges—during uncertain times. This exclusive interview with Doug Prieto, CEO at Tailwater E&P, is the second in an ongoing series with Oil and Gas Investor. 

Deon Daugherty: Where are the opportunities – and challenges – for investment following the upstream consolidation trend?
Doug Prieto: The recent wave of industry consolidation has concentrated inventory among fewer operators, creating opportunities for non-core asset sales, farm-ins and partnerships, particularly as capital allocation becomes more challenging under tighter capex budgets. Meanwhile, teams with limited inventory are actively seeking capital partners to help upgrade and expand their portfolios.

However, non-core asset sales have lagged expectations. This is partly due to lower industry debt levels and previously elevated commodity prices, combined with a strategic focus on preserving inventory. Additionally, advancements in drilling technologies, such as U-turn wells, have allowed operators to develop acreage that might previously have been divested or farmed out.

DD: How will dealmaking take shape this year?
DP: We expect dealmaking to be more measured this year given the current market environment. Volatility and softer oil prices will likely slow oil-focused transactions unless there's a specific catalyst driving a sale. On the gas side, while long-term fundamentals tied to LNG growth and AI-related power demand are constructive, near-term volatility continues to challenge deal execution.

That said, we’re still seeing select opportunities through proprietary channels, which help maintain deal flow. At Tailwater, our approach remains focused on long-term value creation, and we're being disciplined in how we evaluate and pursue acquisitions.

DD: How will the current market volatility influence your firm’s investment strategies during the next 12 [months] to 18 months?
DP: Market volatility doesn’t deter our strategy, it sharpens our focus. We see this as a strong opportunity to partner with operators through our fully immersed midstream and upstream platforms. Our approach is to provide flexible capital that supports our partners' goals across market cycles.

We’re also active buyers of private portfolios seeking liquidity, and we remain committed to our long-term investment strategy. Volatility can create attractive entry points, and we intend to be acquisitive where we see durable value. Additionally, we believe this environment may allow the industry to lower AFE profiles, setting the stage for stronger margins when commodity prices rebound.

DD: How has your investor group evolved? How might market volatility influence their engagement?
DP: Our investor base has evolved meaningfully in recent years. While some traditional generalist investors—such as endowments and pensions—have reduced exposure to fossil fuels due to policy constraints, we've seen growing interest from family offices, RIAs [registered investment advisors] and institutions with a dedicated focus on energy. These investors tend to take a long-term view and are highly aligned with our strategy.

In fact, recent market volatility, OPEC-related developments, and the broader slowdown in capital formation have only deepened their conviction that now is an attractive time to deploy capital in the energy sector. Our investor group is fully supportive of our plan to stay active and acquisitive during this period, viewing it as a compelling window to create lasting value.

DD: Which exit strategies make the most sense in this environment and why?
DP: In the current environment, amidst significant volatility and ongoing uncertainty around trade policy and tariffs, exit strategies need to be both flexible and resilient. Traditional exits can be challenging, so it’s crucial to build downside protection into investments early on to better navigate the full cycle. Structuring a portfolio with strategic value to potential acquirers helps create more predictable and attractive exit opportunities.

Additionally, we’re seeing that a willingness to accept a portion of the consideration in equity when aligned with the right partner, can offer upside potential and foster long-term alignment. Ultimately, creating optionality around timing and tailoring the investment for strategic buyers puts firms in a stronger position when markets shift. A greater emphasis on strategies that limit the J-curve and focus on generating distributions with less reliance on an exit to generate realized returns, is also a core focus for Tailwater.

DD: To what extent is access to capital a challenge for private oil and gas companies?
DP: It’s no surprise that access to capital is a challenge for nearly everyone in the energy sector right now. There is less debt available, and both public and private equity pools have shrunk, creating heightened competition for the limited capital that remains. As a result, companies are finding it harder to secure the necessary funding to execute their strategies.

At Tailwater, we aim to be a trusted partner during these times. We provide tailored capital solutions along with technical expertise across the midstream and upstream value chains, helping both public and private companies navigate these challenging conditions and achieve their goals.

DD: What will be the net effects of crude oil rangebound in the $50s?
DP: If crude oil remains rangebound in the $50s, we expect to see a cascading impact on the upstream E&P sector. Operators are already reducing rig and frac crew activity, which we expect to lead to a rapid drop in production. Much of the recent production from U.S. shale has a high first-year decline profile, and if that decline isn’t offset by new wells, we could see a steep drop in domestic production levels. We’ve already seen several public operators announce cuts to their near-term activity in response to prices dipping below $50. [We also do not expect to see a large build in DUC inventory, as seen in previous downturns, with operators favoring capital efficiency by reducing the time between drilling capital to first production.]

Capital intensity in the shale sector has increased as we’ve moved into a more manufacturing-driven model, but with capital availability at its lowest point in years, this is creating a tough environment for many operators. The efficiency of modern rigs means that a significant drop in rig count could have a greater impact than it did in past downturns, as each rig is now capable of more than before.

If the downturn lasts for an extended period, production could fall even further. Given the lower reinvestment rates across the industry, it may be challenging for operators to return production to pre-downturn levels. However, this situation could create significant long-term opportunities for those committed to the industry and willing to invest in quality assets and strategic partnerships during periods of volatility.

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