[Editor's note: A version of this story appears in the April 2021 issue of Oil and Gas Investor magazine.]
Well construction has improved dramatically in recent years, and for the better. Now, is the construction of young E&P companies backed by private equity changing, and for the better?
The shale business model worked brilliantly for about a decade and some impressive fortunes were made by entrepreneurs and their private equity sponsors who were able to make deals quickly. That is changing. The popular strategy of drill-a-few-wells and flip has gone out of style, as investors demand higher returns. It may not be broken, but it is not a sustainable model either, sources said.
The traditional “waterfall” deal terms may not have changed, but ways for private equity backers to incentivize E&P management teams has, with a greater emphasis on meeting return hurdles, rather than growth measures. “Last year was just a whole new high of uncertainty like we’ve never seen before,” said one E&P CEO.
Throughout the oil patch, E&P companies and their private equity sponsors are taking a longer view. But many began doing that even before the pandemic turned markets upside down. Oil and Gas Investor spoke with a number of sources to find out what business model works now and their plans for 2021, since oil prices have recovered back to reasonable levels, above $60/bbl at press time.
