As the oil and gas industry continues to face significant challenges, private equity professionals have their hands full. Valuations that were once reliable, are now fraught with new complexities due the extreme volatility in commodity prices. Lawyers from Winston & Strawn LLP recently spoke to Hart Energy about the challenges for private equity in the oil sector and their path to recovery.

Private equity partners need to effectively work with their portfolio companies to ensure survival and plan for future success, according to Mike Blankenship, corporate partner at Winston & Strawn.

“Survival requires ensuring the financial strength of the individual portfolio company, which includes checking balance sheets, analyzing credit facilities and other debt arrangements, watching for supply chain disruptions, counterparty and bankruptcy risks. In some cases, consolidating portfolio companies within a fund may help create the desired economies of scale and reduce unwanted G&A costs. This is especially true in basins or regions where it is clear there is only room for a few companies to succeed,” he explained.


“There is certainly a tough environment for private equity in the energy industry,” said Eric Johnson, corporate partner at Winston & Strawn.

“Sourcing new deals and putting money to work is difficult when everyone chases the same assets,” Johnson continued. “Raising new money for non-distressed assets may be difficult when potential investors have negative views of the oil and gas industry. In a similar vein, limited partners (LPs) may want to see more ESG (environmental, social and governance)-focused solutions going forward, which some professionals may not have as much experience with. Also, exits or liquidity events are being delayed until the bid-ask spread returns to normal.”

Regarding dealmaking, sponsors can enhance their diligence processes across the upstream, midstream and oilfield service sectors to deliver better investment results, said Brad Ratliff, associate at Winston & Strawn’s Corporate Department.

“To unlock value from the diligence process, sponsors will need to accomplish more with fewer resources available to them,” Ratliff explained. “Firms should embrace technology to help them drill down on the common areas of interest with more efficiency.

“For upstream and midstream targets, these areas will focus on land and title, engineering and geology,” he continued. “For service company targets, attention should lean more towards intellectual property, human resources and operational matters. Understanding how the pandemic has changed customer and supplier relationships will also be key to determining a target’s future financial performance” 

Even though most diligence processes will need to take place virtually due to lockdown, it will be important for sponsors to identify any areas that still require physical in-person diligence. These could include environmental, land and mineral title and inventory counts, which could potentially cause a delay in timing of the transaction.

Thus, successful general partners will chart parallel paths, learning to grow their diligence capabilities online while crafting safe and effective plans for resuming in-person diligence once applicable restrictions have been lifted, Ratliff said.

New investments

Once the immediate fund-level and portfolio concerns have been addressed, the focus will shift toward new investments, Ratliff said, adding that right from the outset, fund professionals should understand their mandates to know whether they are allowed to seek out alternative investments from the normal course, such as Section 363 of the U.S. Bankruptcy Code.

As Blankenship pointed out, this is the time to “get creative” in putting deals together.

“We are seeing some private equity firms looking at more public company investment opportunities such as private investment in public equity, or PIPEs, and high yield debt, which they have not typically invested in,” he said.

In addition, LPs may want to see sponsors increase their commitments to more sustainable or ESG-related investments to the extent which their funds mandates allow them.

“As more distressed assets come to market, sponsors should roll up their sleeves to understand how such assets became impaired and whether there is any potential for future growth,” Blankenship said.