Private-equity-backed E&Ps are harvesting returns for investors, but—these days—not the old-fashioned way. Traditionally, the return has been via selling the portfolio—full of PUDs and plenty of PDP to demonstrate the acreage has good rock, ripe for tapping.
The buyer, usually a public E&P looking for more future-well inventory—that is, PUDs and, with some extra attention, some of those probables—on HBP leasehold with producing cash flow, would pick it up. The sale—usually within three or five or, pre-shale boom, up to seven years—was the harvest of private investors’ initial investment plus more than 30%.
In the heated Permian, before shareholders shut down further public E&Ps’ acquisitions of more leasehold, one PE-backed leaseholder flipped in fewer than 24 months; even with the capital-gains-tax hit, the sale met the return threshold.
Without public E&Ps wanting more inventory right now, what’s a PE-backed E&P with a build-and-flip model to do? Many are proceeding to harvest upside for themselves, at least, via producing the reserves, instead. They’re drilling those PUDs.
This changes the business model and thus, everything, really.