HOUSTON—At a recent energy forum, panelists discussed how private equity has remained active in the energy industry during the low price environment.

Overall, acquisition activity in the sector has been constrained, both on the corporate level and for private equity. As upstream and midstream companies rushed to cut costs, the expectation was that those companies that were hurting for capital would divest assets to increase their liquidity. That has turned out not to be the case, as panelists explained.

Mark Burroughs, managing director at EnCap Investments LP, said companies are hanging on to assets as long as possible because everyone expects oil prices to go up.

“Everyone wants to buy at $50 to $60 oil. No one wants to sell,” he said at the Mergermarket Energy Forum on May 19.

Rakesh Wilson, partner at Apollo Management, said that companies, to avoid selling, have strategically raised a lot of debt and equity.

“That has provided a lot of liquidity to the energy businesses, but not for long,” Wilson said. Those companies raising liquidity through debt and equity are essentially playing a waiting game, hoping prices rebound or stabilize before their stop-gap measures become ineffective, he added.

According to Burroughs, “What has to happen, if we’re in a prolonged period of lower prices, at some point when the hedges roll off and the cash flows continue to go down, the banks will have to put pressure on companies to sell assets. It’s just going to happen.”

If and when it does happen, which Burroughs anticipates could be at the end of 2015 or early 2016, lower quality assets would come up for sale first, but high-quality assets would also likely be up for acquisition not long after.

Alternatively, transactions could pick back up if the price of oil stabilized, Burroughs predicted. Many companies remain hesitant to place assets for sale while oil prices are still volatile. If the price settles, even if the price hovers at around $65 per barrel for the near-term, management would feel more comfortable resuming transaction activity.

“When you have stability not only in price but in people's thinking, you start to see more transactions happen,” Burroughs said.

Once transactions resume in the energy space, private equity will likely be right there ready to start doing acquisition deals again, as private equity investment never really slowed down in the space, according to Amber Meek, partner at Kirkland & Ellis LLP.

Rather than slowing down, “it's really more that a lot of our clients started pivoting,” she said.

“The deals that they were looking at, the deals that they were trying to do, did fall by the wayside, and so the fourth-quarter [2014] and the first-quarter [2015] of this year were slow as far as closing deals. But they actually got very busy and started ramping up on alternative transactions, these creative ways of doing things maybe they traditionally hadn't done,” she said. Rather than acquire a working interest in a company, private equity clients might instead buy into company debt or purchase securities of a public company through a PIPE (Private Investment in Public Equity) transaction.

“It wasn’t necessarily that everything just ramped down and [private equity] stopped being active in the market,” she said. “They’re just pivoting to different things and ramping up those deals and saying ‘let the other deals fall off.’”

Contact the author, Caryn Livingston, at clivingston@hartenergy.com.