Last summer, oil companies were jumping over one another to announce their latest feats. A new well was pumping oil at volumes far beyond what engineers predicted. Or a private equity firm had committed another couple hundred million dollars to finance the great U.S. shale boom overtaking Texas and North Dakota.
And then suddenly crude prices were plummeting, falling from more than $100 a barrel in late July to less than $50 a barrel by early January. The pipeline of news releases came to a grinding halt.
But as oil prices have leveled off over the last month, settling around $50 a barrel, signs are emerging that some private equity and investment firms are moving money back toward the energy sector. It is a calculated risk that crude prices are at or near their bottom: Anything bought now, whether stock or an oil lease, will only rise in value when crude prices rebound.
Private equity firms have been building up stockpiles of cash, ready to buy up assets from companies falling into financial difficulty — what some in the oil industry have dubbed “vulture funds.” Even as layoff announcements pile up and companies scale back their drilling programs, executives at Denham Capital’s offices in Houston recently announced they are financing a Midland oil company toward the acquisition of oil leases in West Texas.
“Our crystal ball is as hazy as anyone’s on when oil prices will rebound,” said Geer Blalock, a director with Denham. “We recognized an opportunity in a part of the world that is pretty compelling. You can get access to things of relative quality whereas six months ago people weren’t willing to part with their best assets.”
The shifting of outlook on the oil and gas sector can be seen in the financial markets. An index tracking energy companies within the S&P 500 hit its low on Dec. 15 and has since risen by more than 9 percent.
BlackRock, an investment management firm, is among the largest investors in Dallas-Fort Worth-based oil companies like Exxon Mobil and Pioneer Natural Resources.
Earlier this week, BlackRock reported its Exxon holdings at 239 million shares, a 2 percent increase from a year ago. And its position in Pioneer has increased more than 20 percent to 9.4 million shares.
In a conference call Thursday, BlackRock investment managers said the market was oversupplied by about 5 percent, far less than in other severe downturns in the 1980s. They predicted crude would be back up around $65 a barrel by the end of 2015.
“If you look at the market today, oil prices are simply too low to incentivize investment,” said Poppy Allonby, portfolio manager with BlackRock’s natural resources group. “Oil prices will have to rise or costs will have to move lower to incentivize investment. From an investor’s perspective, either of these outcomes is a positive.”
But whether this latest leveling off is a sign of a turnaround or simply a pause before an even larger decline is the subject of much debate.
Some economists are predicting oil prices will move in a “W” pattern for the foreseeable future — meaning consistent and alternating periods of increasing and decreasing crude prices. So this latest rise might just be the calm before another decline, as the market tries to find what Citigroup’s Ed Morse describes as its “new equilibrium level.”
In a report this week, Morse said oil could fall as low as $20 a barrel before the downturn is over.
Adding to such dire prognoses, the U.S. Energy Information Administration put out estimates this week that U.S. oil production would continue to rise into 2016, reaching the near record level of 9.5 million barrels daily. That flies in the face of a number of predictions that U.S. crude production would level off later this year, as drilling rigs start to pile up in equipment yards around Midland.
Time is money
The varying signals have left buyers and sellers at a crossroads. Will Abney, general counsel at Atlantic Resources, the Midland oil company now financed by Denham, said there’s been some softening in prices but not enough.
“Buyers want to buy on $40 oil. And the sellers are still looking at higher prices,” he said.
But as the downturn persists and creditors come calling, fewer and fewer companies are expected to enjoy the luxury of waiting.
David Mahmood, chairman of Allegiance Capital in Dallas, said before the price slump he had expected one of the oil field companies his firm works with to sell for $40 million or even $45 million. Now the owner is telling him he’d take $10 million.
“There’s going to be some real buys out there,” he said. “If I was an oil trader I’d probably be buying up oil and putting in a tanker and plan on selling it in six months.”