Private Equity Investing in Upstream Oil & Gas

EMS:

Hi, Larry. Thank you so much for being with me today.

Larry Keller:

Thanks for having me, Elana.

EMS:

Absolutely, Larry. So, to kick off the conversation, tell us a little about yourself and how you got to where you are today.

LK:

A thumbnail sketch of my background begins with myself being a degreed petroleum engineer from the Colorado School of Mines. I have over 40 years’ experience with a primary focus on conventional reserves in the major producing basins domestically. In the past 20 years, I have focused on acquiring underdeveloped conventional reserves, operating and investing capital to develop these properties, providing attractive returns to the investors. Most recently, I have been focused on Rover Petroleum as the founder dating back to 2017. Rover had an equity commitment of $250 million from Riverstone Holdings. Rover was focused on the acquisition and development of conventional oil reserves, primarily in the Permian Gulf Coast and Midco areas. Today I am a shareholder and board member of Rover Petroleum, and also, I am the sole owner and manager of Petra Solidus, which is a small private oil company.

EMS:

Larry, it's definitely an interesting time right now with respect to dealmaking in the upstream oil and gas space and I wanted you to share your outlook for M&A activity in this space for 2024.

LK:

Well, Elana, when you look back at the M&A activity over the last couple of years in the upstream oil and gas industry, it's been quite anemic. And the primary reason for this was the buyer evaluations were so low that the seller didn't want to sell. But in 2024, I think we're seeing, and we'll continue to see a pickup in M&A activity, and I believe the larger corporate entities will be divesting of the assets that do not fit their long-term strategy for reserve growth. At the same time, the private equity backed portfolio companies are aging in their respective funds and they need to be divested. So, the bottom line is there needs to be some house cleaning within the asset portfolios of quite a few companies.

EMS:

Larry, the current macroeconomic environment has clearly presented challenges to deals closing. Would you be able to discuss which macro factors have had the most impact on your clients who have closed transactions?

LK:

Well, these macroeconomic factors that impact oil and gas operators are higher interest rates on debt, rising material costs such as tubulars and oil field services such as completion and frack services. We've seen  evolving environmental policies and regulations changing, becoming more stricter. And lastly, the emerging technologies, especially in the development of shale or the unconventional reserves. Now all of these factors are playing an important part and they're driving up investment capital and the need for financial planning is definitely a must. The experienced operators are still seeing these returns on capital as being very attractive because of today's commodity prices, and there continues to be a continued push for growth for the shareholders. So, all the factors are really important at today's, for today's oil and gas operator.

EMS:

Larry, as a follow-up question, what about valuations? How has the macroeconomic client impacted valuations of companies that operate in the upstream oil and gas sector?

LK:

Well, these macroeconomic factors must be worse and reviewed by the operators in order to understand how it will impact their ability to grow earnings for its shareholders. The successful buyers will find ways to uncover a different view on the revenue and the cost synergies that will push up the evaluations of when the deal. At the same time, it will be satisfying the seller. Now, the successful buyer will also accelerate value realization by utilizing quicker execution after closing the transactions.

EMS:

Larry, what about trends and what you've been seeing in purchase prices and EBITDA multiples in the upstream oil and gas space, and how do you think those trends will continue into the rest of 2024?

LK:

There appears to be an upward trend of purchase prices and EBITDA multiples. The EBITDA multiples over the last couple years were very low in the 24-to-36month range, or twoto-three-year range. I think what we're seeing now is that the EBITDA multiples are running higher in the 36-month-to-60 month or threeto-five-year range. I believe the higher valuations at these multiples EBITDA will continue. The upstream oil and gas industry is in a stronger financial position, and we are seeing higher oil prices and there seems to be a stabilizing macroeconomic environment. The overall industry's financial strength will be able to finance investments, pay dividends, and make acquisitions support an aggressive capital program and grow future revenue for the shareholders.

EMS:

Larry, what is one key piece of advice you would give to a company in the upstream oil and gas space contemplating a buy-side transaction? And also, I'd love to hear your thoughts about contemplating a sell-side transaction.

LK:

Well, on the buy-side transaction, the advice I would give is look at the acquired assets and make sure that you know them well and that you've had success growing shareholder value in the past. If you're looking to acquire assets, make sure that they provide cost synergies. At the same time, it compliments your current operating areas. Make sure that your near-term projections for the acquired assets looking, say two to three years forward are achievable and accurate as possible. Now, on the sales side, the advice I would give is make sure you identify the potential buyers that will maximize your business valuation, present detailed financial and operational analysis, and identify areas of improvement for the potential buyer. Finally, timing is everything. If there are many investments opportunities on the market, you're going to be limited on the number of potential buyers. You want to time the market process to maximize the number of potential buyers bidding on your assets.

EMS:

Larry, with ESG energy transition, top of mind, how do those factor into evaluating companies in the upstream oil and gas space?

LK:

A lot of major financial investors evaluate oil and gas companies these days on how they're moving to an energy transition, which means how are they moving to a lower carbon future? These companies are rated for ESG, which is an acronym for environmental, social and governance. Let's look at an example that happened in late 2023. ExxonMobil bought Denbury in an all-stock transaction valued at $4.9 billion. The Denbury acquisition of assets gives Exxon the opportunity to play an even greater role and a thoughtful energy transition with carbon capture and storage. The Denbury assets were perfect for this and helped boost Exxon's rating related to ESG.

EMS:

Larry, we've covered a lot of ground today and wanted to see if there are any final thoughts you'd like to share with us.

LK:

Well, the oil and gas business has been a wild ride during my career and will continue to be so. We have seen commodity price cycles in the past, primarily associated with demand and geopolitics. Now we're seeing a transition of oil and gas companies working in an environment with demands for higher returns, increasing dividends at the same time, investing in the energy transition and emissions reduction. Technology with the aid of AI will continue to play an important role in the future for cost reductions, improved performance, resulting in higher shareholder returns. And I'm very excited to be part of this transition.

EMS:

Larry, I wanted to thank you so much for sharing your perspective with our listeners.

LK:

Thanks for having me, Elana,

EMS:

And thank you for listening to the EisnerAmper podcast series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.