RED President Steve Hendrickson highlights some of the key takeaways from last week’s Private Capital Conference organized by the IPAA.
Last week, the Independent Petroleum Associate of America (IPAA) hosted its annual Private Capital Conference in Houston. This year’s theme was “The Realities of the Energy Transition” and I thought it was one of the better conferences I’ve attended in terms of learning, new, up-to-date information. The quality of the presentations was very good, and the panelists were well-informed.
Here are a few interesting/important points taken from my notes of the comments made by the speakers. This week, we’ll touch on capital markets and save the energy transition points for next week.
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The cash flow model continues to be dominant and the return of capital through a liquidity event is less emphasized. This is driving persistent interest in low-decline properties. In a world without a “lease and flip” model, private equity funds have shifted to longer holding periods and low-decline properties that generate cash are a better fit.
Debt – Approximately 35-40 lenders remain active in the upstream business and the bank market is in “great shape” from a lender’s perspective. Commodity prices have improved, loans have more restrictive covenants, and the loans are of higher quality. There has been increased interest in term loans, with about 25-35 active lenders. European banks continue to drift away, while the Asian banks are coming back. Public debt had a very good year in 2021 with $50 billion in high-yield issuances. Higher commodity prices led to a rally in energy bond prices and, according to one speaker, “all of the exits are gone”, except high-yield issuances.
Equity – Endowments and foundations continue to rotate out of the energy business, but family offices are taking notice. Public IPOs remain limited due to public market valuations that have shrunk to the 3x-4x EBITDA range. Undeveloped locations are being valued in the Permian, but essentially nowhere else, other than perhaps the core Bakken, Marcellus, and Haynesville.
A&D – Valuations are being driven by cash flow multiples in the low 3x. Small- and mid-sized players are looking to add to/high grade their drilling inventory and the majors are looking to divest non-core assets. Abandonment expenses are getting increased focus and, according to one speaker, are always quantified and valued. Another wrinkle in valuations is that bonding requirements on federal lands are increasing. Deal flow is up and so is the portion of the purchase price paid with equity, at least at the closing table. There’s optimism that 2022 will be a good year for A&D, but undeveloped locations still aren’t generating much value, despite rising commodity prices. Consistent with the focus on cash flow generation, valuations are looking more towards a returns-based approach than traditional NPV/NAV.