Class of 2019 | delgj@wharton.upenn.edu

In the last decade, the United States saw a tremendous shale-drilling boom in which private equity firms were among the most aggressive financiers. Seeing great potential returns due to increasing production, many investors financed the shale boom, but did so with the price of $100 per barrel of oil in mind. In the long run, the shale boom produced market-flooding supplies of oil and gas and was a factor in oil prices crashing to $45 a barrel in 2014. Many of these investments in the industry were made through funds which typically have a limited lifespan, promising to liquidate assets and return their investors’ money after a period of ten years. Due to this fall in oil prices, however, numerous energy-focused private equity funds today are filled with assets worth less than they cost and are now facing the prospect of having to liquidate at steep losses.

Such funds are approaching these issues by either negotiating deals with current investors to extend the fund or by bringing in fresh cash from external investors and refinancing investments. Jay Yoder, the head of real assets at Pavilion Alternatives Group, a firm that advises private equity investors, said “The number of energy funds that need more time is at a level we’ve not seen before.” EnerVest Ltd., a Houston-based investment firm that operates more oil-and-gas wells than any other company, is asking investors in two of its funds for hundreds of millions of dollars to support their suffering vehicles to avoid losing billions that were invested. First Reserve Corp., on the other hand, has proposed waiving management fees in exchange for extending the life of a fund that has lost more than a third of its original value.

While many companies suffer from their losses on their oil-patch investments, others are seeking opportunities to grow in oil’s current bear market. Over the last several years, oil producers in West Texas have been able to extract crude oil at some of the lowest costs per barrel in the country. While oil prices have been low and stock investors have been more willing to finance acquisitions, many private equity firms have been selling Permian fields to larger energy producers eager to stake claims to drilling land in West Texas, resulting in unique investment opportunities in the Permian Basin.

Since oil prices plunged in late 2014, Diamondback Energy, for instance, has shifted its expansion strategy outlook to a far more aggressive one. Diamondback Energy is headquartered in Midland, Texas and has approximately 78,000 net acres in the Permian Basin as of 2015. Since 2015, however, Diamondback Energy has sold more than $1.5 billions of new shares and used much of the proceeds to fund acquisitions. In July 2016, it agreed to pay $560 million for another 19,000 acres in the Delaware Basin fields from Luxe Energy LLC, a venture backed by Carlyle Group LP. More recently, Diamondback Energy became the likely winner of an auction for Silver Hill Energy Partners. Silver Hill was founded in 2011, backed with $725 million from private equity firms, and owns drilling properties south of New Mexico in the Delaware Basin. It is comprised of two privately held entities controlled by affiliates of Kayne Anderson Capital Advisors and Ridgemont Equity Partners that collectively own 41,000 net acres and 58 wells.

However, when deal talks between the two fell apart, RSP Permian swept in and quickly acquired Silver Hill for $1.25 billion in cash and 31 million shares of common stock, which results in a total purchase price of approximately $2.4 billion. This deal results in the strategic union of two premier, growth-focused companies with complementary asset bases, which provide investors with near-term liquidity and continued upside exposure given the current low oil prices. This is one of several deals that have taken place over the past year for Delaware basin acreage, with heavy involvement from private equity firms. Some firms have found opportunities amidst the chaos and losses caused by plunging oil prices and positioned themselves for brighter futures.