Oklahoma oil fields attract private equity
Billions of dollars of private equity money has flooded into Oklahoma oil fields, sparking drilling, pipeline and support projects throughout the state, speakers said Thursday at Gov. Mary Fallin’s Energy Investment Luncheon.
The private equity emphasis is both a function of the general equity markets and the age of development of the state’s oil fields, said Jason McMahon, upstream investments partner at Encap Investments.
“These plays move in cycles,” he said. “The people who get in early are the entrepreneurs. They prove it up first. Then the bigger companies see a path to get the oil out. They see a lot of inventory that has been de-risked and know what the rate of return is going to be.”
Oklahoma’s oil fields still are in the early phases of development, an effort that has attracted dozens of smaller companies backed by out-of-state private equity groups.
Those private equity firms typically expect to get back their investment in three to five years or so when the companies they back are bought up by larger corporations. By the time the rock is tested and proven, larger companies buy up assets, driving up sales prices.
“That’s when private equity traditionally passes the baton,” McMahon said.
The Permian Basin in west Texas and southeast New Mexico has been the country’s hottest play for the past several years, but a series of high-profile sales has driven up the price to buy into the area.
“When the price gets too high, we have to move on,” McMahon said.
Moving west
In Oklahoma, much of the attention over the past two years has been centered on Kingfisher County and the STACK play.
“In the Kingfisher STACK, we’re already well past that valuation point for private equity,” McMahon said. But as we move west in the play, there are different dynamics. That area still has a lot of guys able to put together enticing proposals.”
Private-equity backed companies also are working in western Oklahoma’s Anadarko Basin and in southeastern Oklahoma’s Arkoma Basin.
Oklahoma has attracted the ongoing investments because of a mix of the rock and other less-tangible qualities, said Nathaniel Harding, president of Oklahoma City-based Antioch Energy.
“Certainly geology has to be there,” he said. “We have some of the best assets in the country. We also have a lot of institutional knowledge. A lot of us have benefited from that. There’s so much institutional knowledge that’s never more than a phone call away.”
David Hayes, a partner at NGP Private Equity, agreed that the state’s experience with oil production is attractive to investors.
“Oklahoma has benefited significantly because it is a legacy producing area,” he said. “It has a good climate for business and the acceptance of the industry. People understand stack plays and the things that matter with unconventional development.”