AUSTIN, Texas—In times like these, upstream private-equity providers are getting a relatively rare downcycle view of members of their portfolio-company management teams, according to Ken Friedman, managing director at SFC Energy Partners.

They get a glimpse of which members “really want to go through this cycle and do the things that are necessary to live to fight another day,” he said in a roundtable discussion at the recent Energy Capital Conference presented by Oil and Gas Investor. Portfolio companies have to look at every cost that doesn’t fit a “conservation mode,” and also at which plays “are really worth hanging on to,” he said. “It’s a sobering experience,” but “a necessary one.”

EnCap Investments LP is currently deploying its upstream $6.5 billion Fund X. Doug Swanson, a managing partner, said that among EnCap’s roughly 35 upstream investments across North America, it is also focusing on balance sheets, risks and other economic measures.

“What we’re not doing is picking drilling locations,” he added. But, regarding investment decisions, “at the end of the day, it comes down to what are the single-well economics. If we don’t have to drill wells, let’s not drill wells.”

EnCap’s investments cover all of the major unconventional-resource plays. SFC has less exposure to these as its equity commitments are smaller, Friedman said. A $40 million investment, for example, is better suited to existing-field development, such as waterflood, infill drilling and extensions that could require $2 million wells rather than $6 million wells.

“What we don’t want in this environment is to step into a new play with a gun to our head [in terms of new-play lease deadlines],” he said. “That’s absolutely a non-starter for us.” But, he added, “We’re still leveraging a lot of the technology that has come out of the horizontal shale plays.”

In terms of acquisitions, one involved a waterflood project in Canada from Exxon Mobil Corp. (NYSE: XOM). From the time of deal commencement to closing, WTI declined 30%. “Exxon is a company that doesn’t really like to change its terms,” Friedman said, “so we had little SFC with Exxon on the other side of the table.”

The deal almost didn’t work, but it didn’t blow up. In the end, “the two parties were willing to accept the pain and be equally dissatisfied,” he said.

Bayou City Energy Management LLC makes private-equity investments of between $5 million and $35 million, putting it at the smaller end of the market. Bill McMullen, founder and managing partner, said, “We’re going into areas of the world, specifically the U.S., where plays and basins are geologically de-risked. We’re not afraid of unconventional assets,” but “where we really butter our bread is going after an asset where we can take LOEs [lease operating expenses] of $20 a barrel down to $10.”

The smaller market, from an equity perspective, “is very undercapitalized,” he said. Bayou City has made two investments since itJune 2015 formation: TXon-SCZ LLC in and around the KMA Field in Wichita County, Texas, and White Knight Resources LLC in the San Joaquin Basin in California.

Bayou City also aims to invest as a drilling partner. Its one deal to date is with Alta Mesa Holdings LP to drill legacy acreage that is in the Stack play in Oklahoma. “We want to put as many dollars as we can into the ground” as possible rather than fund general and administrative expenses, such as is done in traditional private-equity, he said.

Swanson said it is clear that although EnCap successful exited portfolio company Felix Energy Holdings LLC to Devon Energy Corp. earlier this year, “there is no question you’re going to have to hold these assets longer.”

EnCap might have one exit toward the end of 2016 “if there is a price recovery.” Otherwise, “we have to have capital structures in place where you can be patient.”

Friedman expects more transactions eventually. Public E&Ps will need to find drilling inventory that generates positive returns if a $40 to $50 oil price persists—whether in shale or conventional rock. “It’s really about the ability to do something on a low-risk basis and do it repeatably,” he said.

McMullen said that with Bayou City at the smaller end of the market, “we’re bumping up against guys who are having issues with their credit facilities.” He was waiting in March for capitulations as a result of new borrowing-base determinations.

In addition, the Office of the Comptroller of the Currency (OCC) issued new, stricter guidelines to banks in late March regarding lending on proved reserves. “The new OCC standards, I think that is going to force some transactions … to actually break free,” McMullen said.

Friedman noted that Harold Hamm, chairman and CEO of Continental Resources Inc. (NYSE: CLR), remarked at the conference earlier in the day, while accepting Oil and Gas Investor’s Executive of the Year award, that great innovation has come during downcycles. For example, Hamm said, the fracture-stimulated, horizontal discovery of the Middle Bakken shale member in Elm Coulee Field in Montana was in 2000.

“As Harold pointed out, often what you find on the other side of these downturns is some of the best opportunity,” Friedman said.

Nissa Darbonne can be reached at ndarbonne@hartenergy.com.