With the landscape of oil and gas shifting dramatically amidst a roughly 20-month slide in crude prices, it’s sometimes hard to find landmarks. The role of commercial bank lending is changing; the strength of public equity markets for energy is fluctuating; and the high-yield market is shut for most oil and gas producers. But there’s still private equity—standing at the ready to play a pivotal role.

The good news for private equity sponsors is that, as they put money to work, they are able to choose from a greater quantity—as well as a greater quality—of assets coming onto the market. Private equity is said to have been the largest buyer in the A&D market last year, and it is hard to imagine it won’t stage a repeat of that major role in 2016.

Private equity’s ability to fund will be needed, as energy transactions are expected to require a notably larger equity component. In the wake of lower commodity prices, many commercial banks have had to pare back their energy loan exposure, making it more challenging to assemble energy bank syndicates, especially for larger loan amounts. In turn, energy loan costs have risen significantly as regulators apply a total debt test—rather than a prior test of senior secured debt only—in instances where clients have also issued unsecured debt.

And in many cases securing a bank loan is now dependent on having commodity hedges protecting several years of production.

This more constrained role for commercial banking means that the substantial funds raised by private equity—variously estimated at $50 billion to $100 billion or more sitting on the sidelines—are likely to carry added importance as a crucial funding source.

“The debt capital markets will be changed for a very long time,” observed Quantum Energy Partners LP’s CEO, Wil VanLoh. “Banks are just not willing to take the price risk that they’ve taken historically.”

Along with the steep sell-off in commodities, these changes to longstanding financial channels may provide the catalyst for further changes in the energy patch, although some can cut both ways. A less accommodating debt capital market, for example, may serve to hold down asset prices for private equity-backed buyers but may also restrict use of leverage in developing those assets.

But a surprising assortment of new avenues is opening up. One private equity-backed company has successfully gone to the bankruptcy courts to acquire assets. Another has gained traction in making unsolicited bids for assets. Others have set up programs to buy royalties. Several are pondering the type and timing of oilfield service investments in the middle of continuing E&P capex cuts. How about an acquisition JV? Or buying back deeply discounted bonds?

One of a few near-consensus themes relates to which basins remain most popular: the Midland and Delaware subsets of the Permian Basin; the Scoop and Stack plays in the Midcontinent region; and the Marcellus and Utica plays in the Appalachian Basin.

Not surprisingly, private equity sponsors’ commodity outlook is generally positive but peppered with nuances as to the timing of a sustained upturn.

Putting money to work

Dallas is home to several private equity sponsors, including NGP Energy Capital Management LLC, whose managing partner is Tony Weber. Although he views WTI prices in the range of $30 to $40 per barrel (bbl) as unsustainable, Weber cautioned that the market may take yet another leg down before it has fully capitulated. Meanwhile, the firm is “pretty picky” and deploying capital “relatively slowly.”

“At prices of around $35 to $40/bbl, there are very few places that generate sufficient returns today,” he said in mid-April. A couple of NGP’s investments have been focused on the Delaware Basin, where IRRs of over 30% can still be generated at current strip pricing, he noted. Other favored targets include parts of the Eagle Ford and the Niobrara, as well as the Marcellus and Utica on the gas side.

“We’re focusing on investing in the best and most economic plays in North America and only in the core of those plays,” said Weber. “We’re not interested in fringe acreage. We want to be right in the middle of the core so that we have the best optionality on exit.”

Last year, NGP backed Luxe Energy LLC with a $500 million equity commitment, a portion of which was used to buy 18,000 net acres in the core of the Delaware Basin. Earlier this year, it made an equity commitment of $150 million to Black Mountain Oil & Gas LLC, also focused on the Delaware Basin. Both reflected “real conviction in a management team we like, in a basin we like,” said Weber.

NGP continues to concentrate on the acquisition and exploitation model where its management teams can hone in on production enhancement and operating cost reductions in more mature fields.

Through its portfolio company, Bluestone Natural Resources II LLC, NGP has also been active in buying assets through bankruptcy proceedings. Early this year Bluestone—led by a management team that NGP has now backed three times—was approved by the bankruptcy court as the buyer of the domestic oil and gas assets of Quicksilver Resources Inc. The transaction, valued at $245 million and including over 1,000 operating wells in the Barnett Shale, was the largest acquisition by Bluestone to date.

The purchase out of bankruptcy received particular attention because it also involved renegotiating terms of a gathering agreement covering the majority of the Barnett assets. Bluestone struck a new 10-year agreement with the existing midstream provider, Crestwood Equity Partners LP.

“The beauty of the bankruptcy process was it allowed us to sit down and start from scratch in terms of re-setting the economics for both sides,” recalled Weber. “If banks don’t capitulate and force borrowers to sell assets, an alternative is to follow the borrowers through bankruptcy and pick up assets that way.”

The challenging backdrop for banks is reflected in how much harder it has become to secure loans.

“Getting a loan of over $500 million underwritten and syndicated is extremely difficult,” said Weber. “The market is becoming very shallow. Rates on bank loans are probably going to go up by 100 to 200 basis points, and the high-yield market has become much more expensive and selective.”

EnCap Investments LP managing partner Murphy Markham said the company’s strategy has shifted from primarily leaseand- drill to an even split with acquire-and exploit during this downturn.

In terms of the quality of assets coming onto the market, according to Weber, “it’s only recently that we’ve started to see anything close to resembling core properties come onto the market.”

The latest fund raised by NGP—NGP Natural Resources XI LP—brought in total commitments of about $5.3 billion in early 2015. Of this, around 20% has been actually funded to portfolio companies. The pace of investment has been “relatively slow,” acknowledged Weber, “but if you look back over the last 18 months since the fund closed, I don’t know that’s necessarily a bad thing. The market simply isn’t giving us that many compelling opportunities.”

NGP commitments in its latest fund are typically made in the range of $100 million to $200 million. NGP also has a “Leaders Under 40 Initiative,” which makes smaller capital allocations to the next generation of entrepreneurs in the oil and gas industry.

With main offices in Dallas and Houston, EnCap Investments LP last year raised some $6.5 billion in its latest fund, EnCap Energy Capital Fund X LP. With EnCap alone having a capacity of more than $9 billion, including uncommitted amounts in its two prior funds, estimates of $100 billion of total private equity on the sidelines “are probably not too far off the mark,” said managing partner Murphy Markham.

“I think the biggest source of capital to fund acquisitions this year will be private equity, and it will probably be funding at least 50% of the A&D market,” said Markham. “We’re seeing the quality of the acquisitions improve, and we would expect that to continue to improve in 2016 as more and more companies try to rationalize their asset bases.

“Some of the better assets are actually coming from financially sound entities, such as some of the majors and larger independents who don’t have to sell,” he continued. “But strategically they may want to shed non-core assets—which are really quality assets—and focus on core areas. As a result, we’ve closed on several acquisitions with very financially strong entities and are signing purchase and sale agreements on some additional ones. We’re seeing a pretty good flow of acquisition opportunities.”

Historically, EnCap has shifted the mix of its business between an acquire-and-exploit strategy and a lease-and-drill strategy, with an 80:20 mix in favor of acquire-and-exploit a decade ago, swinging to an 80:20 mix favoring lease-and-drill during the shale revolution. Now, that’s changing again.

“With the most recent downturn, our strategy has shifted. We’re not actively buying leases, and our drilling activity has significantly decreased. We’re in the process of doing more acquisitions,” said Markham. “I don’t think it will swing back to the inverse, or 80% acquisitions, but an acquire-and-exploit strategy will play a bigger part of the business. It will probably approach a 50:50 split.”

EnCap-backed companies hold mainly unconventional properties, but more conventional assets are likely to be added, according to Markham.

“What’s ideal is buying conventional properties that are holding all the acreage by production, and realizing the upside by drilling horizontally into some of the other, deeper or stacked pay zones,” he said. “That can be done by buying existing production in the Permian and then having Wolfcamp, Spraberry and other zones available.”

While EnCap is “somewhat agnostic” as to whether it invests in oil or gas, evaluating each opportunity on its merits, the consensus at EnCap is that a $50 or $60/bbl oil price is needed to sustain production. For natural gas, by contrast, an abundance of supply is expected to keep prices at “depressed” levels, potentially even placing a “ceiling” on price. But for oil, said Markham, “I don’t know if there is a ceiling. If worldwide demand continues to grow, and production continues to fall, prices could trend back toward historical levels.”

One area of increasing interest for EnCap is participating in joint ventures with better capitalized producers that are often facing lease expirations. These are structured as “drill-to-earn” deals, under which EnCap foregoes paying for leases and pays the seller an agreed carry as it drills to earn acreage.

EnCap’s investments in the midstream area are made through its partner, EnCap Flatrock Midstream.

The private equity firm’s return targets are unchanged: to turn $1 into $2, and to generate a 25% rate of return. As of mid-April, EnCap portfolio companies had received commitments—but not yet funding—accounting for “a little over half” of its latest fund. With funding trailing commitments, EnCap has more than $8.5 billion available in its last three funds to support its portfolio companies and fund future opportunities.

“The market is becoming very shallow. Rates on bank loans are probably going to go up by 100 to 200 basis points, and the high-yield market has become much more expensive and selective,” said Tony Weber, managing partner, NGP Energy Capital Management LLC.

Active times ahead

Quantum Energy Partners’ VanLoh, based in Houston, sees private equity as a bright light given the lack of competing capital sources and a rising tide of acquisition opportunities.

“I think the next two to three years is going to be a time when private equity shines, because it will be the one real source of capital today that is available and actively interested in buying new assets,” said VanLoh. “You’re only just seeing this wave start, given the amount of bankruptcies and restructurings we have to work through between the banks and the bondholders and equity holders. There’s a good ways to go before this process plays itself out.”

Moreover, much of the industry is marking time until prices recover and balance sheets strengthen.

“The publics are mostly repairing balance sheets, and to the extent their balance sheets are okay, the independents are generally still in preservation mode. Most of them are not looking to go out and spend their precious liquidity on new acquisitions,” he continued. “And the majors have continued to decrease their A&D activity domestically each year for the last four to five years.”

Is Quantum putting more capital to work?

“We bought a lot of properties in the fourth quarter of last year and the first quarter of this year. Those two quarters were as busy as any we’ve had for a while,” commented VanLoh. “We find the opportunity set today to be at the higher end of attractiveness relative to the last 10 years. And I think prices firming up into the $40s, maybe $50, could actually dislodge more assets. There’s a lot of people hanging on, hoping prices come back up.”

For current Quantum portfolio companies, it has not been “business as usual” across the board. The companies in still-active basins are running rigs and, occasionally, adding acreage from nearby operators with weaker balance sheets. Elsewhere, Quantum companies accounting for 15% to 20% of its portfolio have laid down rigs, focused on balance sheet preservation and are working with banks to extend maturities in cases where they have too much debt and may need more equity, said VanLoh.

For the active E&P group, the “good news” is that most still have access to “meaningful committed capital that is undrawn, and we’ve been very successful in picking off acquisitions from nearby players that need to raise capital. A lot of those have been one-off opportunities where a company may only call three people. There are a lot of assets that are trading right now without significant processes being run, because they need timely solutions and certainty of closing.”

While Quantum has traditionally focused on unconventional plays, the burgeoning scope of assets on the block has provided an opportunity—at scale—to prosecute properties combining both conventional and unconventional characteristics. Late last year Quantum’s portfolio company, Tanos Exploration LLC, purchased ConocoPhillips’ entire ArkLaTex division in a $425 million transaction that adds an extensive inventory of horizontal drilling locations in the Cotton Valley to a base of vertical wells with upside from work­overs, recompletions and more.

“And there’s typically a lot more exploitation opportunity when it’s a complete basin exit. You’re getting some bottom tier assets, but you’re also getting some of the family gems—those gigantic fields that still have a lot of oil or gas in place,” noted VanLoh.

Quantum has also been working with public entities—whose balance sheets may in some cases be in disrepair—on such subjects as acquisition JVs, buybacks of deeply discounted bonds and PIPE (private investment in public equity) deals. Quantum has agreed on terms for two acquisition JVs, one on the E&P side and another on the oilfield service side.

By sector, Quantum funds typically allocate roughly 75% to upstream and 10% to midstream. Up to 15% may be allocated to power and oilfield services, but no funding has been made to these sectors in the latest Quantum fund. While valuing oilfield service companies is difficult, since most are breaking even at best, said VanLoh, “we have a very active pipeline of oilfield service relationships.”

Quantum’s latest fund, Quantum Energy Partners VI, closed with $4.45 billion in commitments last year and is only about 20% invested.

For the right management teams, “we’re sitting on a lot of capital,” noted VanLoh.

Townes Pressler, managing director, Lime Rock Partners, noted that the company has been outbid in the enticing Scoop and Stack plays where there is plenty of dry powder to compete against.

Not slowing down

Based in Houston, the Kayne Anderson Energy Funds, the energy private equity arm of Los Angeles-based Kayne Anderson Capital Advisors LP, is geared to the middle market segment of private equity and, according to co-managing partner Mike Heinz, sees little need to change its investment philosophy to adjust to the current commodity environment—either in putting new money to work or in planning exits for its existing portfolio companies.

Kayne Anderson believes significant demand exists for all the private equity funds being raised today.

“Cash flow at public companies has been reduced considerably, and there is a substantial amount of capital required to develop core plays that can generate economic returns in today’s commodity price environment,” said Heinz. “I don’t see a reason to slow down if a potential acquisition comes in that meets our opportunistic yet disciplined approach.” Despite the long slide in crude prices, “the pace of opportunities we’re seeing is substantially greater than what we’ve seen over the last four or five years.”

“I don’t see a reason to slow down if a potential acquisition comes in that meets our opportunistic yet disciplined approach,” said Kayne Anderson Advisors LP’s comanaging partner, Mike Heinz.

According to Heinz, the growing presence of private equity sponsors in the market for assets has been apparent from both sides of the table. In sales of assets held by Kayne Anderson portfolio companies, many of the bidders are backed by larger private equity counterparts; and when looking to buy assets, Kayne Anderson portfolio companies “are seeing less competition for middle market-sized assets, as a majority of private equity firms have grown commitment sizes and continue to focus on larger deals,” observed Heinz.

“To the extent there are competitors, it is mostly from other private equity sponsors,” he said.

Has the quality of assets coming to market improved?

“Without a doubt,” said Heinz. “Assets people are selling today would have never been sold if oil were $50/bbl or higher.”

Heinz cited as an example the purchase of 40,000 acres in the Midland Basin by Amistad Energy Partners LLC, which received a $150 million equity commitment from Kayne Anderson last year. Also, Casillas Petroleum Resource Partners LLC, a new Tulsa-based Kayne Anderson portfolio company, recently closed on the acquisition of oil and gas assets in the Scoop play from Chesapeake Energy Corp. for $106 million.

Another example is Kayne Anderson-backed Silver Hill Energy Partners II LLC’s $290 million acquisition of 14,000 acres in the Delaware Basin, along with 5,000 barrels of oil equivalent per day (boe/d) of production, from Concho Resources Inc. Silver Hill was already running two rigs on an adjacent property— and generating IRRs of 30% to 35% at recent prices—so it had insight into the economics of the purchase, Heinz said.

Since the 2014 Thanksgiving OPEC meeting, Kayne Anderson has invested more than $1 billion in companies and high-quality acreage, according to Heinz. “We feel we have put together very good positions in some of the highest quality basins in North America, where even at recent commodity prices we can generate gross returns through the drillbit of around 20% to 25% or higher.”

Some purchases came from large resource players with assets spread across multiple basins that have sharply reduced capex levels. In the downturn, Heinz said, some are opting to focus on core, delineated assets and sell more immature assets, because they lack the funding to maintain or prove up high-growth positions. For Kayne Anderson, “these types of assets are a diamond in the rough.”

As a result, Kayne Anderson has assembled numerous positions of 10,000 to 40,000 acres apiece that it plans to develop in the Delaware and Midland basins, as well as the Scoop and Stack plays.

Kayne Anderson portfolio companies are currently operating seven rigs. However, if crude stays above $40 for a sustained period, said Heinz, “we could have as many as 15 to 20 rigs drilling for the rest of the year across the portfolio and generating typical private equity returns.”

James Levy, Warburg Pincus Energy LP managing director, observed that the Terra deal was “an ambitious transaction in an environment in which many banks were closed to new business.”

Moreover, if observers are correct in projecting a rebalancing of crude markets around the latter part of 2016 or early 2017, Kayne Anderson plans to take advantage of periodic “windows of opportunity” to implement exit strategies for a significant number of more mature portfolio companies, he said. These would be companies that have ideally de-risked significant acreage, as well as multiple benches, in a given play.

“If there’s a good appetite for companies that have 10,000 to 40,000 acres and have drilled 10 to 30 wells, we’d want our companies at the top of the list,” he said. Exits have historically been through asset sales, although increasingly IPOs are a potential option.

And for those considering a start-up—now that sinking stock prices have loosened some executives’ “golden handcuffs”—how good is the timing?

“A lot of CEOs in their mid-50s say, ‘If I’m ever going to do it, now is the time.’ It’s a generational opportunity to invest in the market.”

Aggressive competition

Lime Rock Partners, with offices in Houston, Connecticut and London, has an international slant. But, post the U.S. shale revolution, the firm is concentrating its E&P investments in the onshore U.S.

“It has been difficult for us to find willing sellers of properties that can generate positive drilling returns in this environment,” commented managing director Townes Pressler. “But I think the worst is behind us, and A&D activity will definitely pick up.

“We’re really focusing on a couple of main areas where it makes sense for us to continue investing capital. We have a number of companies in the Permian, and we have a company in the Marcellus.”

In addition to the Permian, “the hot areas right now seem to be the Scoop and Stack plays, where there’s a lot of activity,” said Pressler. “What we’re seeing is private equity getting aggressive in these plays. You have to get aggressive to clinch the deals. Given how much dry powder is out there, we continue to be outbid in auction processes. But we are also making some unsolicited offers, and some of these appear to be gaining traction—more so than in the past.”

In terms of financing, there is “definitely a tightening of credit,” with transactions calling for a greater equity component, noted Pressler. The silver lining may be that, “now that banks are tightening their credit standards in lending, we’ll be more competitive with our peers. Some companies in the past have put in less equity and leveraged up transactions, and as a result offered higher values when buying assets.”

In looking at the oilfield service sector, the protracted downturn “has been the most difficult time we have had in making investment decisions in that market,” said Pressler. “We do see some good opportunities, but the big questions are: ‘How long does it take to turn? And, if we make an investment, how long are we going to have to fund negative cash flow?’”

One oilfield services investment made by Lime Rock earlier this year involved the launching of Ardyne, based in Aberdeen, Scotland. Financed by a 50 million pound sterling commitment by Lime Rock, Ardyne made its first acquisition—downhole tools provider Wellbore AS, based in Norway.

Another investment segment is Lime Rock’s move to back teams buying minerals in core shale acreage. “You can buy minerals at what we think are still reasonable prices,” said Pressler. “A lot of what two of our platform companies are doing is buying nonproducing minerals that we think will get developed in the future.”

Global reach

With an ability to tap two sources—both a global private equity fund and an energy-specific companion fund that invests alongside it—New York-based Warburg Pincus is well- equipped to make investments of size and for the long term. And with a network of Warburg Pincus investing offices across the world, it carries with it a global perspective.

The hard close of Warburg Pincus Energy LP occurred just before the 2014 Thanksgiving OPEC meeting, raising $4 billion, recalled managing director, James Levy. However, funding capacity for energy in total is even greater. Energy has historically made up 25% to 30% of the firm’s funds, and the most recent global fund, Warburg Pincus Private Equity XII LP, closed with capital commitments of $13.4 billion late last year. With the firm’s companion fund model, any energy investments are made 50:50 from these two funds.

How timely are current energy prospects viewed at Warburg Pincus?

“Warburg Pincus has committed itself to a disciplined approach and consistent strategy throughout the cycles,” said Levy. “Our strategy is not about betting on prices. We choose to partner with best-in-class management teams who view energy as a long-term business, as we do. This approach has been critical to our performance through price cycles, and it’s an important reason why our current portfolio is operationally and financially well-positioned.”

As regards higher quality—and more—assets making their way to market, the early flow appeared to be tilted initially more to natural gas, with oilier assets tending to lag, in Levy’s opinion.

In natural gas transactions, Terra Energy Partners LLC was able to make its first acquisition, a $910 million purchase of Piceance Basin gas assets, with equity commitments from Warburg Pincus and Kayne Anderson earlier this year. Terra received an aggregate equity commitment of $800 million, split 50:50 between the two private equity sponsors, with Kayne Anderson increasing an earlier commitment.

The Terra transaction illustrates some of the challenges now encountered in the bank market as it relates to acquisition finance, observed Levy. With an initial borrowing base of nearly $600 million, it was “an ambitious transaction in an environment in which many banks were closed to new business.” The financing ultimately succeeded, however, due not only to strong sponsorship from its private equity investors but also to Terra’s conservative business model, including an aggressive approach to hedging.

As part of the transaction, Terra received existing in-the-money natural gas hedges (in exchange for which Terra assumed a firm transportation obligation) and further expanded hedges of its own such that, at signing, its hedge book in total covered about 80% of its estimated proved developed production over the next five years.

“With commodity prices continuing to deteriorate as negotiations unfolded, this was a critical element for being able to get the deal done,” said Levy. And, for the overall industry, getting a larger deal like Terra’s over the finish line was important in that it “brought valuation expectations into a range that made sense for private equity to come in as buyers.”

Terra is a portfolio company in both the Warburg Pincus energy fund and its recently launched global fund. Another shared investment is the former Ross Smith Energy Group, based in Calgary, which was purchased from ITG for $120.5 million. Known for, among other activities, its breakeven analysis of major North American oil and gas basins, the research group has been renamed RSEG and will continue to operate as an independent/stand-alone business.

While Warburg Pincus takes a flexible approach in terms of investment size, it is comfortable with relatively large equity commitments of around $500 million, said Levy. For example, a line-of-equity commitment of up to $500 million was recently awarded to RimRock Oil & Gas LLC, whose management formerly led the North American shale division at Talisman Energy. Last year, a similar amount was announced for Independence Resource Management, headed up by Mike Van Horn, most recently vice president of geoscience at Newfield Exploration. With significant dry powder to put to work, “we’re looking to play at scale,” commented Levy.

Warburg Pincus has continued to invest in the midstream and oilfield services sectors, although Levy described the latter investments as “more targeted.”

One such investment was a line-of-equity of $300 million made to Rubicon Oilfield International in Houston, which is aimed principally at downhole tool acquisitions.

Another line of investment is a platform to buy royalties through an earlier portfolio company, Brigham Resources LLC, which is getting “out in front of the drillbit” in core areas of the Permian and other basins.

Alternative capital

For veteran investors at Five States Energy Capital LLC, the strategy differs from traditional private equity. Instead, the firm partners with upstream and midstream operators, providing custom financing solutions by taking direct working interests (or other real property interests, e.g., net profits interests, overriding royalty interests, or first or second liens) or acting as a mezzanine lender. For Five States’ investors, returns are principally in the form of a recurring income stream from real oil and gas assets.

“Our goal is to accumulate a portfolio of income-producing oil and gas interests for the long term,” said Fives States’ president and CEO, Arthur Budge. “We want to buy long-lived assets with low decline rates and low lifting costs.”

Budge attributes the firm’s longevity—it is on its 29th fund this year—to “discipline and patience.” Investments are typically in the range of $5 million to $25 million, but may be significantly higher if working with private equity sponsor New Mountain Capital, in New York. Through the latter’s affiliate, New Mountain Finance Corp., the two companies formed a strategic alliance in March of last year to “pursue defensive, lower- and middle-market energy investments.”

Until recently, in the midstream sector, Five States had participated in a gathering system and rail facility, Great Northern Midstream, serving the Bakken. The investment was sold in January on risks that the Bakken, with higher breakeven costs, would be unprofitable unless crude prices reached $60/bbl.

“I’m concerned about continuing development in North Dakota,” said Budge. “If oil settles out in the $50s, I’m not sure if North Dakota will ramp back up. I think there’s a real risk that it won’t.”

Five States retains midstream assets in West Texas and Kansas. The company’s current fund, with $112 million of equity commitments, is approximately 30% invested.

In addition to taking working interests, Five States structures mezzanine transactions. The firm’s targeted return is in the high teens to low-20s, made up of a 10% to 12% coupon and a participation that kicks in, after payout, and accounts for the balance. Five States typically requires significant hedging with mezzanine financing. “To us, it’s another way of buying production,” commented Budge. “It’s buying production with a preferential right.”

Five States has a mix of conventional and unconventional production, weighted more heavily to the former. Most of the unconventional output came by way of developments in North Dakota, where Five States had previously purchased conventional assets that were then held by production. Five States has not chased recent unconventional deals.

“We’ve always had a hard time with unconventional assets,” said Budge. “With a short ‘half-life’ and a lack of proven data on what the tail production looks like, it’s really hard to value unconventional PDP properties.”

In terms of the tempo of transactions, “We’re seeing a whole lot more things that we’re interested in these days,” according to the Five States CEO. “On average, we usually have 20 or so deals in our pipeline that are in varying stages of review or underwriting. Right now, on a percentage basis, we have more deals that we would like to close if we can get the right prices. It’s a matter of pricing discipline.”

Are companies under financial stress offering opportunities?

“Some of the bankruptcies are starting to look interesting,” he said. “And some of the deals that the banks are bringing to us are starting to look interesting. The problem for many of the sellers is that, if they close the transaction, they’re broke. The guys that can hang on are hanging on, and the guys that can’t hang on are hanging on.”

As one long-time industry player observed: “The banks are in distress. They’ve been able to hold their ground so far, but I don’t know how much longer they can hold on.”