The Rodman Energy Group gathers semi-annual information from professional private-capital providers to the energy industry as a proxy for industry trends. The first-half 2010 Rodman Private Capital Energy Index surveyed 19 capital sources in North America, all of whom participated in the most recent semi-annual survey. The results depict a contracting capital base, but also an industry undergoing dynamic change and continued recovery, including a notable transfer of asset ownership from privately funded to publicly funded companies that may rejuvenate private-capital fundraising among Index participants.

Capital availability. First-half 2010 continued an 18-month slide in capital available for oil and gas investment. In fact, normalizing the data collected for two investors missing from this survey and for another who has activated a previously inactive fund, the capital available for investment appears to have fallen by 6%.

However, a number of generalist private-equity firms excluded from the survey have increased their oil and gas allocations and investments. This may indicate that the decline in available capital prevails among the more seasoned oil and gas investors who comprise this survey, while an increase has occurred among those who don’t.

Funding. This theme manifests itself most clearly in the near absence of any new fundraisings. Respondents reported only $300 million in new fundings, down 33% from the previous low ebb in first-half 2009, and representing a double-dip low point in our survey following the second-half 2009 uptick to $3 billion. Private-capital purveyors have simply not replenished their investment coffers.

The data are somewhat misleading, however: Four participants report active 2010 fundraising efforts, two of whom estimate aggregate new funding expectations of $3- to $4 billion before year-end.

Investments. New investment commitments were also moribund, double-dipping to only 38 deals, on par with the first-half 2009 low point of only 37. And of the 38 new commitments, only 11 were made to new portfolio companies, while the other 27 were committed as add-ons to previous relationships. Total investments of 176 during the first half were roughly consistent with the deal-a-day pace of 2009; however, the aggregate dollars invested fell to $1.8 billion, lower than the first-half 2009 level of $2.9 billion and the lowest on record since the survey began.

Monetizations. Investment exits dominated the first half of 2010. Respondents reported a huge uptick in monetizations to 74 in the first half alone, more than any other half-year period on record since our survey began, and nearly rivaling previous full-year highs achieved in 2006 and 2007, the two years most commonly noted as the last cycle high.

These results illustrate a classic cycle of private capital harvesting during a period of ebullient public-company M&A activity. Unlike the 2006–2007 cycle when high commodity prices drove private capital to the exits, this cycle’s exits have been driven by the public capital markets’ embrace of public companies aggressively acquiring growth, and by multinational oil companies recycling dollars into U.S. unconventional plays.

Preferred business plans. First-half 2010 saw some increased appetite for risk. Common themes included the funding of experienced management teams aggregating midstream assets; land-aggregation business plans in unconventional plays with expectations of rising land values; joint ventures or companies with lower risk acquire-and-exploit attributes; and aggregation of exploitable, proven oil reserves.

International investing. The index revealed steady, but slow, growth in international investments, which rose in number by 46%, from 26 to 38. Total international dollar investments rose by 40%, from $500- to $700 million, while the average investment size remained static, at $19 million per deal.

Conclusion. The index reflects an experienced group of private-capital providers tending to their portfolios during an upcycle following an economically challenging period. This year’s low point appears more proactive than in 2009, as new investments and fundraising were intentionally neglected or avoided in order to focus, instead, on realizations of capital and capital gains prior to renewed expansion of funds.

—Bill Weidner, managing director, The Rodman Energy Group