Key Takeaways from the IPAA Private Equity Conference | Timely LLP
RED Chairman Steve Hendrickson highlights some of the key takeaways from last week’s private equity conference hosted by the IPAA.
Last week, the Independent Petroleum Associate of America (IPAA) held its annual private equity conference in Houston. This year’s theme was “The Realities of Energy Transition” and I thought it was one of the best conferences I’ve attended in terms of learning new, up-to-date information. The quality of the presentations was very good and the panelists were well informed.
Here are some interesting/important points taken from my notes of the comments made by the speakers. This week we will discuss capital markets and save energy transition points for next week.
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The cash flow model continues to be dominant and the return to capital through a liquidity event is less prominent. This is driving continued interest in low-decline properties. In a world without a “lease and flip” model, private equity funds have shifted to longer holding periods and low-decline properties that generate cash are better suited.
Debt – About 35-40 lenders remain active in the upstream sector and the banking market is in “great shape” from a lender perspective. Commodity prices have improved, loans have more covenants, and loans are of higher quality. There has been increased interest in term loans, with approximately 25-35 active lenders. European banks continue to retreat, while Asian banks return. Public debt had a very strong 2021 with $50 billion in high yield issues. Rising commodity prices have driven energy bond prices higher and, according to one commenter, “all the outflows have disappeared” except for high yield issues.
Equity – Endowments and foundations continue to pull out of the energy sector, but family offices are taking notice. Public IPOs remain limited as public market valuations have narrowed to the 3x-4x EBITDA range. Undeveloped locations are assessed in the Permian, but essentially nowhere else, except perhaps the core of Bakken, Marcellus, and Haynesville.
AD – Valuations are driven by cash flow multiples in the low 3x. Small and mid-sized players are looking to increase/high-grade their drilling inventory and majors are looking to divest non-core assets. Abandonment expenses are receiving increased attention and, according to one commenter, are still quantified and valued. Another wrinkle in the ratings is that bond requirements on federal lands are increasing. Deal flow is up, as is the portion of the purchase price paid with equity, at least at the closing table. Optimism is that 2022 will be a good year for A&D, but undeveloped locations are still not generating much value, despite rising commodity prices. In line with the focus on cash flow generation, valuations are leaning more towards a yield-based approach than the traditional NPV/NAV.