“The important thing to note is that this is still just a margin business,” Mr. Swanson said.
EnCap Investments LP has raised $7 billion for one of the biggest energy-focused private-equity funds amassed this year.
The Houston firm wrapped up its latest fund at the end of November, just as recent gains in energy prices have been stoking new optimism for an oil industry working through a fragile recovery.
The fund, EnCap Energy Capital Fund XI LP, closed ahead of its $6.5 billion goal and follows a $6.5 billion predecessor launched in 2015, which is now fully committed to companies, executives said.
The new fund enables EnCap to finance capital-intensive investments in the oil and gas exploration and production industry. The firm typically forms new companies and then funds their purchase of acreage and other energy ventures in the hopes of eventually selling the assets at a profit.
Oil prices rallied after a host of oil-producing countries recently agreed to limit output, but prices still remain below their highs in 2014. Publicly listed energy producers–ripe candidates to buy EnCap’s investments—now are less likely to buy assets at a premium unless those assets are proven. The firm says it invests with an eye on the pressures such buyers now face to limit their spending to assets that can demonstrate financial viability.
“Buyers are not being rewarded for buying large chunks of acreage that might be prospective,” Jason DeLorenzo, an EnCap managing partner, said in an interview. “To really realize value today you need a more fully-developed asset base and convert undrilled locations into cash flow and production.”
Among the regions that the firm will continue to favor are the Permian Basin and the Scoop and Stack of Oklahoma, mineral-rich regions believed to be more economical for drilling at today’s oil prices.
EnCap joined a wave of private-equity firms that kept buying after oil prices plunged in 2014. It deployed $7.8 billion into upstream deals between the start of 2015 and the end of September.
“We’ve been on the offense building during this downturn,” said EnCap Managing Partner Douglas Swanson.
EnCap also took advantage of publicly listed producers’ willingness to buy tested assets to profit from some earlier bets. The firm invested in Felix Energy LLC in 2013 with an initial $400 million equity commitment that it later increased to $500 million. The company amassed more than 80,000 net acres in Oklahoma for energy plays and was acquired by Devon Energy Corp. in 2016 for $1.9 billion.
More private-equity firms are raising funds focused on the energy space. Private-equity firms across the globe that closed energy funds last year raised north of $62 billion, and those that wrapped up funds this year collected another $52 billion, according to data-provider Preqin Ltd.
The money going into energy has triggered a production boom in some hydrocarbon rich regions and prompted oil-field service companies that provide support to energy producers to take advantage of the uptick in drilling to charge higher rates. EnCap is paying attention to the rising costs.
