Investors have grown wary of U.S. shale after years of disappointing returns, and they have pressed shale companies to rein in reckless drilling practices. But with money still pouring into the shale sector, there’s no sign yet that Wall Street is withholding investment in the industry.
Shale executives have gone to great lengths in recent months to reassure investors that they are pursuing a more conservative strategy, foregoing aggressive drilling plans to prioritize profits. Despite what could be a seismic shift in the shale sector, Big Finance continues to shower shale companies with money.
According to a series of interviews conducted by Reuters with industry experts, there is no shortage of capital interested in shale drilling. “If you’ve got the rocks, you can get the money,” Buddy Clark, co-chairman of the energy practice group at law firm Haynes Boone, told Reuters.
Private equity is taking on a larger role in the shale industry as traditional banks pare back lending. Since 2014, investors have funneled $200 billion to private equity firms that have a focus on energy, according to the WSJ, citing data from Preqin.
Armed with cash and hungry for yield, private equity firms have injected $20.26 billion into energy deals so far this year, more than 36 percent higher than in 2016, Reuters says. The latest example of that trend came from Warburg Pincus LLC, which just a few days ago announced a $780 million investment into ATX Energy Partners. ATX will use the money to purchase assets from larger oil producers, but notably, ATX is a new venture without any drilling assets to date.
The commitment from Warburg Pincus is, in part, a bet on ATX’s chief executive, with whom Warburg has worked on other shale ventures. But that the private equity firm is willing to put up more than three quarters of a billion dollars despite ATX not having oil producing assets is a sign of how bullish private equity firms are on the shale industry generally. ATX doesn’t even have a clear picture of how it will use the cash.
Reuters reports that new financial instruments are popping up, servicing the needs of shale drillers and filling the void that traditional lending has left. “The upstream industry has been really creative in how it pursues financing of late,” Charlie Leykum, founder of private equity firm CSL Capital Management LLC, told Reuters. These instruments include Drillcos, which give investors more control over cash flow until certain returns are met.