Energy-focused private equity funds scaled back on oil and gas exploration in recent years. Big Houston-based players and Wall Street counterparts alike confronted major investor backlash and a tectonic shift to renewable sources.

However, geopolitical turmoil and supply shocks have changed that.

Though the window may be short- lived, there’s a renewed interest in higher-risk – from financial and reputational standpoints – fossil fuel projects.

Biden administration officials and titans of the industry were spotted huddled in the White House in mid- March discussing an ambitious agenda. Out of the gate, came an ambitious emphasis on liquefied natural gas (LNG), including a broad-strokes deal for the U.S. to export more cubic meters of it to Europe, part of a larger, coordinated effort to starve Russia of the revenue it needs to wage war in Ukraine.

Andrew Gillick, Enverus

“I think there’s a good chance the ‘energy security’ drum beat will start to grow louder in the industry,” says Andrew Gillick, an analyst at Enverus, an energy-focused software and data provider in Austin, Texas.

In one of the more significant energy fundraises so far this year, Houston- based Lime Rock Management garnered $538 million for a new fund focused on acquiring oil assets.

Rising oil prices and a shortage of capital in oil and gas is fueling opportunities for buyers, according to public statements made by Lime Rock’s Eric Mullins, who heads Lime Rock Resources which runs the fund.

During the early days of Russia’s widely condemned invasion of its neighbor Ukraine, oil prices flirted with $140 per barrel while the national average for a gallon of gas rose above $4.

Even prior to that, oil and gas specialist PE funds were actively acquiring assets.

From Trickle To … Gusher?

According to Bob Palmer, a U.K.- based oil and gas partner at the law firm of Mayer Brown, there were 12 deals completed for European oil and gas businesses in 2021, compared to just one in 2020.

One noteworthy transaction, announced early last year, was Postlane Partners’ acquisition of A/S Dansk Shell, operator of one of two oil refineries in Denmark.

Mayer Brown’s Palmer said some PE funds have been long-term investors within the lower-risk midstream and services segments viewed as insulated from oil price volatility.

The oil-and-gas sector has been perceived, ever-increasingly, by institutional investors – across the board, not just university endowments –as a dirty business that’s destroying the planet.

Even the pension funds that did not shy away grew impatiently chagrined over the past decade. Investments were not showing much of a payoff, creating a cycle in which energy PE players threw off cash to placate investors (versus taking risk on seeking a new producing well).

Jamie Dimon Goes to Washington

Suddenly, talk of a Marshall Plan- esque policy is flowing in the corridors of power, with an all-forms-of-energy-on deck call from JPMorgan CEO Jamie Dimon. This past March, per Axios, Dimon told President Joe Biden that the U.S. needs to ramp up its production of oil and other energy resources, and called for Europe to rely less on Russian imports.

The disruption of the pandemic led many companies to reassess their portfolios, according to DC Advisory, which consults on PE deals, in a research piece published in early 2022. This trend coupled with the renewable- centric market landscape, triggered a surge of both divestitures and strategic acquisitions, as companies moved to reinforce the aspects of their business with the highest potential for growth.

DC Advisory said energy transactions remained largely consistent from 2020 to 2021, with an eight percent increase in value across completed deals compared to 2020.

There was a clear shift towards LNG investment as traditional energy providers look to decarbonize their existing asset portfolio, DC Advisory said.

“We have a historic set of ideas on the table for investment in the U.S. energy sector, which would strengthen our security and make us more resilient to actions by leaders like Putin,” a White House official told Axios. “Those ideas are concrete, and we welcome engagement from all those who would join us in driving investments to strengthen our energy sector.”

Ben Dell, co-founder and managing partner of alternative asset manager Kimmeridge, recently gave a public interview in which he echoed points made by a growing chorus of industry members regarding growing oil and gas domestically for export. “It helps from a geopolitical standpoint,” he reportedly said. “And it is also a large driver of GDP.”

War in Eastern Europe has dramatically shifted priorities as evidenced on March 31 when President Biden announced the largest release ever from the U.S. emergency oil reserve. In the same speech, Biden (much to the dismay of some in his party) challenged oil companies to drill more.

A ramp up already appears underway. Large U.S. independents’ drilling activity increased 15 percent since November, according to Enverus.

Farzin Mou, Enverus

“The oil and gas exploration and production (E&P) industry can grow, remain profitable, and do it in an environmentally responsible way,” said Farzin Mou, an Enverus vice president.

Mou is co-author, along with Jen Snyder, an Enverus managing director, of a study (released in mid-March) that concluded fossil fuel drilling activity will continue to increase.

Wells, they forecast, could earn attractive returns in the next 18 or so months.

Assuming they do, Snyder said, it will not be any executive nudge but the trajectory of 2024-2025 crude futures prices that will drive operators’ capital commitments.