Private equity companies in the oil and gas business play similar roles to venture capitalist in other startup businesses like high-tech. This is an opportunity for entrepreneurs to develop new ideas with significant funding. Success is greatly rewarded. Failure is not an option. As a result, private equity or PE provides millions of dollars to teams working in North American resource plays.
There are several steps to building a PE company. Refreshingly, the first and perhaps most important step is the development of a team. Key team members include a good to great financial officer, two geology gurus—both a seasoned oil finder and sophisticated petrophysicist, an aggressive, senior landman not adverse to buying HBP properties, a business development entrepreneur—usually a reservoir engineer (and/or a landman), and a disciplined, cost-driven operations engineer. In most cases there is a team builder—a success financier or it can be a small group of high-net-value individuals.
The second step (defined by the first) is the overall type of team. Oil and gas PE companies tend to be engineering-dominated or geology-dominated. Engineering-dominated private equity companies are more common and they focus on purchasing packages and spend a lot of time data rooms and bidding. Geology-dominated teams tend to focus on grassroots plays and typically purchase acreage through original leases or through small HBP packages.
Step three is to define a business model which fits the team...or vice versa. There are multiple business models for of oil and gas private equity companies. The dominant model during the resource oil and gas boom was the “buy and flip” model. This model involves acquiring undervalued properties at low prices, drilling a few wells for proof-of-concept and monetizing within 3-5 years (the shorter the better). A successful buy and flip model requires healthy, aggressive public companies competing for new properties. With current poor market conditions due to the retreat of public companies, the “purchase and produce” model is in vogue. This model involves buying producing properties and using new technology and methods to develop. This tried and true plan provides long term returns with less risk although you typically to not see the high 3-5x returns. Other more niche business models include “ID & buy minerals” and, of course, mid-stream PE companies.
There is a fourth step which is picking the PE company for a financial sponsor or rather getting the right one to pick your team. This is a complicated process that requires a lot of research. It is beyond the scope of this paper and will not be addressed except as already discussed above.
Execution is the next step. It leads to monetization which is the overarching goal. In developing a PE company, the prime directive is “return on investment.”. The entire team must focus on profit—that is why I listed the CFO first. As said earlier, “Failure in not an option”. That said it is surprising there is not more “How to” information available on building a PE company, That is the purpose of the remainder of this paper—Dos and Don’ts.