Technological advancements in shale oil have made it possible to significantly slash sunken costs. This is primarily the reason why investors are pouring in funds in the U.S. shale sector knowing that even if it were to hit $40 a barrel, it would still not hurt them.
Despite the fact that investors who took a hit last year when dozens of U.S. shale companies filed for bankruptcy, they are already placing new bets on the industry’s resurgence.
As per Preqin, a financial data provider, in the first quarter of this year, private equity funds raised a whopping $19.8 billion for energy ventures. This is nearly three times the total they had raised for the same period last year.
The development comes against the backdrop of a quickening of the pace of investments made by private equity, including hedge funds and investment banks, even as the recovery of CLc1 is stalling midst a stubborn glut in the global oil pool.
It appears that the shale oil sector has become increasingly attractive to investors not just because of rising oil prices, but instead because producers are being able to reduce their input costs significantly.
Investors have managed to cut costs by as much as 50% of the cost of producing a barrel of oil, from the last two years. The belief that that glut will gradually dissipate with steady demand is strong in their mind.
This belief system is giving the financiers an extra bit of confidence that they can squeeze higher returns from shale fields, without incurring any hike in input costs, thanks to improved technological advances.
“Shale funders look at the economics today and see a lot of projects that work in the $40 to $55 range” per barrel of oil, said Howard Newman, head of private equity fund Pine Brook Road Partners, which committed to invest $300 million in Admiral Permian Resources LLC, a startup, to drill in West Texas, last month.
Although the data on investments made by non-public private funds, including hedge funds, is meagre the rush of new private equity money however is indicative of enthusiasm levels at play in the shale oil sector.
“Demand for oil has been more robust than anyone imagined three years ago,” said Mark Papa, chief executive of Centennial Resource Development Inc.
“There is a ton of private capital to invest in the U.S. oil industry,” said Gerrit Nicholas, co-founder of private equity fund Orion Energy Partners.
He stated that his comfort level for oil extends to even $40 a barrel.
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