Private equity firms Quantum Energy Partners and NGP Energy Capital are asking a Texas regulator to help oil producers struggling with low crude prices in the coronavirus pandemic.
In separate letters this month to the Railroad Commission of Texas, Houston-based Quantum and Dallas-based NGP urged the regulator to temporarily prorate, or limit, oil production amid a massive surplus that’s devastating the industry. The private equity firms, which own substantial oil assets in Texas, each expressed concern over the viability of producers in the current global conditions.
“We have our finger on the heartbeat of the oil and gas business in our state,” Quantum founder and chief executive officer S. Wil VanLoh told the Railroad Commission of Texas in a letter dated April 8. “I can unequivocally tell you that the vast majority of oil and gas producers are teetering on insolvency, and many of them will be filing for bankruptcy if these conditions persist for long.”
Quantum and NGP submitted their letters ahead of a virtual meeting on April 14, which the Texas regulator scheduled to consider a jointly filed motion from Pioneer Natural Resources U.S.A. and Parsley Energy requesting it prevent any “wasteful” production of oil and gas. In their motion, Pioneer and Parsley pointed to “unprecedented disruption” in the industry stemming from the pandemic and a battle between Russia and Saudi Arabia for share of the oil market.
“We urge the Railroad Commission to issue a temporary proration order that would reduce production throughout Texas on a fair and equitable basis and to encourage other states to do the same,” NGP co-managing partners Tony Weber and Christopher Carter said in the firm’s April 7 letter to the regulator. Quantum’s VanLoh told the Railroad Commission that it “can lead the U.S. in doing its part to reduce global supply to levels that provide a more sustainable oil price so that we don’t bankrupt the oil and gas industry.”
Not everyone is convinced that government intervention has merit.
A temporary proration order is an “archaic tool” that would be “totally useless,” according to Edward Hirs, a fellow at BDO Natural Resources and the University of Houston who will provide testimony at the Railroad Commission’s April 14 meeting. “Texas would just cede market share to everybody else,” he said in a phone interview Monday. It’s unlikely that other state regulators would intervene with similar proration orders, he explained, leaving demand to shift toward cheaper oil outside Texas.
Hirs sent his own letter to the Railroad Commission, stating that oil production in Texas represents about five percent of global demand. “Because the U. S. oil market is a free market with imports and exports, Texas oil producers compete with oil producers everywhere,” he wrote. “Reducing production in Texas would not bring supply and demand anywhere near the balance they enjoyed at the beginning of the year.”
Investment funds managed by NGP hold companies that collectively produce more than 150,000 barrels of oil equivalent per day in Texas, according to the private equity firm’s letter.
Quantum and NGP sent their letters around the end of the comment period the Railroad Commission had opened following the late March motion filed by Pioneer and Parsley. A phone call to Weber and Carter was deferred to an NGP spokeswoman, who did not immediately respond to an email seeking comment on the firm’s portfolio and letter to the regulator. Efforts to reach VanLoh by phone were not immediately successful, as the private equity firm’s voicemail was full.
Quantum is one of the largest gas drillers and producers in Texas, owning two large companies in the Haynesville Shale play in East Texas and others in the Permian Basin, according to VanLoh’s letter. He said the private equity firm employs more than 1,500 people, directly and indirectly, across the state’s energy business.
Institutional Investor reported last month that Quantum posted one of the strongest private-equity returns among vintage 2012–2015 energy funds in 2019, according to data from private-markets tracker Cobalt. Quantum Energy Partners VI, a vintage 2014 fund, had a net internal rate of return of about 30 percent at the end of September, the data show.
In Quantum’s letter to the Railroad Commission, VanLoh said oil prices have dropped to low-to-mid $20s a barrel, leaving most producers taking in $8 to $20 a barrel at the wellhead after costs. “There is not one producer in Texas that can make money at those levels,” he said.
Oil was trading around $23 on Monday afternoon, down from more than $100 a barrel in 2014. That compares with crude prices that generally ranged between $50 and $60 a barrel for most of last year, according to data from the U.S. Energy Information Administration.
[II Deep Dive: The Mystery of the Profitable Energy Marks]
Texas oil and gas producers have been delivered a “one-two punch,” VanLoh said, with demand destroyed by the coronavirus pandemic plus “the supply surge instigated by Saudi Arabia and Russia to harm the U.S. shale industry.”
With Texas oil production representing about 42 percent of the U.S. total, “the Railroad Commission is in a unique position to provide an important leadership role on this issue,” Weber and Carter said in NGP’s letter. They suggested that a proration order be tied to companies’ production prior to the downturn and end “once the market rebalances within historical norms.”