The fact that US oil prices have dropped 35 percent in six months wouldn’t appear to be welcome news for private equity firms raising and investing significant amounts of capital in energy-related real estate. For Sheridan Production Partners, however, it’s an opportunity to capitalize on distress.
To be sure, energy-related real estate has been a niche strategy, where firms such as Kohlberg Kravis Roberts and Related Companies have focused on building residential development to support the population growth in US markets that have benefited from the recent shale oil boom. Sheridan, however, has employed a more land-focused tactic.
In December, the Houston-based oil and gas operating company raised a total of $1.5 billion in equity for its third fund, Sheridan Production Partners III. The vehicle, which acquires onshore oil and gas properties in the US, primarily in Oklahoma, Texas, New Mexico and Wyoming, was one of the largest private equity real estate funds that closed last year.
“Declining petroleum prices create opportunities for Sheridan as companies seeking to pay down debt sell mature properties with predictable production,” said the company’s founder and chairman Lisa Stewart, in a statement. Since its founding in 2006, Sheridan has pursued a business strategy of acquiring oilfields and other oil and gas assets and creating value by making operational improvements and controlling costs to maximize production and extend the commercial life of those properties.
Indeed, “low prices will put some small and medium-size companies into a ‘distressed situation’ that forces them to either unload property to raise cash or sell out completely,” commercial real estate services firm JLL noted in a December report. At year-end 2014, oil prices dropped below $65 for the first time since 2009, plummeting more than 35 percent since last June, when prices clocked in at above $100 per barrel.
One of Sheridan’s most high-profile deals was the 2012 purchase of the Permian Basin assets of SandRidge Partners, an Oklahoma-based oil and natural gas company, for $2.6 billion in cash, on behalf of its last fund, Sheridan Production Partners II. SandRidge said at the time that the proceeds of the sale were be used to fund the company’s capital expenditure program in the Mississippian Play and to repay debt.
Meanwhile, lower oil prices are likely to extend into 2015, as a result of a supply surplus, slowdown in production and weaker demand stemming from slower economic growth in China and reduced oil demand in Europe, the JLL report said. If this indeed is the case, Sheridan stands to benefit from a new surge of investment opportunities in the coming year.