EnCap Investments, the private equity firm, specializing in the oil & gas industry, pulled off a rarity in the U.S. shale business earlier this month, the $2.5 billion sale of oil producer Felix Energy to rival WPX Energy Inc, striking a deal at a time when energy mergers have all but dried up.
EnCap’s big payday, 153 million WPX shares valued at $1.6 billion plus $900 million in cash, proved short-lived as convulsing oil and stock markets knocked nearly two-thirds off the value of WPX shares within days of the closing.
Shale companies and their investors have been divesting operations to raise cash for several years, often ploughing the proceeds into drilling and share buybacks. However, sellers who took and held onto shares for those assets are facing yet another blow from the oil market collapse.
Numerous already are reeling from oil prices that last week fell the most in a decade, to about $31 a barrel, and falling demand from a global economy weakened by the coronavirus. The magnitude of the price drop will hurt the companies’ ability to borrow against their newly-less-valuable reserves of oil and gas.
Those who held shares in other energy companies face potential multi-million-dollar hits to earnings when they reconcile the value of acquired shares to the latest price.
“They’re going to have to take a write-down. It’s an asset on their books and it’s worth a lot less,” said Craig Pirrong, a finance professor at the University of Houston.
Waiting for a recovery
On Friday, EnCap’s 153 million shares in WPX were worth about $688.5 million, down about $911 million from the original value. As a private equity firm, it will distribute shares to investors.
EnCap declined to comment.
Companies may have some discretion over when they take the write-down, said Pirrong, and could potentially wait a quarter to see if the stock bounces back from its drop.
Shale producer ConocoPhillips, which three years ago accepted shares in Canada’s Cenovus Energy as partial payment for an exchange of its oil sands and natural gas assets, now has about a $1.3 billion loss on the 208 million shares.
Conoco took the shares, which made it the biggest investor in Cenovus, with the intent of selling them, and began talks with investment banks in 2018 about a sale when the stake was valued at about $2 billion. It has used other asset sales to fund share repurchases and lower debt.
That stake was worth just $624 million on Friday, based on the $3 per share closing price on the New York Stock Exchange.
Lockup collides with scandal
“Given the magnitude of this market event we are analyzing what actions we might take in response to the current situation,” Conoco spokesman John Roper said of the oil price and shares convulsions. Still, he added: “We’re in an advantaged position relative to most of industry.”
Another shale producer, Pioneer Natural Resources, faces a haircut on its stake in West Texas services firm ProPetro Holding Corp. Last year, Pioneer received 16.6 million ProPetro shares as partial payment for a fracking unit, becoming the service company’s largest individual shareholder.
That nearly 17% stake, valued at about $172 million when the deal closed in early 2019, was worth $62.4 million on Friday. Pioneer had planned to sell the shares, but a financial scandal at ProPetro emerged as it was able to sell after a lockup period.
Pioneer did not reply to a request for comment.
Reported by Liz Hampton