The Deal Quotes John Goodgame on Outlook for Private Equity Oil Patch Deals

The Deal has quoted Akin Gump oil and gas partner John Goodgame in the article “PE Scrounges for Oil Patch Deals as Strategics Stay Put.” With public companies vowing not to spend as much money this year, focusing instead on returns, the article looks at how the decline in oil prices could affect private equity activity in the sector.

“If you went back and looked at earnings releases from two years ago in the E&P space, very few companies talked about return on invested capital, very few companies talked about return on investment, very few companies talked about anything other than growth in reserves, growth in production, additional capex spend—things like that,” said Goodgame. “If you went and looked at 2018 earnings releases, everybody is talking about returns, everybody is talking about ROI, because that’s what investors are demanding.”

Goodgame said he knows of several companies that have held discussions with significant equity investors, including money managers, on the subject.

“Most people believe, and I’m one of them,” he continued, “that what you compensate for is what gets done, so every year in the proxy, companies will say ‘Here are the things that are components of our executive comp program.’ And so we know a number of investors went to a number of oil and gas companies and said ‘If your management compensation program doesn’t heavily include return on invested capital-type metrics, then we are going to vote against your entire [board’s executive compensation] committee.”

According to the article, this has led oil and gas companies to put away the checkbooks for large acquisitions of private acreage packages in an effort just to increase reserves of oil and gas.

“You have seen, and you’re going to continue to see, a drive toward consolidation because that’s what makes sense,” Goodgame explained. “If what investors are interested in are growth in reserves, growth in production, then they are focusing on things that require a lot of capex and require a lot of funding. If on the other hand what investors are focused on is return on invested capital, then that puts a lot greater focus on costs and G&A; and when the focus is on those things, you start to see companies looking for ways to reduce costs and reduce G&A relative to the asset base. When you see that, that's what leads to consolidation.”