By David French

(Reuters) – Energy bankers lost clients as poor returns forced many investment companies out of the U.S. Oil patch received a welcome email in January.

Elliott Management was a hedge-fund founded and managed by Paul Singer, who is well known for his activist investing. In January, Elliott Management wrote to the bankers asking them to offer opportunities to buy U.S. oil & gas acreage.

A banker at Elliott’s meeting said that they wanted to know everything about the U.S. shale opportunities.

Contrarian strategies are not recommended. Many investors have ended the sector due to large losses that were suffered from the collapse of energy prices, and most recently, in 2020, when fears over the COVID-19 Pandemic temporarily turned down prices.

Few remaining investors are taking advantage of the energy price rise to buy assets and cash out.

According to sources, Elliott shows a willingness and ability to accept risk when it considers these deals.

Although each shale basin is different, analysts estimate that Elliott would be able to make investment gains greater than 80% if oil prices remain at $100/barrel.

The bankers believe that if U.S. oil drops below $65, Elliott might lose his money. U.S. crude briefly traded at $130 following Russia’s invasion in March. Oil currently trades at $110. [O/R]

Reuters talked to over a dozen sources from the business community about Elliott’s plans. They were all willing to speak confidentially if asked to remain anonymous.

Elliott declined comment.

Andrew Dittmar from Enverus Energy Consulting said that he believes the upside is significantly more than the downside.

Dittmar said, “At these high prices, sticking $1 in the ground for oil or gas wells is one the best things that you can make in North America because of their phenomenal returns.”

Enverus data from the Eagle Ford Shale Basin in South Texas shows that the potential internal rate (IRR), for the 12,000 wells it monitors in the area, was approximately 140%. This was when oil was priced at $70/barrel and natural gas was $3.50/million British thermal units (mmBtu).

U.S. now stands at $8.75/mmBtu [NGA/]A benchmark return for deals similar to private equity in this sector is usually 20%

According to sources, Elliott wants capital for management teams that acquire land or develop oil and natural gas production. Elliott made an $880 million investment in Validus Energy last year to assist it with the purchase of Eagle Ford assets by Ovintiv (NYSE 🙂 Inc.

Elliott Energy Capital and Pontem Energy Capital have been looking into the sale of Validus. According to sources, the price will exceed $1.5 Billion, which includes debt.

CLIMATE CONCERNS

According to Enverus, buyout companies active in the U.S. energy and oil sector sold 3 times more assets than what they received on a dollar for dollars basis last year. It has been accelerating this year.

Graphic: Private equity and U.S. oil & gas acreage deals – https://graphics.reuters.com/ENERGY-DEALS/ACREAGE/zdvxowqadpx/chart.png c39a538e-2c3b-4904-a8d4-6b34ebd4509e1

Hedge funds and private equity companies have often left the sector due to concerns that they are contributing to climate change. Elliott also invests and pushes green policies for the firms it backs. It doesn’t disclose its investors and isn’t clear if or how it communicated with them about its entry into U.S. Oil Patch.

Singer was a supporter of politicians who expressed doubts about the severity of carbon emission. Singer, who has been a strong financial supporter for the Republican Party, also chaired the Manhattan Institute board of trustees. This think-tank promotes free markets, but Singer’s energy advocacy is heavily influenced by long-term fossil fuel use.

The sector is not something Elliott has done before, but the New York-based fund had been buying stakes in companies in this industry for years. It was successful investing in Hess Corp (NYSE:), however, its bets in Roan Resources and Riviera Resource failed when both companies were sold.

Elliott will likely make good returns on Birch Resources. This company was formed from energy assets that were secured through the 2018 Chapter 11 bankruptcy agreement with Breitburn Energy partners.

Founded by Singer in 1977 and currently managing around $51.5 billion, Elliott has earned a reputation as one of the most formidable activist investors, going up against corporate giants include AT&T Inc (NYSE:) and SoftBank Group Corp.

Elliott, through its Evergreen Coast Capital private equity arm has increased the number of leveraged buyouts. This year, it has agreed to $10.1 billion for Nielsen Holdings (NYSE :), and $16.5 billion for Citrix Systems (NASDAQ :).