As our readers know by now, Five States issued two new funds last fall – Five States Energy Income 2021 and Five States Renewable Energy Fund. These funds will be closing to new investment by mid-year, and we have been pleased by the response from investors this spring. A reminder… call us right away to get into either or both of these funds!
Marketing new funds is always an eye-opening experience. Meeting with prospective investors, many of whom are new to Five States, gives us first-hand exposure to what is on their mind. Having returned from a number of investor meetings/events, some with standing-room-only audiences, and others where our meeting slots were oversubscribed, we have reason to believe that our funds today are highly aligned with investor interests and our message is resonating. Why is that? And… what are investors thinking about energy investments today?
The short answer – They are wondering about the macro-factors of:
- Commodity Prices
- Deal Valuation
- Inflation
And… they are wondering how these factors will affect Investment Performance.
- The high commodity prices we are currently enjoying make our fund performance extremely attractive, but they contribute to overall inflation.
- Inflation is causing increased costs for us too, which serves to dampen profitability.
- High commodity prices can make it harder to find quality deals at reasonable valuations.
- Will the net effect of these factors be positive or negative on investment performance?
Our Observations
High oil and gas prices are having an outsized affect on fund performance… and this will continue.
- Commodity price increases have far outpaced cost increases. From 2020 to 2021, oil prices increased 55% and natural gas prices increased 47%. As of this writing, prices for oil and natural gas are 128% and 217%, respectively, above year end 2020 prices. From year end 2020 to year end 2021 the industry saw 11% inflation of oil field service costs, which was well below the improvement in prices. This illustrates why energy investments have historically been such a good inflation hedge.
- Five States Energy Income 2021 already purchased a large asset at prices significantly lower than they are today and is performing better than we forecast. Oil and gas production volumes are almost 30% above our underwriting case. In short, FSEI 2021 has an outstanding anchor asset.
- High commodity price environments allow us to layer on hedges at high prices – this gives us a “backstop” for some of our acquisition pricing.
- Deals are happening… but changing. Higher commodity prices are making it more difficult to find low-cost “PDP Only” deals, but the lack of drilling capital (see the 4Q edition of The Producer) is resulting in exceptional PUD drilling opportunities. These can provide valuable IDCs (look it up!) for investors.
- Deals are being awarded to purchasers like Five States that have cash. Five States’ ability to buy assets with cash means we can still be conservative on valuations - Certainty of closing and speed of closing are bringing a premium today.
For the investment industry and the investor community, these are interesting times indeed. Fortunately, Five States’ funds are the right kind of offering for these times. Speaking of TIME, the time to invest in these funds will end soon. Investors are encouraged to move quickly to sign up.
We thank you for working with us in the past and look forward to working with you in the future.