It has been years since an earthquake in the commodities markets caused oil prices to plunge and set off a wave of bankruptcies in the energy sector. The aftershocks are still being felt.

Chapter 11 filings in the US and the equivalent bankruptcy protection measures in Canada amounted to 44 in 2015 and spiked to 70 in 2016, according to a report from law firm Haynes and Boone.

The next two years provided a reprieve: bankruptcy filings in 2017 and 2018 (24 and 28, respectively) remained well below 2015 levels. Still, there have been a staggering number of casualties: from 2015 until mid-May this year, there were 172 filings.

On the whole, things are now looking better. “Energy commodity markets are in pretty good shape,” Orion Energy Partners chief executive Nazar Massouh says. “Gas markets are still depressed, but the break-even point [for companies] is so low. We’re seeing returns among [exploration and production] producers at 30-40 percent at the current price of oil. Most companies run all their financial forecasts at a $40-$50 oil baseline.”

Drilling down to the specifics though, things become a little more complicated. Factors can vary depending on whether the source of capital is from public or private markets and the sub-sector of energy.

Here are PDI’s takeaways on the energy investing environment.

Midstream is the place to be

“Midstream water [is among] the most active areas we are witnessing,” Massouh says, noting that the alternative energy and biofuel subsectors are also attractive. “Large-scale midstream M&A is also very active, but it is less of a focus for us given our middle-market size.”

Michael Zawadzki, head of GSO Capital Partners’ energy group, agrees: “Attractive investment opportunities are available in the midstream sector, due to the combination of strong underlying business fundamentals, large growth capital needs, and challenges accessing the public equity markets.”

Energy private equity firms have been specifically drawn to midstream.

“There has been a proliferation of PE-backed deals in midstream/pipelines, particularly companies working to build out infrastructure in the Permian Basin,” says Fitch Ratings senior director and energy analyst John Kempf. “Private companies are also more hesitant to source capital for exploration and production and oil field services, given the difficulty in exiting these investments.”

BDCs are reluctant to lend

US business development companies were large lenders to oil and gas companies in the years leading up to the oil-price crash of 2014, and these probably seemed like solid investments at the time, given the US energy boom. “A lot of the BDCs got burned in the energy sector,” says Fitch Ratings managing director Meghan Neenan. “So, a lot of the BDCs are shying away from those companies completely. The truth is, a lot of these global managers have funds with energy sleeves. But whether or not they continue to do sector-focused funds, we will see.”

Indeed, several of the firms that had a high concentration of energy names in their books have largely exited the space, including Apollo Investment Corporation (AINV). The New York-based BDC overseen by Apollo Global Management said on its second-quarter earnings call in 2016 that it would shift towards “traditional corporate loans” after the energy names in its portfolio ran into trouble.

Its oil and gas exposure has been reduced substantially. AINV’s portfolio consisted of 6.6 percent oil and gas holdings as of 31 March, compared with the 11.6 percent reported at the end of the second quarter of 2016. “Compared to other areas of private credit that have seen significant capital formation in recent years, the pool of capital targeting energy credit remains limited,” says Zawadzki.

Public markets sceptical of E&P

In another fallout from the energy crisis, it has been tough for oil and gas companies to regain the trust of public investors. “Normally everyone aspires to exit to a public market,” says Massouh.

“Now, for the most part, in public equities – whether it’s E&P, service companies, even in the midstream sector – multiples are just not there.

“It’s been driven by a lot of investors that got burned in the energy downturn. The growth assumptions that existed back then completely evaporated.”

From 2015 to February 2019, there was $12.7 billion in IPO activity from energy companies. In 2014 alone there was $12.9 billion-worth of public offerings from those businesses, according to a February webcast by Gibson & Dunn that cited Bloomberg and Dealogic data.

According to the report, public investors in exploration and production have “cooled receptivity to many new” businesses and are more focused on future cashflow than absolute production growth. Similarly, oilfield service companies have “rotated out of favour” because of “weakened sector fundamentals and deteriorating financial performance”.

The sector’s prospects may have brightened though, according to a March report from Fitch. The rating agency sees “upside potential to global IPO activity” in the oil and gas industry thanks in part to “bullish” oil price forecasts.

However, the precise level of upside could depend on the particular subsector. “For pipelines, E&P and oilfield service companies, the public market is essentially closed except for the highest credit quality issuers,” says Kempf, referring to BB-rated companies and above. “Even there, debt financing is more expensive.”

PE fundraising for energy is down

Energy-focused private equity funds raised considerable amounts in the run-up to the energy-market downturn.

In 2012, they raised $11.76 billion. In 2013 and 2014, those figures were $23.27 billion and $31.29 billion, respectively.

In 2015, energy fundraising declined, slightly, to $27.26 billion, possibly because the downturn did not hit markets particularly hard until the second half of the year. However, in 2016, energy-focused fundraising fell off a cliff to just $10.53 billion.

But these capital pools are on the up again: they raised $14.32 billion in 2017 and $17.66 billion in 2018.

One area that has still not had a great reception from investors is upstream-focused energy funds. Zawadzki says: “While the upstream market remains under pressure, as a credit investor you can be more protected by investing senior in the capital structure, with high current income and less reliance on terminal value.”