Sponsors are capitalizing on the increasing demand for natural gas to launch continuation vehicles (CVs) for their gas-heavy portfolio companies.

“The best thing out there [are] gassy assets,” said Dan Pickering, founder and chief investment officer at energy-focused financial services firm Pickering Energy Partners.

This news service reported that First Reserve and EnCap Investments are exploring CVs for their stakes in natural gas producers Ascent Resources and PennEnergy Resources, respectively.

We have “never been busier than right now,” said Robert Teigman, managing director and co-head of Houlihan Lokey’s financial and valuation advisory energy and infrastructure practice. CVs of oil and gas upstream companies can achieve 2x-3x multiple on invested capital with 20%-type internal rates of return, he added. “On a risk adjusted basis, it’s a really attractive return relative to other alternatives.”

Global gas demand increased 2.7%, or 115 billion cubic meters, in 2024 – a new all-time high, according to the International Energy Agency. About 75% of the demand growth was supported by industry and electricity generation as technology companies are engaged in an artificial intelligence infrastructure (AI) arms race. Microsoft, for example, plans to invest USD 80bn this year on AI data center infrastructure.

And although the supply of natural gas is also expected to increase in the coming years, the price of the fossil fuel is forecasted to continue trading at the current USD 3.50-USD 3.75 per million British thermal units’ range through 2026, according to 28 energy bankers surveyed by Haynes Boone. In contrast, they estimate the price of oil to average USD 56.2-USD 57.2 per barrel through 2034, down from the forecast price of USD 58.3 for 2025.

Against this background, enthusiasm for natural gas-heavy CVs compared to oil-heavy vehicles is growing, said Kim Mai, a partner and member of Haynes Boone’s energy practice.

Oil markets tend to be more sensitive to macroeconomic fluctuations and geopolitical developments compared to natural gas. The benchmark future price for US oil, for example, dropped more than 20% in late April and early May following the decision by the Organization of the Petroleum Exporting Countries and its allies to accelerate oil output hikes and President Donald Trump’s ‘Liberation Day’ tariff announcement. Prices recovered after Israel launched an air campaign against Iran, only to slight drop again.

The forecasted price stability in natural gas, on the other hand, makes it easier to value natural gas-focused CVs because producers of the fuel can hedge at current prices and profitably drill new wells, said Teigman.

Broader appeal

Natural gas is also considered a bridge fossil fuel that supports the expansion of renewables and accelerates the shift away from coal. This notion has allowed certain limited partners (LPs) to invest in gas-heavy CVs without completely walking back on their ESG commitments, said Mai. As a result, the potential pool of investors for such vehicles has broadened, she added.

Family offices and sovereign wealth funds, for example, have been actively participating in oil and gas-related CVs, said a senior director at a US public pension plan.

Hedge funds, such as Elliott Management, are also active in the sector. New York-based Elliott reportedly committed more than USD 500m to a USD 1.6bn CV set up by Quantum Capital for natural gas producer HG Energy. The hedge fund has also reportedly supported Ridgewood Energy’s USD 500m CV for its Gulf of Mexico assets and Riverstone’s USD 815m CV for ILX Holdings.

A new breed of investment firms specializing in oil and gas CVs is also starting to emerge, said Abby Branigan, a Dallas-based partner at Vinson & Elkins’ M&A and private equity practice.

Austin, Texas-based Melange Capital Partners is one of those new outfits, Pickering said. According to its website, Melange “was formed to improve the ecosystem of the private energy markets [where] a highly illiquid alternatives market has created a unique opportunity for secondary transactions.”

Melange declined to comment.

This news service reported in July 2024 that private equity firms were preparing to double down on the oil and gas sector, either through new funds or continuation vehicles.

And while many institutional investors continue to stay away from fossil fuels, those that continue to participate in the sector are becoming more comfortable with CVs, with the senior director at the US public pension saying it now insists on co-investment opportunities alongside CV offerings.

Dual track

Sponsors of natural gas companies are now asking advisors to run dual track processes seeking a traditional sale or a CV. Dual track “used to mean IPO and sale, but we have started to see assets coming to market with the initial LOI [letter of intent] asking to bid as an FCV [fund continuation vehicle] or a full sale,” said Branigan. “A couple of years ago, the FCV was more used as a backstop to a failed sale process.”

Teigman characterizes the current wave of energy CVs as offensive situations – “where it’s a great asset with a lot of upside potential and a good return to show to existing LPs.” This contrasts with their use 18 to 24 months ago in more “defensive” transactions to provide liquidity solutions for tail end funds.

Launching a CV, however, does not preclude sponsors from continuing to evaluate an IPO, according to Pickering. “You don’t want to miss a window just because that IPO window happens to be pretty close to your CV window,” he said. “I don’t necessarily think that these tracks are mutually exclusive.”

And while a sale process might yield a higher price than a CV, sponsors are asking themselves how much an asset could be worth if they hold on to them for another three to five years, said Kris Agarwal, a partner in Willkie Farr & Gallagher’s private equity practice group.

Perhaps the most successful CV in the industry is Lime Rock’s USD 1.9bn CV in 2018 to extend its controlling investment in CrownRock. The move paid off handsomely when Occidental acquired the Midland, Texas-based oil and gas company for USD 12.4bn. The deal reportedly grossed Houston-based Lime Rock a 79x return on the USD 96.5m it had invested in CrownRock since forming it in 2007.