EIG Global Energy Partners spent $3.6 billion on energy companies in a six-week shopping spree earlier this year, including a $1 billion deal with Breitburn Energy Partners LP in March.

“It’s been a very active period,” said Bill Sonneborn, president and chief executive officer of the Washington-based private equity firm. “They all relate to similar themes, which is the energy sector under fire.”

Preferred Equity

EIG stepped in to help Breitburn repay a loan after its bank tightened credit limits. As part of the arrangement, EIG bought $650 million in bonds that pay 9.25 percent interest and $350 million of preferred equity that gave EIG an 18 percent voting stake in the oil producer and a seat on the board.

By comparison, the $500 million of senior unsecured notes of larger producer EOG Resources Inc. that mature in 2025 pay 3.15 percent.

EIG hedged its bet by demanding convertible preferred equity instead of Breitburn’s common stock. The preferred equity acts more like a bond in that it pays 8 percent interest, gives EIG a minority interest in the company and puts EIG ahead of common shareholders if the company goes bust and needs to be liquidated. It also gives EIG the option to convert it into common equity later if the stock price recovers.

Being Selective

U.S. and Canadian explorers sold about $12 billion in stock in the first three months of the year, in the sector’s busiest quarter for equity sales in eight years, according to data from Credit Suisse Group AG. Whiting Petroleum Corp., Encana Corp. and Noble Energy Inc. raised about $1 billion each selling shares in February and March.

The flood of funding from capital markets may prolong the downturn by propping up distressed producers and allowing them to keep pumping, according to Bloomberg Intelligence.

Magnetar has invested in several of the energy equity offerings, but also has been selective about its deals, Scheyer said. Not all turn out well. Encana, which issued more than $1.1 billion in stock, saw shares fall 7.6 percent in the week after the March 4 offering, and they didn’t rise above the offer price for about a month. Emerald Oil Inc., which drills in North Dakota’s Bakken shale formation, has fallen 46 percent from its $1.12 additional offering price on Feb. 5.

Buyers of the $1 billion secondary Whiting Petroleum Corp. shares sold March 23 have fared better. The stock was up about 17 percent as of Friday from the $30 offering price, according to data compiled by Bloomberg.

Scheyer looks for companies with solid executives and growth potential that are responding to the downturn by cutting spending and cleaning up their balance sheets. Magnetar chose not to buy shares in several companies that were selling equity to plug short-term cash flow holes, he said.