private equity to play greater role in oil gas investment

December, 9^th 2013

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Private equity investment will play a greater role in oil and gas industry capital investment, according to a recent survey by Ernst & Young (EY).

Fifty-five percent of private equity (PE) executives polled by EY said oil and gas industry investment activity now is the foremost driver of their investment activity in the industry. Forty-four percent of the 100 respondents surveyed cited availability of financing as the second largest driver in PE activity, while 36 percent cited global expansion as the third largest driver in PE activity.

PE is expanding beyond its traditional focus on leveraged buyouts into an array of new asset classes, according to EY and Mergermarket’s new report, “Financing the Future Energy Landscape: Private Equity Trends in Oil and Gas”. The largest funds are transforming themselves into diversified alternative asset managers, offering investors a consolidated platform for PE, venture, debt and credit funds, hedge funds and fund-of-funds investments, EY noted in the report.

Focus has also has become a greater differentiator than ever before within the PE sector, with funds becoming more open-minded to deploying capital in emerging markets with growth opportunities, EY noted.

PE firms are well positioned to be a key player in driving future growth of the oil and gas industry, which is in a period of major capital investment.

“PE firms can leverage their operational and commercial insight, oil and gas sector expertise and financial discipline to influence outcomes,” Michael Rogers, EY’s global deputy private equity sector leader, said in a Dec. 3 press release.

PE funds are finding that the oil and gas industry fits well into their evolving model of bringing genuine operational and commercial insight to their investee companies to develop and execute winning strategies.

“Where this is combined with the potential to manage the deployment of a large amount of different types of capital, such as the oil and gas industry, then genuinely attractive returns are still available,” EY noted in the report.

In 2008, PE activity in the oil and gas industry constituted 65 deals valued at $18.4 billion. The value and number of deals declined to $3.6 billion and 34 deals in 2009, but rose in 2010 to 51 deals and $8.3 billion and 45 deals and $23.2 billion in 2011. Last year, PE investors did 56 deals valued at $27.2 billion in the oil and gas industry.

Sixty-four percent of survey respondents anticipate fundraising opportunities for specific oil and gas subsectors will grow in 2014 and 65 percent of survey respondents expect to be actively fundraising in the new year.

Survey respondents expect the United States, China, Russia and Brazil to see the highest level of PE activity. North America will likely remain the main target for the bulk of PE investment. However, Latin American and Asia-Pacific are expected to receive the largest increase in attention from PE firms over the next two years, EY noted. Eighty-two percent of respondents expect PE activity to rise in Latin America and 79 percent anticipate PE activity will rise in Asia-Pacific.

EY has seen an influx of capital investment into the emerging markets, said Andy Brogan, EY’s global oil and gas transaction advisory services leader, in a statement.

“The risk profile of emerging markets investments can be very different from those of developed markets. Companies are exercising caution, but optimism around the potential returns from acquisitions remains high,” Brogan said in a Dec. 3 press release.

Political risk in Africa and Europe was rated highest by survey respondents due to the effects of the Eurozone crisis and North African political instability. Operational risk, including health, safety and environment, was cited as one of the main threats to investment in Latin America and the Middle East. Fiscal and tax risks in North America and Asia-Pacific were noted as primary concerns among PE investors.

The global oil and gas industry is undergoing significant change as it contends with growing energy demand, increasing economic uncertainty and continued geopolitical instability. A number of trends have made the oil and gas industry an inviting space for PE, including the unending global quest for energy resources and advancement in drilling and well completion technologies that resulted in the unconventional resource boom.

The rise of national oil companies and resource nationalism, renewed industry consolidation and infrastructure challenges and investment needs are also creating investment opportunities for PE, according to the report.

“As the broader PE industry continues to mature and evolve, PE firms focused on the oil and gas industry are in the midst of their own transformation and evolution,” EY noted in the report. “The field of active players is expanding, with new entrants joining specialist and generalist funds that have been engaged in the space for decades.”

 

 

 

 

 

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