Over the past 24 months, the low oil price environment has led to increased interest in the hydrocarbon sector from private equity investors. However, this has not translated into the anticipated avalanche of PE investments in comparison to the 24-month period preceding the drop in oil prices, which many analysts had initially predicted. That said, there has been a notable increase in PE deals in the upstream sector, including a number of headline-grabbing deals. This would indicate that private equity firms, known for finding creative solutions for investment challenges, are still finding ways to get the most attractive deals done. This article examines factors which have incentivised PE houses to contemplate entry into the upstream oil and gas market, as well as the challenges to such PE investment.
June 2014 saw the commencement of a dramatic fall in oil prices which brought a halt to a prosperous run for the oil and gas industry and significantly slowed M&A activity in the sector. Oil and gas companies, particularly oil majors and independents, have variously responded to the downturn by scaling back expenditure, restructuring their balance sheets, reassessing their financing options and seeking M&A solutions to dispose of non-core assets and streamline businesses.
As institutional lenders have responded to the new low oil price environment with caution (at best) and trepidation (at worst), oil and gas companies, even those with quality assets in their cache, have found that they no longer have easy recourse to traditional avenues of lending.
Fortunately for struggling upstream oil and gas companies, 2014 also signalled the commencement of renewed interest from PE firms seeking to take advantage of the opportunities presented by the low oil price environment. Across the EMEA/Asia and Americas regions, there was a notable 20% increase in deal activity in the upstream sector over the period from June 2014 to June 2016, as compared to the period from June 2012 to June 2014.
However, although analysts had initially predicted a spate of PE transactions, the hydrocarbon market has seen only a fraction of the projected PE equity investments—in the first half of 2016 Mergermarket reported a relatively small number of deals with an EMEA/Asia focus with a value greater than £20 million, and although there have been a number of deals with an Americas focus, there has not been a material change compared to previous years. To better understand this trend, we will examine the factors which have motivated recent PE interest in the oil and gas sector, as well as the factors which may be holding back actual PE investments in the sector.
PE investment trends
- Global June 2012 – June 2016
- EMEA/Asia June 2012 – June 2014 (preceding major oil price drop)
- EMEA/Asia June 2014 – June 2016 (post major oil price drop)
- Americas June 2012 – June 2014 (preceding major oil price drop)
- Americas June 2014 – June 2016 (post major oil price drop)
- Upstream vs midstream, downstream and oilfield services
- Americas vs EMEA/Asia
What is driving the trends?
- Investor confidence: Commitments vs investments
- Brand name funds vs first time funds
- Challenges for PE investments into upstream oil and gas assets
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