Private Equity Warms up to Oil

Posted by Joseph Keefe June 21, 2016

Nearly half of PE funds expect a deal by mid 2017; North America remains focal point of deals.

The world's private equity funds, with a cash pile of around $1 trillion, are stepping up their interest in the oil and gas industry, with almost a half expecting to buy assets in the sector over the next year, a survey showed on Tuesday.

Funds' appetite for investments in the sector fell sharply after the start of the oil price route two years ago. But recent signs of a rebound, coupled with abundant assets around the world, are turning the tide, advisory firm EY said in a survey of 100 private equity (PE) firms.

Around 43 percent of the firms said they were planning acquisitions by the first half of 2017 and 25 percent before the end of the year.

"Activity will pick up at the back end of the year but people are still cautious," Andy Brogan, EY Global Oil & Gas Transactions Leader told Reuters.

"The fact that the oil price seems to be sticking is gradually making people more confident that they can make some bets."

PE firms, which typically seek high returns on investment, have a warchest of around $971 billion, EY said.

The expected pickup in activity, however, is likely to vary by region.

North America remains a focal point after a large number of assets was placed on the block as the shale oil and gas boom stuttered, including a rising number of distressed companies, Brogan said. Relatively accessible financing is also supportive, he added.

Asia Pacific is also attracting buyers' interest, although the size of the market is smaller, while mature basins such as the North Sea remain less attractive due to high operating costs and liabilities linked to the clean up of old wells.

PE funds such as Carlyle Group, Blackstone Group and CVC Partners have all set up management teams in recent years to acquire and manage oil and gas assets.

Buying activity so far has nevertheless been limited and focused mostly in North America.

After peaking in 2014 at 104 deals worth $39 billion, PE activity fell sharply last year to 64 transactions, according to EY. The first quarter of 2016 saw 12 deals worth $7.6 billion, including a group of U.S.-based funds acquiring a 12.3 stake in Plains All American Pipeline for $1.5 billion.