Sector focus: oil & gas still draws PE interest

Dealflow for the oil and gas sector has been fluctuating since the financial crisis. In the past few years, renewable energy and alternative fuel rose to the top to give its more traditional counterpart a run for its money. However, the industry seems to be returning to a more stable, comfortable level of dealflow this year, while renewable energy and alternative fuel appears to have fallen off GPs' radars.

A series of high-profile, negative events in the oil and gas sector, such as the Deepwater Horizon disaster and the price of oil per barrel hitting its peak of $147 in 2008 then plummeting to $30 a barrel at the end of the same year, appeared to cause a cautious step back from the industry. Now, a steadying oil price coupled with recent technological revelations in the gas sector, such as fracking – which has begun to unlock a huge amount of previously-unattainable resources – could be drawing private equity investors back into the promising industry of oil and gas.

"Stable oil price and long-term, positive sector dynamics are playing their part in providing good conditions for private equity investments in the oil and gas sector at the moment," says Jock Gardiner, partner and head of energy investments at Maven Capital Partners.

So far this year, investments in the oil and gas sector have surpassed that of its renewable energy and alternative fuel counterpart. While oil and gas has been subject to 23 deals so far in 2013, according to unquote" data, renewable energy and alternative fuel has experienced less than a third of that. And if the second half of 2013 follows in the footsteps of the first, oil and gas will easily surpass its yearly figure for 2012. Meanwhile, the renewable energy and alternative fuel sector – which has so far seen only a quarter of the activity it experienced last year – does not appear as though it will catch up.

"Generally, everybody's looking to move towards the greener, cleaner economy," says Adrian Reed, a managing director at Altium Capital. "But the issue is that there isn't necessarily enough money going into renewable energy and alternative fuel at the moment to generate the next-generation solar photovoltaic (PV) unit which can compete with traditional fuels without subsidies. Gas is seen as a stop-gap for the next 10-20 years until renewable energy increases its baseload and the cost of generating renewable power comes down to 'grid parity'. Then renewable energy and alternative fuel will take over oil and gas in 15 or 50 years' time. But at the moment, oil and gas is still going to be the dominant player."

Despite this current shortcoming in renewable energy's growth, the sector began to experience an abundance of interest from GPs in 2008. While dealflow remained on par with oil and gas that year, 2009 saw the renewable energy and alternative fuel sector experience an uplift of 36%, which Reed attributes to the reduction of tariffs. Investments in oil and gas, on the other hand – specifically exploration and production; pipelines; integrated oil and gas; and oil equipment and services – plummeted by 65%.

Since then and until last year, the renewable energy and alternative fuel industry flourished and experienced three times the number of investments that oil and gas did on a year-by-year basis. The sector reached its peak in 2010 at 72 deals in one year, compared with just 23 for oil and gas, according to unquote" data.

Renewable reversal
This turnaround in investment attitude for the industry could be attributed to a number of events. The sharpest upturn in interest for the renewable energy sector began immediately after the Deepwater Horizon explosion and oil spill in April 2010. Did the effects of the disaster – said to be the largest accidental marine spill in the history of the petroleum industry – ripple through the private equity world and cause a downturn in oil investments, or were GPs unfazed by the backlash?

"I don't think it necessarily had an effect one way or another," says Reed. "What it did do was make private equity firms ask the question, 'What is the risk?'. Good quality companies providing services to the oil and gas industry have always been and will always be attractive investment assets to private equity, as long as they've got the right characteristics in terms of growth.

"Oil and gas is one of those areas where it's a relatively buoyant market – it's a high-value sector in terms of multiples and it's high-growth if you've got the right business. Private equity investors are more likely to make a fantastic return in oil and gas because of the characteristics around it: the size of the industry; the supply chain; and the fact that there are so many niche areas where good quality, smaller companies can provide world-leading products and services."

However, Gardiner believes that while some private equity firms were "scared off" following the 2010 disaster, others "began opportunistically looking for safety-related investments".

"We [Maven] did note an upsurge in safety-related opportunities as a consequence of Deepwater Horizon," he says. "One of our investments, EFC Group, specifically benefited from the post-disaster landscape."

Teaching old dogs new tricks
While fracking, already generating a frenzy of interest in the US, has yet to become as popular in Europe, a generous handful of companies are attracting private equity attention with technology services for the traditional oil and gas markets. In May, the Business Growth Fund (BGF) backed Aberdeen-based Petrotechnics – a provider of software for frontline operational performance and risk management in the oil and gas industry – with a £6m investment.

"Aberdeen has developed a reputation as the leading sub-sea technology capital for the global industry," remarks Gardiner. The UK, he believes, is particularly involved in this new breed of technology for the sector. This is exemplified by London-based Delonex Energy's recent funding round, led by Warburg Pincus, which pulled in $600m in capital. The company is a provider of oil and gas exploration services specialising in using technology and market access to discover and develop hydrocarbons.

Likewise, Saudi Aramco Energy Ventures invested in Aberdeen-based ZiLift in June. ZiLift is currently developing a number of products including TorqueDrive, designed to target heavy oil production and gas-well deliquification including conventional and unconventional gas wells, and SpeedDrive, which targets retrofit conventional oil wells.

"Technologies are always improving," says Reed. "And whoever's got the next new, clever product, system or service will always find investment. Technologies that can be used to access new harder-to-get-to reserves or enhance and maximise the tail-end of production of existing and old assets are increasingly interesting for investors."

As technology as a whole advances further, the oil and gas industry will naturally accrue more companies – ones that are focused on lowering the cost but maximising the yield of oil production, while also simplifying and speeding up the entire process – that will attract the eye of private equity. And after the recent revelation that the world has not reached its peak oil supply just yet (although this is expected to happen at some point between now and 2018), private equity players in the industry can expect to enjoy a few more years reaping the benefits of this lucrative sector.

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• Topics
• Industrials
• Investments
• Maven Capital Partners
• BGF (Business Growth Fund)