Sheila McNulty Private equity broadens interest in oil, gas industry

The amount of private equity moving into the US oil and gas sector has risen dramatically over the past year, drawn by a long-term bet on rising commodity prices and heightened demand for energy infrastructure. This is according to PwC, the consultancy, which put out a report on US energy sector deals on Tuesday.

Overall, there were eight private equity-backed transactions in the first quarter of this year, representing $4.8bn, or 9 per cent of total deal value, compared to just one during the same period last year, worth $767m, the report said.

Chart showing overall value of PE-backed oil and gas deals

Figures from PwC

It is a trend that has been building in recent months. Counting only deals over $50m, there were seven PE deals in in the first quarter of 2011, totalling $8.195bn, while there were five in the fourth quarter of 2010, coming to $6.624bn.

Rick Roberge, partner in PwC’s energy practice, says that in addition to showing more interest, PE investors are moving beyond traditional investments in midstream assets, such as pipelines and storage, into oil and gas production and oil field services. His take on all this?

They want to be long commodities. Private equity investors also recognise that shale production will require a tonne of infracture and oil field service companies to fracture. There is going to be a lot more investment, and private equity wants a piece of that.

The end result for the traditional investors in the sector is that Mr Roberge believes the larger presence of PE in the energy deal space may be contributing to the increased deal values. The report says the total value of US oil and gas mergers and acquisitions during the first quarter of 2011 surged 69 per cent over the same period in 2010.

For the three months ended March 31, 2011, there were 47 deals with values greater than $50m, accounting for $51.5bn in deal value, a significant increase from $30.4bn during the same period last year. First quarter average deal size also increased significantly to $1.1bn, from $620.9m in the same period in 2010, driven by 23 large deals with a value over $250m.

Mr Roberge says:

Combined with recent market support for $100 oil levels, helping buyers and sellers to agree on terms for potential asset transactions, we believe that the remainder of 2011 will be very robust for deal activity.

Yet he cautions that PE firms are facing “stiff competition” from corporates with strong balance sheets and a desire to make big investments like those seen in the first quarter.

As transaction prices get larger, the financial investment for companies and investors is becoming much more significant.

The corporates are in a position of strength when it comes to understanding deal risks, given their long history in all areas of the business. They also can afford to wait a long time for some of these investments, such as in shale gas, to bear fruit, given that rising oil prices are bumping up profits in their current businesses right now.

Steve Haffner, a Pittsburgh-based partner with PwC’s energy practice, notes that shale gas plays remain very attractive to global oil and gas companies because of the abundant supply in the US:

The continued M&A activity in the Marcellus region has been mainly coming from the large, well-financed players, who have a longer-term vision and can ride out the low natural gas prices we’re seeing now.

With the tremendous amount of shale-related deal activity over the past few years, companies are also focused on building the necessary infrastructure to maximise the full potential of unconventional assets.

Given all that is going on, there should be plenty of room for private equity. The risk will be in how well it manages the wide range of assets it is moving into once it takes them on.