Is private equity funding the answer for the cash-strapped oil sector?
When banks aren’t lending and the oil price collapse has hit revenues hard, where do you turn to keep going if you are a firm in the oil sector? The answer could well be the private equity providers.
A vital straw in the wind for oil-related companies is that a great deal of private equity and hedge fund money – serious money — is now being invested in energy. These investment firms are taking the view that the current low-price oil scenario is NOT “the new normal” that quite a few observers have been suggesting and that, in fact, it offers them an unprecedented opportunity.
For example, the Blackstone Group, the biggest private equity company in the world, has decided to invest heavily in energy. It plans to support cash-strapped oil sector companies via a new $4.5 billion (£3 billion) energy fund it has set up. In all, Blackstone’s oil-investment budget is reported to be around $9 billion. The company said it is confident of being well placed to “take full advantage of the significant recent cyclical downturn in oil and gas prices.”
Another US private equity titan, New York-based Warburg Pincus, moved even faster to follow up the opportunity, launching a $4 billion energy fund last October.
These investors could offer a lifeline to oil sector firms that have watched, stricken, as their stock-exchange price headed steadily downwards. In particular, the more savvy private equity companies can distinguish those targets that have been valued unfairly by being lumped together with less able competitors in broadly the same segment. Service companies, for example.
So confident is Blackstone that it has also made its first foreign investment, again in energy – in the midstream, in Mexico. It has signed an agreement with PMI, a subsidiary of Petroleos Mexicanos, and First Reserve — the largest global private equity energy investment firm — to take an equity interest of around 45% in two gas pipelines.
Known together as the Los Ramones ll Projects, these will carry US shale gas through 744 km of pipelines from Texas to central Mexico. The equity financing deal is also a landmark for Pemex as these will be its first infrastructure assets to be built with a foreign stake since the energy reform law of 2013.