Private equity rips up the rulebook

Portfolio reshuffles and asset sell-offs by the majors have provided rich pickings in the upstream sector for the canny private equity (PE) investor.

Their success doesn’t come from knowing one end of a drill-bit from the other, but from knowing a good opportunity when they see one and being ready to pounce and take advantage where the traditional majors have run out of steam.

Examples include Siccar Point’s Blackstone and Bluewater-backed acquisition of OMV UK in November 2016, just three months after it bought a stake in the Greater Mariner area from JX Nippon Exploration; and Chrysaor, backed by EIG Global Energy Partners and understood to be in advanced negotiations with Shell over a package of North Sea assets.

Carlyle Group, the world’s largest PE outfit, is one of two financiers of Neptune Oil and Gas, established in mid-2015 by former Centrica head, Sam Laidlaw, and which is vying for North Sea assets owned by Engie (formerly GDF Suez). Elsewhere, Carlyle is also in discussions with Shell on assets in Gabon. Another Carlyle-backee, Mazarine Energy, is hoping to take over 19 fields onshore Romania following a deal   ̶   currently under scrutiny by regulators   ̶   with OMV Romania.

Apex International Energy, funded by Warburg Pincus, was established in early 2016 and snapped up its first government-awarded exploration licence in Egypt last month. Warburg also funds Trident Energy which, led by a largely ex-Perenco team, is focused on the acquisition of mid-life Latin American and African assets, while London-headquartered TransEuropean Oil & Gas is looking for opportunities onshore Europe, funded by its backer, KKR.

There has been a shift in the midstream too, illustrated by the purchase by Antin Infrastructure Partners from BP of a stake in the Central Area Transmission System (CATS), giving Antin almost 100% ownership of the asset.

This new generation of mid-cap oil companies is hungry for fast results and, in most cases, is likely to succeed. What PE firms lack in downhole knowledge they make up for firstly in cash, secondly in their ability to do things differently from the majors, and thirdly in their agility.

The hallmark of the PE world really comes into its own after the deal. Freed from the bureaucratic shackles of the large structures and equally large cost bases of the majors, they are swift to take and execute decisions – not for them the twenty layers of management all digesting, re-drafting and signing off every single document about the minutest corporate action.

This strategic and cultural nimbleness enables smaller companies to embrace new technology and lower operating costs. PE-backed companies are not bogged down in an existing process in which 500 people are trained; if the company wants to change a process, it can just change it, almost literally overnight, without a lengthy implementation or the dreaded “management of change”.

The majors’ silo approach, with specialists lodged in specific locations and tightly defined roles, sometimes leaves some “redundant” depending on particular business whims at a given time. Smaller companies, on the other hand, thrive on multi-skilled and multi-functional staff who are continuously more hands-on in several parts of the business and can be rapidly deployed where the business needs them most.

Experienced personnel moving to these “new kids on the block” are presented with more responsibility and the opportunity to make their mark in a leaner and more agile environment, a world apart from that of inflexible and process-worshipping majors.

What does this mean for the smaller private equity-backed company? That it can prioritise its original reason for being   ̶   to produce returns and fast.  The PE-backed firm has the freedom to act with commerciality at the fore   ̶   this doesn’t mean that safety will be compromised or that individuals will be badly treated; it means the liberty to take the quickest route to revenue.

In the PE world, common sense makes good commercial sense.