43% of private equity investors plan to deploy capital into oil and gas by first half of 2017

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  • Oil price consensus and asset valuations improve investment environment
  • 71% of private equity funds plan to pursue innovative deal structures
  • Asia-Pacific and North America lead investment destinations

SINGAPORE, 1 JULY 2016 – Private equity (PE) firms are readying to deploy capital into the global oil and gas sector with 25% planning acquisitions before the end of the year and 43% by the first half of 2017, according an EY global survey of 100 PE firms active in the sector.

With US$971.4b of PE dry powder from June 2016 still to be deployed, EY’s survey, Capitalizing on opportunities: Private equity investment in oil and gas, reveals that PE firms are now preparing to increase investment into the sector.

Andy Brogan, EY Global Oil & Gas Transactions Leader, says:
“Access to financing is arguably the biggest challenge facing oil and gas companies. While many expected PE funds to swoop in with capital during the oil price downturn over the last 18 months, investment has fallen short. But the tide may be turning. Greater consensus over the oil price future and more favorable asset valuations are improving the conditions for PE, and we expect to see an uptick in deals before the end of the year.”

Deal structures

Due to the debt burden of many PE-backed oil and gas companies, creative capital structures are on the rise. Of the 71% of respondents exploring new capital structures, 62% cite joint ventures (JVs) and drillcos and 59% cite contingent pricing as the most popular options.

Michael Rogers, EY Global Deputy Private Equity Leader, says:
“As oil and gas companies try to raise capital and reduce debt amid the lower-for-longer price outlook, exploring new capital structures and strategies has become almost mandatory for investors. PE-backed companies are looking to joint ventures to help them cut costs, while others hope contingent pricing will offer much-needed price stability.”

Geographic and subsector landscape

When it comes to where capital is being deployed, the EY survey findings reveal increased attention to rising energy demand in emerging economies.

All respondents (100%) expect to see more PE involvement in Asia-Pacific — up from 79% in the last survey conducted in 2013. Low cost, ease of doing business and general macroeconomic growth is drawing investors to this region. 

Similarly, 99% of respondents believe PE interest in North America will grow. Medium-sized companies looking to service debt, or merge or sell assets are providing ample opportunities for funds looking to bolster their existing portfolios. The US shale gas and oil boom has attracted major PE involvement over the past few years to basins such as the Eagle Ford and the Bakken. PE has also contributed to financing liquefaction plants and export terminals projects.

Sanjeev Gupta, EY Asia-Pacific Oil & Gas Leader, says:
“PE is emerging as a significant capital source for oil and gas in Asia-Pacific, as western players refocus their strategies on North America in the current volatile price environment. We are seeing an emerging trend of partnering between PE and exploration and production (E&P) companies over the past few years and this is expected to continue, especially in Southeast Asia. With access to cheap capital, E&Ps are able to continue acquiring and developing assets, while capital providers enjoy the changing dynamics in the industry leveraging on the technical expertise of E&Ps.”

With regard to industry subsectors, PE firms are set to become more involved in the midstream and upstream segments in the next two years. An equal share (44%) of respondents see these two sectors as their best opportunity for return on investment. 

Sanjeev says: “Besides the upstream sector, service companies with special technologies and consolidation potential attract the interest of private equity too, especially funds with strong operating experience or capability in the specific industry subsector. In addition, some investors also showed interest in asset-heavy offshore and marine service providers given the valuation is largely discounted and among its lowest level in a decade.”

In today’s low oil price environment, PE firms are well-positioned to provide short-term and long-term financial solutions across the oil and gas sector, with 63% saying they will provide value to corporates through growth capital.

Brogan says: “PE firms have an important role to play in today’s transforming oil and gas sector. Opportunities will continue to emerge over the course of the year as more companies succumb to the new normal oil price environment. Funds looking to invest will need flexibility, patience and clear strategic plans to take advantage of a buyer’s market.” 

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Notes to Editors

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This news release has been issued by Ernst & Young Solutions LLP, a member of the global EY organization.

About EY’s Global Oil & Gas Sector
The oil and gas sector is constantly changing. Increasingly uncertain energy policies, geopolitical complexities, cost management and climate change all present significant challenges. EY’s Global Oil & Gas Sector supports a global network of more than 10,000 oil and gas professionals with extensive experience in providing assurance, tax, transaction and advisory services across the upstream, midstream, downstream and oil field subsectors. The Sector team works to anticipate market trends, execute the mobility of our global resources and articulate points of view on relevant sector issues. With our deep sector focus, we can help your organization drive down costs and compete more effectively.

For more information, please visit ey.com/oilandgas.

About the report
In Q1 2016, Mergermarket surveyed 100 private equity firms that have made at least one investment in the oil and gas sector over the past two years. More than half of respondents (52%) are based in North America, 26% in Europe, 12% in the Asia-Pacific region, 5% in Latin America and 5% in the Middle East and Africa.