Home' Trinidad and Tobago Guardian : February 26th 2015 Contents BG8 ENERGY
BUSINESS GUARDIAN www.guardian.co.tt FEBRUARY 2015 • WEEK FOUR
Earning US$7 on the dollar is
any investor s dream. Buyout
group Apollo has shown
with its investment in oil
exploration and production
company Athlon Energy that
such reveries can become
A slump in oil prices has spurred activity
among private equity investors around the
world hoping for their own bumper returns
by scooping up assets on the cheap.
"Clearly what you re seeing in the energy
market with the cataclysmic fall in oil prices
- halved in such a short period - I think you
will have haves and have nots," said Leon
Black, founding partner at Apollo.
"We along with others in our industry are
dusting off (opportunities)," added Black,
speaking at the annual private equity Super-
Return conference in Berlin.
Global crude prices LCOc1 almost halved
to around US$60 a barrel in the past 12 months,
slashing company values, forcing budget cuts
and putting more than US$150 billion of oil
and gas exploration projects in jeopardy this
The time may look right for investments
now, but what if oil prices continue to fall or
fail to rebound for years?
Indeed, despite the Athlon deal, the value
of Apollo s overall portfolio suffered in the
final three months of 2014 because of a mark-
down in the equity value of some other ener-
gy-related companies, or their loans and bonds.
"You re catching a falling knife," said Simon
Henry, chief financial officer at Royal Dutch
Shell (RDSa.L), explaining limits on dealmaking
in the sector.
While some investors are taking a wait-
and-see stance, others are more bullish.
"I think when these knifes are falling is
when the opportunities actually present them-
selves. Everyone is running in the opposite
direction," Joseph Landy, co-CEO of Warburg
Pincus told Reuters. The private equity group
is flush with cash after closing an energy-
focused fund in October.
Activity picks up
While several funds are working out their
strategy quietly, afraid to tip off rivals, others
like Blackstone are more vocal about it.
"Our people are scrambling and trying to
come up for air, we are very busy looking at
specific deals," Blackstone s President Tony
James said last month.
Already, buyout groups activity in the oil
and gas sector has picked up significantly.
They poured US$31 billion into the oil and
gas sector in 2014, clearly outstripping the
US$8 billion in investments that sponsors
have invested in the sector over the five prior
years, according to ThomsonReuters data.
After equity investments in the software
sector, oil and gas came in second on buyout
groups shopping list last year.
"In the long-term the equilibrium point
of oil prices is in the US$70-85 range. The
question is when is it going to get there, are
we talking 9 months or 30 months? That is
were the risk lies," Warburg Pincus Landy
Investment opportunities seem abundant.
Based on company filings and announcements
compiled by oil and gas consultancy 1Derrick,
assets worth about US$112 billion are up for
Half of these are North American, mostly
US oil and gas shale fields such as Anadarko s
Wyoming field and Reliance Industries Eagle
Ford assets, as well as ConocoPhillips oil-
sands operations in Canada.
Outside North America, Russian oil giant
Rosneft is offering its non-core operations
while Apache has mainly Egyptian assets for
While oil majors are offloading assets to
cope with lower earnings some smaller com-
panies are being forced to sell oil fields, explo-
ration and infrastructure firms to survive.
Blackstone is raising its first energy-focused
credit fund in the latest sign that private
equity firms are seeing investment oppor-
tunities among distressed assets.
Blackstone is betting that the bonds of
some exploration and production companies
that rode North America s oil and natural gas
boom are now undervalued, or could be soon.
Marcel Van Poecke, managing director of
Carlyle International Energy Partners, agreed.
"After a crash like this, there is clearly more
upside than downside. This will be a great
time to invest but there is no need to rush
into it, because I don t think we have seen
the bottom yet," he recently told Reuters.
Stage 1 of Saudi Arabia s
plan---or perhaps hope---to
restructure the oil market
is taking longer than expect-
ed. By refusing to rein in
production as prices fell, the
Saudis permitted a big sur-
plus to grow and served notice on higher-cost
rivals such as Russia, Venezuela and American
shale-oil producers that they would not prop
up other people s profit margins at the expense
of their own market share.
That signal has been weakened by the grow-
ing amount of oil in storage, which is absorbing
most of the glut. World oil stocks rose by
about 265 million barrels last year and Societe
Generale, a French bank, reckons that they
will increase by a further 1.6 million to 1.8
million barrels a day in the first six months
of this year, adding roughly 300 million barrels
to the total.
Oil is being stored in the hope that demand
and prices will pick up later. Such restocking
and renewed political worries---flows from
Libya s largest oil field were disrupted again
this week by apparent sabotage---have pushed
the price of oil back up.
After having fallen by more than 60 per
cent since June, the price of a barrel of Brent
crude closed at US$59.96 on February 18.
The restocking cannot continue for long.
Storage facilities in Europe and Asia are already
between 80 per cent and 85 per cent full.
Much more and they will overflow. As it is,
companies are renting tankers to store oil in.
If storage space runs out, prices could tumble
Whether that happens depends on how
quickly Phase 2 of the Saudi plan gets under
way. This is to force high-cost producers out
of the market to increase the influence of Per-
sian Gulf countries.
At the moment this is happening only slowly.
Oilmen recently have become obsessed with
the so-called "rig count," the number of drilling
rigs operating in America and elsewhere. Ana-
lysts think that, as the rig count declines,
shale-oil output will fall, hurting profits and
That seems dubious, however. Figures from
Baker Hughes, an oil-services company, show
that in mid-February the rig count in America
fell to its lowest since 2011, and was 35 per
cent below its peak in October 2014. That is
a big fall, but most of the idled rigs are in
marginal areas. The fall has been only nine
per cent in the main shale-oil basins, in North
Dakota and Texas, which accounted for four-
fifths of the increase in American oil output
in the past two years.
Moreover, productivity is rising in the
remaining wells. Citibank reckons that even
a 50 per cent fall in the rig count would allow
output to rise this year and turn the average
shale firm s cash flow positive, encouraging
"The market sentiment may have changed
but the fundamentals have not," said Antoine
Halff of the International Energy Agency, an
The Organisation of Petroleum-Exporting
Countries said that its members output will
rise by 400,000 barrels a day this year, and
others think that the increase will be greater.
Non-OPEC supplies are likely to rise by twice
that. Thanks partly to cheaper oil, world
demand is rising, but not by much: The IEA
reckons that demand will be flat in the first
half of 2015, before rising by 2 million barrels
a day in the second half. By most estimates
the market will be oversupplied for a while.
In the long run there are signs that oilmen
believe that the decline in prices will be lasting,
which should prompt a broader restructuring
of the industry. Large oil firms have announced
cuts in capital spending of more than 20 per
cent for this year.
BP, for example, will spend US$20 billion
on capital projects in 2015, compared with
US$23 billion in 2014.
As it is, new discoveries also are falling pre-
cipitously. According to IHS, a research firm,
new finds of oil and gas amounted to the
equivalent of 16 billion barrels last year, the
lowest in 60 years.
That will cheer the Saudi strategists.
@2015 The Economist Newspaper Ltd.
Distributed by the New York Times Syn-
Whither oil prices: The Saudi project
New oil rush?
Private equity starts to
buy into energy assets
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