Investor Shift From Fossil Fuels Leaves Surging Market to Smaller Players

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While the oil and gas sector is still moving to boost production, they are not expected to have a significant impact on production.

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Those that are left are moving on to increase production, but they are relatively small players that will not be able to make a significant impact on production. Investors are moving capital away from fossil fuels and toward companies that rank higher in environmental, social and governance, or ESG, measures.

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“Oil and Gas has seen the worst returns of any sector in the last five years; Returns are volatile and investors feel ESG pressure,” says Will Vanloh, who runs Quantum Energy Partners, which manages $18 billion, making it one of the few remaining large energy private-equity funds. “Available capital has declined drastically.”

Oil and natural gas prices are rising as concerns mount about potentially limited sources of energy ahead of the coming winter. US crude prices are up more than a seven-year high of $80 a barrel, having more than doubled in the past year, while natural gas prices have posted similar gains in six months, now set at $5 a million British Is trading above thermal unit.

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fossil fuel account About 80% of US energy consumption despite the increase in alternative energy. Demand for oil, the main source of energy for transportation, is expected to continue to grow in the coming years. According to the International Energy Agency, global oil demand is expected to climb every year until 2026, reaching 104 million barrels a day that year, up 4% from 2019 levels.

In the past, high prices and limited supply prompted American oil and gas companies to open their spigots. Privately held producers are doing just that, but publicly held companies, under pressure to appease angry investors, are buying back shares, raising dividends and cutting their spending. They are on track to spend a little more money pumping oil next year, but most are not increasing production.

This makes privately held operators more important than ever. According to Tudor, Pickering, Holt & Co., of the approximately 600 active U.S. oil and gas rigs today, 59% are operated by private companies, compared to 42% of the 1,150 rigs in January 2019.

“The growth in US energy supply will have to come from private companies because public companies are under pressure to return capital from investors, not to spend on increasing production,” says Doug Swanson, managing partner at Encap Investments LP. Equity Firm in Houston.

But the private-equity firms that operate many of these companies are cutting back or leaving the energy business. Major Firms Including Blackstone Inc.

and Apollo Global Management Inc.

Prefer to make new investments in solar energy, wind or other sources which are not harmful to the environment.

For example, Blackstone, Altus Power Inc. which is a manufacturer and operator of solar-powered installations on rooftops and parking commercial properties. Since 2019, Blackstone has led $500 million in debt financing and has pledged $300 million in preferred equity to Altus.

There are now nine energy-focused private-equity firms with $22 billion in capital to invest in the sector. That’s less than the 29 firms with $90 billion to invest in 2018, according to RBC Capital Markets.

“No one’s left, everyone’s gone,” says Sam Oh, who runs the energy-focused private-equity firm Mountain Capital Management LLC in Houston.

So far this year, $2 billion has been raised by energy funds investing in oil, gas and other so-called conventional-energy investments, while nearly $6 billion has been raised by renewable-energy funds, according to data compiled by Pickering Energy Partners. . By-product.

In contrast, in 2015, nearly $50 billion was raised for conventional-energy funds, while more than $10 billion was raised for renewable funds. According to Mr. Oh, pension funds and other traditional investors in private-equity energy funds have reduced their allocations in the traditional-energy sector to 1% of their portfolios.

Those remaining private-equity firms are ramping up their activities, eyeing the best opportunities in years. For example, EnCap-owned companies operate 17 oil-drilling rigs, last year without rigs during the depth of the Covid-19 pandemic, and 14 before the pandemic.

In April, EnCap spent $900 million to buy an oil producer in North Dakota’s Bakken Shale field, which is expected to boost its production over the next year or so.

Pickering Energy Partners has spent nearly $200 million on oil production acreage around Midland, Texas, so far this year. The firm saw little competition and was able to pay less than $5,000 an acre, less than half the price a few years ago.

A company controlled by Carnelian Energy Capital recently bought an oil-producing asset in the Permian Basin and competes with some rivals.

“Historically, you’ve had 15 or more parties bidding on a property like this,” says Tomas Ackerman, a partner at Carnelian.

According to Mr Swanson, the increased oil supply from EnCap’s companies and the remaining energy-focused private-equity firms will not do much to add supply to the global market.

Meanwhile, most investors and lenders refuse to join coal companies despite rising energy prices.

“Coal is dead, it’s untouchable,” says Mr. Oh of Mountain Capital, which recently bought an oil-and-gas producer in the Permian Basin but is one of those that won’t invest in coal-related assets. . “Today you cannot get a coal loan; You can hardly get oil and gas loans, so many banks have left this area.”

Some energy companies, including TotalEnergies SE, are taking steps to increase spending on renewable energy. Companies like Total are attracting more investors as they move from oil to natural gas, says William Callanan, who runs Syzygy Investment Advisory Ltd.

Other types of investors are taking a fresh look at the energy sector. Hedge funds, junk-bond investors and others have begun to worry about accelerating inflation and see commodities including oil and gas investments as the most attractive in an inflationary environment. Even some investment firms that have been under pressure from clients to prioritize the environment have been buying energy stocks recently.

But investors, who buy stocks but not acres and drilling rigs, are unlikely to do much to help boost overall energy supply, analysts say.

Gregory Zuckerman [email protected] Feather


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