Money talks

Author Manash Goswami, Senior Reporter

How do you survive when the value of your main product is worth half as much as it was six months ago?

How do you survive when the value of your main product is worth half as much as it was six months ago?

There’s the debt and equity route that shale producers like Laredo Petroleum, Antero Resources and Goodrich Petroleum  have followed. Or one can sell the whole company, as BG has with Shell

And then there’s the private equity investor community willing to offer a lifeline. For private equity funds, the list of oil and gas assets on offer is just getting too attractive to ignore, even with the gaping hole in the balance sheets that have happened with the crude price drop of the last year.

Apollo Group’s senior managing director Josh Harris summed up their strategy in their earnings call on 5 February: “So, our general approach is if we find something that we think is long-run intrinsically undervalued, we are going to buy it. And guess what? If the price goes down, we will buy more of it.”

KKR has created “an energy SWAT team” with members from energy, infrastructure, and other teams to scout for opportunities, said Scott Nuttall, global head for capital and asset management, in their earnings call on 10 February.

Linn Energy signed a $1bn equity deal with private investor Quantum Energy to fund acquisitions and pay for the development of oil and gas assets. And just this week Apache said it was selling its Australian subsidiary for $2.1bn to a fund managed by Macquarie and Brookfield Asset Management. First Reserve also said it will invest $1bn in projects in partnership with Mexican national oil company Pemex. These deals suggest that PE funds aren’t just looking for assets in the US but are casting their net wide.

Private equity investors show no signs of slowing down their interest in energy. Houston-based EnCap Investments, which specializes in oil and gas, just closed it 19th fund, a $6.5bn round are aimed at backing proven management teams in the upstream business.

There will no shortage of distressed assets for investors to consider, at least in the US. Only three US shale oil areas generate at least 10pc returns at $50/bl Nymex WTI prices, according to a study by consultancy Wood Mackenzie. The remaining 35 top oil-weighted shale acreage areas need an average drilling and completion cost reduction of 30pc to be economic at $50/bl.

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