Financing the future energy landscape Private equity trends in oil and gas
Contents Introduction 2 Private equity in oil and gas: strategic perspectives 4 Evaluating growth prospects and challenges 6 12 14 Conclusion: what s next? 16 17
Introduction Private equity (PE) is in the midst of a transformational period. Having assisted their portfolio companies to survive once again on the offensive. The result is a sector that is investment landscape. PE is expanding beyond its traditional focus on leveraged buyouts into an array of new asset classes. and fund-of-funds investments. with which they do business increased transparency, greater are specialized by sector and geography. genuinely attractive returns are still available. It is characterized by: underpinned the unconventional oil and gas revolution, Structural changes to the industry, including: the rise is expanding, with new entrants joining specialist and generalist renewable energy. PE activity in the oil and gas industry Value (US$b) Volume 2008 18.4 65 2009 3.6 34 2010 8.3 51 2011 23.2 45 2012 27.2 56 *Excludes lapsed/withdrawn deals Source: Mergermarket.com 4 Financing the future energy landscape Private equity trends in oil and gas
The oil and gas industry across the oil and gas industry. relationship between PE and the oil and gas industry. To this
Private equity in oil and gas: strategic perspectives Growing demand, opportunities abound 1 The industry is access to resources or capital, technology or related costs, there 55% gas projects. Private equity s interest and expertise The oil and gas industry continues to push the technical boundaries The main drivers of PE activity in the oil and gas industry The primary ways PE can add value to an oil and gas company Capital requirements Global expansion Access to high-growth markets Commodity prices 17% 24% 36% 41% 55% 17% 9% 7% 4% 63% Growth capital Geographic expansion Providing operational expertise Placing effective leadership/executives Providing access to networks Market dislocation opportunities 15% Access to technological innovation 12% 0% 20% 40% 60% 80% 100% Percentage of respondents 1 International Energy Agency (IEA), World Energy Outlook 2013 6 Financing the future energy landscape Private equity trends in oil and gas
with tight corporate credit conditions that are now loosening. Top two priorities for respondents funds in the next 12 24 months Making organic investments to existing portfolio companies Making new platform acquisitions Improving operational performance of portfolio companies Making acquisitions to existing portfolio companies Raising new capital Exiting current investments 19% 17% 16% 35% 32% 41% 40% generate good returns Europe-based PE partner 0% 20% 40% 60% 80% 100% Percentage of respondents Financing the future energy landscape Private equity trends in oil and gas 7
Evaluating growth prospects and challenges Hotspots for private equity particularly active in the unconventional oil and gas growth story in Shale gas and oil are Expectations of PE interest in oil and gas in the next 12 24 months Expected growth in PE interest by region North America 77% Expect the region to see increased PE interest 49% Currently active in the region Europe 50% 12% 38% Middle East 64% 18% 18% Africa 68% 8% 24% North America 77% 8% 15% 79% 2% 19% Latin America 82% 8% 10% 0% 20% 40% 60% 80% 100% Percentage of respondents Latin America 82% Expect the region to see increased PE interest 20% Currently active in the region Increase Decrease Remain the same 8 Financing the future energy landscape Private equity trends in oil and gas
Europe 50% Expect the region to see increased PE interest 30% Currently active in the region 79% Expect the region to see increased PE interest 20% Currently active in the region Africa 68% Expect the region to see increased PE interest 12% Currently active in the region Middle East 64% Expect the region to see increased PE interest 32% Currently active in the region Financing the future energy landscape Private equity trends in oil and gas 9
Key imperatives for PE in the emerging markets Start with the exit in mind creation throughout the ownership period. Never underestimate the importance of the network Emphasize alignment at the outset of the deal Ensuring that all parties are aligned at the outset is Plan on bringing something to the table besides capital Get management right at the outset Be clear on risk appetite 10 Financing the future energy landscape Private equity trends in oil and gas
to acquire energy supplies globally are also typically prepared to pay higher prices to secure prospective targets. More intense deepwater exploration unconventional resources. gas industry Regulatory issues 54% Competition from cash-rich corporates Overvalued targets Establishing viable exit strategies Lack of viable opportunities Too much PE capital in the market 20% 20% 18% 14% 31% 39% 0% 20% 40% 60% 80% 100% Percentage of respondents Financing the future energy landscape Private equity trends in oil and gas 11
Risk versus reward Business Pulse: Oil and gas report The number one ranked risk by region Fiscal and tax risk North America Political risk Africa Europe Operational risk/hs&e Latin America Middle East oil and gas industry. In recent years, regulation governing Additionally, operational and HSE-related regulation has been tightened and expanded. Uncertainty exists as the industry understand potential evaluation purposes. Canada-based PE partner 12 Financing the future energy landscape Private equity trends in oil and gas
Ranked level of risk associated with each factor in the following regions Africa Europe Latin America Middle East North America shareholder rights shareholder rights shareholder rights shareholder rights shareholder rights shareholder rights Highest ranked risk Lowest ranked risk Financing the future energy landscape Private equity trends in oil and gas 13
whether it is debt or institutional investors. US-based PE partner 12 months (compared to previous 12 months) and seller? Easier Remain the same North America 49% 51% Middle East 56% 44% 47% 42% Latin America Europe 40% 60% 57% 43% Africa 42% 58% 45% 55% 11% 0% 20% 40% 60% 80% 100% Percentage of respondents Yes No 14 Financing the future energy landscape Private equity trends in oil and gas
raising opportunities in the next year will increase. Illustrating players to invest, says a US-based vice president. trends are creating between the buyer and right valuation and end up not doing the transaction. European-based PE partner respondents pegged average leverage or debt-to-capital ratios valuation gap between buyers and sellers in the oil and gas right valuation and end up not doing the transaction. However, 62% Financing the future energy landscape Private equity trends in oil and gas 15
Targeting and focusing consistent and predictable returns. Given the unpredictable nature players non-traditional, non-industry owners, which have The primary drivers by industry subsectors 6% 2% 11% 12% 15% 29% 30% 19% 33% 40% 25% Upstream Midstream Downstream 15% 33% 9% 26% 19% 19% 11% 11% 10% 25% Greatest supply of targets Reduced exposure to movement of commodity prices Attractive valuations Consistent/predictable returns Ease of exit 16 Financing the future energy landscape Private equity trends in oil and gas
Investments in energy alternatives 86% of respondents say they are currently pursuing other energy options 67% Renewable energy 56% Power and utilities 27% Petrochemicals/ Chemicals 11% Mining returns will be considerably high and can be predicted when survey respondents say they are also currently pursuing other oil or natural gas prices, than the other subsectors. This is in respondents rate this subsector as the one that provides the Financing the future energy landscape Private equity trends in oil and gas 17
Conclusion: what s next? presents growth prospects given increasing oil and gas spending, A European-based PE partner says: PE activity in the oil and gas industry is increasing in every region, including Europe. These their strategy and respond accordingly. in oil and gas. As would be expected with an open-ended question, success would be another revolution. As one US-based vice in oil and gas equity. PE oil and gas players. 18 Financing the future energy landscape Private equity trends in oil and gas
EY contacts About Mergermarket Dale Nijoka Jeff Bunder Michael Rogers Andy Brogan using an exhaustive database. This proprietary intelligence and historical Jon McCarter
EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and How EY s Global Oil & Gas Center can help your business The oil and gas sector is constantly changing. Increasingly uncertain with extensive experience in providing assurance, tax, transaction and How EY s Global Private Equity Center can help your business only and is not intended to be relied upon as accounting, tax, or other