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Private equity opportunities in oil and gas

Thursday, September 24, 2015

We interviewed Chris Sim, director of investment banking at Investec, about where he sees the biggest opportunities for the private equity sector in the oil and gas industry.

The private equity sector (investment funds which buy ownership stakes in private companies) is increasingly making its presence felt in the oil and gas industry.

Larger private equity companies have recently made a number of investments into exploration and production companies in the North Sea, including Zennor Petroleum (backed by Kerogen Capital based in Hong Kong and London), Siccar Point Energy (owned by Blackstone and Blue Water Energy), and Neptune Oil and Gas, led by former Centrica CEO Sam Laidlaw, funded by The Carlyle Group and CVC Capital Partners.

In addition, some of the larger private equity companies who have invested in oilfield services include The Carlyle Group, KKR, Riverstone, and Blackstone, as well as specialists such as First Reserve, Blue Water Energy and Limerock. “There are also other ‘mid-market’ private equity funds in the UK who are also active in oil field services, such as LDC, Inflexion, and Phoenix Equity Partners,” says Chris Sim, a director of investment banking at Investec, who has recently completed a number of oil and gas private equity transactions.

There are also private equity funds that specialise in earlier stage oil and gas technology investments. “Examples include Saudi Aramco Ventures, who are particularly interested in bringing new technology into Saudi Arabia,” Mr Sim says, ”while other smaller company investors, benefit from the UK government’s Venture Capital Trust scheme, such as Energy Ventures, based in Aberdeen, and the Business Growth Fund (BGF),” he said.

Kentech / Bluewater

Investec recently acted as financial advisor and capital arranger for a $32m capital raising for oil and gas services company Kentech.

The investment was made by Blue Water Energy, a specialist private equity energy fund who typically look to make investments of $50m to $150m per company.

Kentech provides electrical, instrumentation, control and telecommunications (EICT) services for the oil and gas industry, employing over 3,000 people.

Headquartered in Ireland, Kentech has operations in Kazakhstan, Sakhalin Island, Australia, UAE, Qatar, Kuwait and Mexico and has worked in over 30 countries worldwide. It services a blue chip client base consisting of a number of oil majors, as well as the international engineering, procurement and construction companies (EPC) such as Petrofac and Saipem.

“When considering investing in a company like Kentech, one of the important considerations is where the operations are,” Mr Sim says. “Having operations in the Middle East is a big plus. The region has one of the lowest costs of production in the world so big oil and gas projects are still going ahead there, despite the low oil price. This offers a considerable degree of investor protection in a sustained period of low oil prices.”

Oilfield service companies

“Some private equity companies have seen some big successes in the oilfield service sector,” he says, “so there is still a willingness to invest further.”

It helps that the oilfield services sector often has more in common with conventional businesses than the exploration and production sector. “You might build things, sell things or rent things out,” he says, “which generate revenues and cash flows which are easier to analyse. By comparison, private equity firms often view exploration and production investments as higher risk. You need a specialist background to fully understand the technicalities of geological risk,” he said.

When considering an investment, investors tend to focus on past performance, the quality of the customer base, the market position, management track record, key growth drivers and the geopolitical exposures.

Styles

Private equity companies can have a range of investment priorities.

For example, for firms like Blue Water Energy, a key priority is a high quality management team with a proven track record of value creation, who maintain a meaningful stake in the business.

Private equity firms are often keen to build their reputations as good companies to work with, encouraging the managers of their existing portfolio companies to speak to the managers of prospective portfolio companies.

For these sorts of investors time horizons are typically 3 to 5, but can be as long as 10 years (meaning that the private equity company is planning to hold its investment for 10 years).

Many private equity firms will typically seek a controlling, majority stake in businesses. Although this can sometimes be met with caution by family businesses wary of losing control, target companies should balance this against investment firms’ ability to bring much more to the table than just their capital, including industry contacts and expertise as well as significant experience in growing companies.

Some private equity companies make repeated investments with the same management team who will manage different businesses, often running a company, turning it around and selling it, before moving on to another company to repeat the strategy.

Private equity companies are in a very competitive world, and they need to consistently outperform their competitors in order to continue attracting funds. This means making good decisions and good investments, and finding the right experts to provide advice is essential. “Experience in the sector and an understanding of the potential issues is key,” Mr Sim says.

If the company makes a specific piece of equipment such as pumps, you need to have knowledge of the pumps market.

But a good investment can quickly turn sour if (for example) a larger company in the sector with a market leading position and a strong balance sheet makes a strategic decision to go into direct competition with a recently acquired portfolio company. With the current low oil price, there are likely to be many companies urgently in need of money, so good opportunities could shortly become available. “Now could be an incredibly good time to put good money to work,” he said. “But there is still the risk it could be awful if you invest in the wrong parts of the sector, or the oil price continues to recede.”

Around the world

In terms of international opportunities, “Africa is important,” he said. “There is an ever changing landscape. The challenge is to try to work out the best way to take the business forward.

Investec was founded in South Africa. “We have completed transactions across many sectors in Africa,” he said.

Challenging political and commercial landscapes, can mean that “it’s easy to lose money as well as make money,” he said. “Some of these places are not straightforward to operate in.”

Some countries have different legal systems, for example West African countries often follow French law.

“Another challenge with African investments is ensuring that a business has the correct anti-bribery and corruption procedures in place,” he said.

Egypt is “a country with a considerable wealth of hydrocarbons and there is a bit more stability there now than there was a few years ago,” he says. “They have a very young population and they want inward investment. A number of smaller oil and gas production companies have run into cash flow issues as the government has at times been slow to pay them for their production.

“Iran has the potential to become very interesting,” he says, “but working out how best to play the opportunity will be tricky. The political stability there compared to Iraq could make it a very attractive place to invest in the future.”

Associated Companies
» Investec

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