Mustafa Siddiqui is enjoying a change of scene. He’s just arrived in the UK to head up Blackstone’s energy investments in Europe – the first time they’ve been run out of London, instead of New York.
That highlights a phenomenon that is changing the shape of the oil industry: private equity’s interest in oil, once largely focused on North America, is going global.
“There’s a lot of virgin ground outside the US and the competition is thinner,” Mr Siddiqui, a managing director at Blackstone, told the Financial Times.
Private equity has long been a big investor in energy, especially in the US. Buyout groups have piled into oil and gasfields, oilfield service companies, power plants, utilities and wind farms.
Some of the most successful oil companies of recent years were backed by private equity. The standout example is Kosmos Energy, the small explorer initially funded by Warburg Pincus and Blackstone, which discovered the massive Jubilee oilfield off the coast of Ghana in 2007.
Kosmos is no longer an outlier. More and more buyout groups are investing in the high-stakes business of finding and producing crude. Global private equity-backed oil and gas M&A has totalled $5.9bn so far this year, according to Thomson Reuters – up 48 per cent on the same period in 2013.
“Private equity and the national oil companies are the only pots of money chasing exploration right now,” says Nick Cooper, chief executive of Ophir Energy, the Africa-focused junior. “And when it comes to start-ups, PE is virtually the only source of funding.”
That’s a big change from the situation just a few years ago. The exploration scene was dominated by western majors like BP and publicly listed independents such as Tullow Oil and Ophir, a group that was behind a string of spectacular discoveries in Africa.
But the landscape is shifting. Quoted explorers are finding it hard to raise funds, as capital markets sour on oil exploration. The majors, under pressure from shareholders to improve returns, are curbing spending and shedding assets. And US-headquartered independents have gone back home to ride the shale boom.
“That’s opening up a lot of investment opportunities elsewhere in the world, and private equity is stepping in,” says Will Honeybourne, a managing director at First Reserve.
First Reserve, along with Riverstone and Warburg Pincus, were pioneers of oil investment. Now others, such as Carlyle, Apollo Global Management and KKR, have got in on the act, raising dedicated energy-focused funds or building up their own specialist teams to invest in the oil and gas space.
Last year, Carlyle committed up to $200m in Discover Exploration, a start-up that has been drilling for oil off the coast of New Zealand. Blackstone, which raised its first, $2.5bn energy fund in 2012, has just announced a $250m investment in Siccar Point Energy, a new UK-based oil company focused on the North Sea. The New York-based group is now seeking $4bn for a new energy-dedicated pool, according to people with knowledge of the matter.
The groups’ recent forays into oil differ markedly from standard private equity investments. Buyout funds typically own their holdings for about three to five years before selling them on. But investment horizons for the oil industry, where an exploration well can have a two-thirds chance of failure, tend to be much longer.
“One of the things that’s changed about private equity investors in oil is that they seem to be willing to hold things for longer – say for seven to eight years rather than two to three,” says Andy Brogan, head of global oil and gas transaction advisory services at EY. “Specialist PE investors seem to be more willing to take on exploration risk.”
As a result, PE-backed companies are often under less pressure to hit production milestones than their quoted counterparts. “We are patient,” says Mr Siddiqui. “We are not focused on quarterly metrics.”
At the same time, buyout groups also tend to target higher returns than with more conventional investments. “We’d like to think that over the next five years we can make three times our money,” says Graeme Sword, a partner in Blue Water Energy, which is also investing in Siccar Point. That compares with about two times the initial investment typical for plain leveraged buyouts.
What is clear is that the asset market for PE-backed companies has rarely looked so buoyant. The majors are expected to try to divest more than $300bn of oil and gas properties in the coming years – rich pickings for private equity.
“Look at the inventory of what’s for sale in the North Sea,” says First Reserve’s Will Honeybourne. “It’s massive.”