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Financing the future energy landscapePrivate 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

4 | Financing the future energy landscape Private equity trends in oil and gas

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*Excludes lapsed/withdrawn deals Source: Mergermarket.com

across the oil and gas industry.

relationship between PE and the oil and gas industry. To this

The oil and gas industry


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

Private equity’s interest and expertise The oil and gas industry continues to push the technical boundaries

55%

41%

36%

24%

17%

15%

12%

Percentage of respondents

0% 20% 40% 60% 80% 100%

Access to technological innovation

Market dislocation opportunities

Commodity prices

Access to high-growth markets

Global expansion

Capital requirements

The primary ways PE can add value to an oil and gas company

55%

gas projects.

63%17%

9%

7%4%

Growth capital

Geographic expansion

Providing operational expertise

Placing effective leadership/executives

Providing access to networks

The main drivers of PE activity in the oil and gas industry

1 International Energy Agency (IEA), World Energy Outlook 2013

7Financing the future energy landscape Private equity trends in oil and gas |

with tight corporate credit conditions that are now loosening.

41%

40%

35%

32%

19%

17%

16%


0% 20% 40% 60% 80% 100%

Exiting current investments

Raising new capital

Making acquisitions to existing portfolio companies

Improving operational performance of portfolio companies

Making new platform acquisitions

Making organic investments to existing portfolio companies

Top two priorities for respondents’ funds in the next 12—24 months

generate good returns

Europe-based PE partner


Evaluating growth prospects and challenges

Hotspots for private equity

particularly active in the unconventional oil and gas growth story in

Latin America

82%

20%

Expect the region to see increased PE interest

Currently active in the region

77%

49%



North America

Expected growth in PE interest by region

Shale gas and oil are

Expectations of PE interest in oil and gas in the next 12—24 months

Percentage of respondents0% 20% 40% 60% 80% 100%

Latin America

North America

Africa

Middle East

Europe 50% 12% 38%

64% 18% 18%

68% 8% 24%

77% 8% 15%

8% 10%82%

79% 2% 19%

Increase Decrease Remain the same


Africa

Middle East

50%

30%



Europe

79%

20%



68%

12%



64%

32%



10 | Financing the future energy landscape Private equity trends in oil and gas10 | Financing the future energy landscape Private equity trends in oil and gas

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 dealEnsuring 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

Key imperatives for PE in the emerging markets


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


0% 20% 40% 60% 80% 100%

Too much PE capital in the market

Lack of viable opportunities

Establishing viable exit strategies

Overvalued targets

Competition from cash-rich corporates

Regulatory issues 54%

39%

31%

20%

20%

18%

14%


Risk versus reward

Business Pulse: Oil and gas report

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

The number one ranked risk by region

Operational risk/HS&E

Latin America

Middle East

Fiscal and tax risk

North America

Political risk

Africa

Europe

understand potential

evaluation purposes.”Canada-based PE partner


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


42%

11%

47%

12 months (compared to previous 12 months)

Easier

Remain the same

Percentage of respondents0% 20% 40% 60% 80% 100%

Africa

Europe

Latin America

Middle East

North America 49% 51%

56% 44%

40% 60%

57% 43%

55%45%

42% 58%

and seller?

Yes No

whether it is debt or

institutional investors.”US-based PE partner


62%

raising opportunities in the next year will increase. Illustrating

players to invest,” says a US-based vice president.

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,

trends are creating

between the buyer and

right valuation and end up not doing the transaction.”European-based PE partner


consistent and predictable returns. Given the unpredictable nature

“players” — non-traditional, non-industry owners, which have

Greatest supply of targets Reduced exposure to movement of commodity prices

Attractive valuations Consistent/predictable returns Ease of exit

The primary drivers by industry subsectors

29%

26%9%

15%

15%

6%

Upstream

11%

19%

19%

30%

2%

19%

Midstream

33%

11%

33%

11%

12%

Downstream

25%

10%

40%

25%

Targeting and focusing


oil or natural gas prices, than the other subsectors. This is in

respondents rate this subsector as the one that provides the

Investments in energy alternatives

returns will be considerably high and can be predicted when

survey respondents say they are also currently pursuing other

86% of respondents say they are currently pursuing other energy options

27%Petrochemicals/Chemicals

67%Renewable energy

56%Power and utilities

11%Mining


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,

Conclusion: what’s next?

success would be another “revolution.” As one US-based vice

in oil and gas equity.

PE oil and gas players.

using an exhaustive database. This proprietary intelligence and historical

EY contactsDale Nijoka

Jeff Bunder

Michael Rogers

Andy Brogan

Jon McCarter

About Mergermarket

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About EYEY 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 businessThe 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

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