The rule of three says to emphasize and surprise, take advantage of the way our brains cling to patterns. Harness the power of three. Harness environmental, social, and corporate governance (“ESG”) criteria when assessing the performance of portfolio companies.
In the past 2 decades, there has been an upward movement in both the number of private equity deals in the oil and gas industry and the dollar value of these transactions. The ten largest private equity firms have invested $1.1 trillion to harness the energy industry.
The three graduate to four! The oil and gas industry has four major sectors: midstream, oilfield services, downstream, and upstream. The question is, why do private equity players show interest in this sector. The answer is simple: the risk continuum and an increasing need for capital leading to widening the circuit of investment. This is the moment for them to leverage another three, namely, their experience, associations, and industry competence to their advantage. Be it purchasing properties and supporting experienced management, private equity players want to play.
For the bigger oil and gas majors, the moving away from fossil fuel extraction and stepping towards renewable and alternative generation has resulted in them selling off the non-core asset, especially those that do not come under their geographical purview. The outcome is that smaller firms are relooking at their own assets via acquiring and divesting.
What are the drivers going to be? As mentioned in an earlier article – ESG.
Investors clearly prioritize green energy investments. The more traditional energy companies will be challenged and will surely need to relook at their assets to pacify the set of shareholders who consider reduced emissions to be the top priority. Geographical landscape was taken into account by Shell in its movement from Hague to London.
The second crucial factor is the optimization of portfolios. The more giant corporations will look at divestment of assets to optimize their entourage. This will meet the increasing ESG expectations and follow the rules for green energy.
The Oilfield Services (OFS) industry will widen its base and capabilities. Smaller OFS firms will work towards increasing scale to decrease costs of operation, widen cash flow, and progress towards a stronger existential pathway. Assets acquisition will be the deal-breaker for midstream companies to spread their network bereft of capital commitment. Newer constructions will be vied for. Companies in the downstream segment need opportunities to add facilities through acquisitions.
To support this with numbers, in the first three months of 2022, US energy deals transacted up to 11.2 billion US dollars. Alternate energy has seen many breakthroughs. Oil and gas industry, man or artificial is the new age sector. Watch out. Get energized to go where no man has gone before!
In addition to analyzing trends resulting from recent changes in the operational environment, we strive to continue monitoring the PE&VC market. You may set up a free consultation by emailing at john@kgfinadvisors.com