“Investors will go where the money is” – An Analysis of the Sentiment among Energy Investors

“Investors will go where the money is” remarked one of the Energy Council’s members when asked about the increased pressure on funds to be ESG driven and avoiding hydrocarbons altogether.

Investing in O&G E&P is certainly not dead, but the outlook among investor groups remains varied. The unavoidable reality is that many traditional public investor groups who have historically allocated into the sector, are either transitioning those investments out of oil and gas, if they haven’t already done so. Compounding the problem is private equity capital that has been so reliable in weathering the previous down cycle, now also seems to be under strain. One Private Equity fund manager described to me how all new assigned capital in the sector, will now need to be invested directly in projects that directly drive down CO2 emissions via their “Pure Energy Transition Fund”.

The emergence of PE in Europe as the dominant investor profile during the middle of the last decade was driven by a clear investment case, built around relevant easy exits and solid multiples. The onset of a lower price environment, muted demand and the energy transition has disrupted this investment thesis. Many PE players who have committed capital to the sector, now find themselves with stranded assets, with publicised IPOs taking a hit and off the cards for the foreseeable months ahead. Private equity is now left with the ultimatum of either holding firm and streamlining to preserve capital in the hope that oil markets stabilize to such an extent that IPOs can occur in 2021, or to plan a less traditional exit to seek a return on investment

The sector as it has always done, is adapting to the new reality. The recent planned reverse takeover of Premier Oil by Chryasor is an example of the ways in which private companies are finding a way to recapitalise. Many analysts conclude that the evidence of the Chryasor deal points to further deals of this nature as PE companies remaining in E&P continue to plot their exits. One Portfolio Manager we spoke to commented that they too will explore a variety of JVs in the coming months, as they are keen to “dip their toe in the water” and assume less risk.

De-risking has become a theme in the vast majority of conversations among investors in the Energy Council Network. Even the longstanding traditional investors who remain bullish in their approach to E&P are diversifying their portfolios to explore potentially more sustainable investments that can be offered in and around Green Gas, CCUS and Biofuels. Despite a steady return to demand for oil and coronavirus vaccine breakthroughs providing glimmers of hope for oil markets, the outlook mid-term is still extremely muted. The UK hosting the rearranged COP26 in 2021 will add further weight on the industry, with many investors with an appetite for E&P being less reticent than ever to commit capital when there is a very real risk of public scrutiny. As such, we are seeing key O&G investors accelerate their exposure to unconventionals. One Energy Council member firm with $20bn AUM, commented that despite no long-term desire to compete in renewables, they too will now look to place pressure on their portfolio companies to become carbon neutral. This is part of an interesting merry-go-round, with one group of investors after the next promoting the relevant merits of their green credentials.

HitecVision’s portfolio offers us a glimpse to the future. In the first half 2020 they were able to raise over $1bn for their O&G fund, as they continue their co-operation with many producers but then as late as November 2020 this month have also announced a new renewables JV with Eni to “play a major role in the development, construction, operation and financing of renewable energy projects” in Norway.

LPs and Pensions funds are where a significant shift in priority is happening in investment decisions however the sentiment among institutional investors is that the continuing low price environment presents great opportunities and while many may be sat on their hands, they are vigilant to opportunities to swoop in and acquire desirable assets. As many plan exits and conclude their exits there will be “heaps of opportunity in upstream” as one high-profile investor put it. It may mean a period of creative deal structuring and investors looking for JVs and de-risked investment level opportunities, but in a world with a rapidly growing population and subsequent energy demand increase, E&P is to play a vital role in the future of the Energy Mix. Undoubtedly investors’ portfolios will shift and restructure with the ever developing energy matrix, however the sentiment remains that despite the fact that many will either exit or diversify with investments in LNG, Biofuels and Renewables, investors will continue to identify and invest in high-returns oil assets as the energy industry evolves.

The short term resilience of the sector is laid bare by the fact that in May of this year the price for a barrel of oil was negative, and has now been steady at c.$40 for 3 months. In addition, despite numerous delays and slashed budgets for drilling campaigns and new exploration, oil and gas discoveries are set to exceed 10 billion boe, which far outperforms the 7.7 billion boe discovered globally in the previous crisis of 2016.

The Energy Council’s most senior gathering of Oil and Gas Executives, Investors and Members is the World Energy Capital Assembly, which this year occurs virtually Monday 30th November – Wednesday 2nd December. For the chance to network with and hear from the industry’s key decision makers and to take the pulse of our investors circle, register for your place here.

Written by:
Matt Maginnis
Portfolio Director
Energy Council