Private equity (PE) firms are preparing to deploy capital into the global oil and gas sector with 25% planning acquisitions before the end of the year and 43% by the first half of 2017, according to an EY global survey of 100 PE firms active in the sector.

With US$971.4b of PE dry powder from June 2016 still to be deployed, EY’s survey, “Capitalizing on opportunities: Private equity investment in oil and gas”, reveals that PE firms are now preparing to increase investment into the sector.

Andy Brogan, EY Global Oil & Gas Transactions Leader, says: “Access to financing is arguably the biggest challenge facing oil and gas companies. While many expected PE funds to swoop in with capital during the oil price downturn over the last 18 months, investment has fallen short. But the tide may be turning. Greater consensus over the oil price future and more favorable asset valuations are improving the conditions for PE, and we expect to see an uptick in deals before the end of the year.”

After a productive 2014 for PE deals in the oil and gas sector – 104 deals worth US$38.6b, according to Mergermarket data – activity slowed significantly in Q1 2015, in step with the drop in the

price of oil. However, after a tepid start, 2015 picked up and was very much in line with previous years, down only 7% in deal volume and 10% value compared with 2013. The first quarter of 2016 has also seen material PE activity with 12 deals worth $7.6b, including notable midstream deals, such as a group of US-based PE investors acquiring a 12.3% stake in Plains All American Pipeline for US$1.5b. Despite the downturn in the price of oil, recent deal activity indicates that PE firms still believe the sector offers a solid value proposition – though perhaps in different parts of the value chain, EY says.

Deal structures

Due to the debt burden of many PE-backed oil and gas companies, creative capital structures are on the rise. Of the 71% of respondents exploring new capital structures, 62% cite joint ventures (JVs) and drillcos and 59% cite contingent pricing as the most popular options.

Michael Rogers, EY Global Deputy Private Equity Leader, says: “As oil and gas companies try to raise capital and reduce debt amid the lower-for-longer price outlook, exploring new capital structures and strategies has become almost mandatory for investors. PE-backed companies are looking to joint ventures to help them cut costs, while others hope contingent pricing will offer much-needed price stability.”

Geographic and subsector landscape

When it comes to where capital is being deployed, the EY survey findings reveal increased attention to rising energy demand in emerging economies.

All respondents (100%) expect to see more PE involvement in Asia-Pacific — up from 79% in the last survey conducted in 2013. Low cost, ease of doing business and general macroeconomic growth is drawing investors to this region.

Similarly, 99% of respondents believe PE interest in North America will grow. Medium-sized companies looking to service debt, or merge or sell assets are providing ample opportunities for funds looking to bolster their existing portfolios. The US shale gas and oil boom has attracted major PE involvement over the past few years to basins such as the Eagle Ford and the Bakken. PE has also contributed to financing liquefaction plants and export terminals projects.

With regard to industry subsectors, PE firms are set to become more involved in the midstream and upstream segments in the next two years. An equal share (44%) of respondents see these two sectors as their best opportunity for return on investment.

In today’s low oil price environment, PE firms are well-positioned to provide short-term and long-term financial solutions across the oil and gas sector, with 63% saying they will provide value to corporates through growth capital, EY said.

Brogan says: “PE firms have an important role to play in today’s transforming oil and gas sector. Opportunities will continue to emerge over the course of the year as more companies succumb to the new normal oil price environment. Funds looking to invest will need flexibility, patience and clear strategic plans to take advantage of a buyer’s market.”