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EY Oil and Gas – PE perspective
March 2017
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Contents
1.
PE investment in the context of industry capital raising
2
2.
PE as a finance ‘multiplier’
7
3.
PE as a driver of the unconventional industry
11
4.
PE as a driver of behavior and change
15
Industry
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PE investment in the context of industry capital
raising
Private equity is a small proportion of the total capital invested in the industry
Post oil price decline, PE firms have followed a “wait-and-watch” approach for investing in the sector, accounting
for approximately 2-4% of the total capital raised globally (between 2013-2016)
Capital raised (US$b)
4%
• Capital raised by oil and gas
companies during 2016
continued to remain under
pressure
19.6
28.4
19.4
461
3%
3%
15.9
2%
362
PE investments
366
241
Loans
Bonds
Equity
248
237
246
209
PE as a % of overall capital
raised
• Equity markets received a
boost, mainly from a few
sizeable new IPOs and several
follow-on offerings from US
shale companies.
• Debt market for investmentgrade bonds remained relatively
robust, albeit at lower levels
than 2015
• Surge in activity in Q4 2016
62
74
63
81
2013
2014
2015
2016
Source: EY Global Oil and Gas transactions review 2016, 1Derrick
Oil & Gas — EY’s global perspective
Note: To analyse yearly trends in deal value, mega 2016 PE deals considered as outliers and excluded from analysis, which includes PE investment in Rosneft, Petrobras (NTS), NGGD and Essar Oil.
3
Industry structure
PE as a finance ‘multiplier’
Oil & Gas — EY’s global perspective
4
PE has the capacity to invest a great deal more than it has recently
North America-focused oil and gas fundraising
No. of funds closed
40
Aggregate Capital Raised
Average ticket size
US$[VALUE]b
43
US$[VALUE]b
US$39.0b
35
US$[VALUE]b
US$[VALUE]b
US$[VALUE]b
US$[VALUE]b
19
US$[VALUE]b
2013
2014
2015
2016*
Source: Preqin Special Report: North American Oil & Gas, November 2016
Note*: 2016 numbers are till October 2016
•
•
•
•
Despite price volatility, PE oil and gas fund raising has not been impacted significantly. 2016 saw US$33.9b
of funds raised for investment in North-America alone.
Average ticket size for each fund increased to US$1.8 b in 2016 compared with US$1b in 2013.
Significant capital overhang in the industry from past fund-raisings, not much that has been raised could be
invested; close to US$100b still available as dry powder capital for investments.
PE will typically use leverage of 1-1.5x equity (in the US) to magnify its investment.
Oil & Gas — EY’s global perspective
5
Industry structure
PE as a driver of the unconventional industry
Oil & Gas — EY’s global perspective
6
PE’s significance derives from its focus on the North American unconventional
sector 2016 activity was relatively very low until Q4 2016
North America1
56
55
Europe2
43
US$[VALU
E]b
21
19
US$[VALU
E]b
2014
2015
US$[VALU
E]b
2016
US$[VALU
E]b
2014
South and Central America
6
US[VALUE
]b
US$[VALU
E]b
2014
2015
2016
13
US[VALUE
]b
2015
2016
APAC and MEA
6
3
US$[VALU
E]b
US[VALUE
]b
4
US$[VALU
E]b
5
5
US$[VALU
E]b
US$[VALU
E]b
2014
2015
2016
• PE firms has been most
active in North America,
accounting for more than a
third of the total global PE
deal value between 20142016.
• Recent years have seen
broader interest in other
mature basins, such as the
North Sea. Notably, Europe’s
share in total global deal
value increased to 38% in
2016, from 16% in 2014.
• Interest in US
unconventionals surged in
Q4 2016
Value of PE deals
Volume of PE deals
Source: 1Derrick and EY analysis
Notes: 1North America includes US and Canada
2Europe
includes transcontinental countries i.e. Russia, Kazakhstan and Ukraine
Oil & Gas — EY’s global perspective
Note: To analyse yearly trends in deal value, mega 2016 PE deals considered as outliers and excluded from analysis, which includes PE investment in Rosneft, Petrobras (NTS), NGGD and Essar Oil.
7
More specifically, low cost, fast response and quality acreage positions in key US basins,
most sought after by PE
PE deal value and number of deals for key US
basins
(2013-2016)
• Increase in PE investments
expected in order of basin
efficiency.
Niobrara
Bakken
Marcellus
US$18m; 7 deals
US$1.4b, 9 deals
US$242m, 4 deals
• Activity expected to remain
primarily concentrated on fast
response, low cost and
quality acreage positions (eg.
Permian unconventionals).
• For higher cost basins with more
mature assets (Bakken and Eagle
Ford) activity has been slow but
some uptick expected considering
PE’s inclination to unlock value
while filling capital shortage gap.
SCOOP /
STACK
Haynesville
US$730m, 5 deals
US$2.1b, 3 deals
• Key considerations for PE to be
successful in unconventional
plays would be to understand
basin characteristics, nimbleness
in adopting new technology and
continuous learning.
• Notably, PE has faced strong
competition from strategics who
are willing to pay higher premiums
and have outbid PE in few
instances.
Permian
Eagle Ford
Barnett
US$1.3b, 17 deals
US$2.3b, 6 deals
US$777m, 6 deals
• Thus, PE focusing on mid-sized
deals, that does not put them in
direct competition with larger
public companies.
Oil & Gas — EY’s global perspective
Source: 1Derrick and EY analysis
8
PE is disproportionately focused on US unconventional, with Permian basin accounting for
maximum number of PE deals in last three years
PE deal activity by basin
(number of deals)
[SERIES NAME];
[VALUE]
Bakken, 9
Permian basin, a key driver of US shale growth
Niobrara, 7
•
Area: 250 X 300 miles across western Texas and southern New Mexico
Barnett, 6
•
Dominates US oil production by contributing 2.3 million bpd
•
Production forecast: EIA expects Permian oil production to reach 2.5 mbpd in 2018
[SERIES NAME], [VALUE]
SCOOP/STACK, 5
Marcellus, 4
Haynesville, 3
San Juan, 3
Bighorn & Wind River Basin, 3
[SERIES NAME], [VALUE]
Gulf Coast , 2
Rest of US play, 13
Mutiple, 12
Unavailable, 8
2013
2014
2015
2016
Total
“Permian Basin dominates US shale due to lower break-even costs, existing infrastructure and multistacked plays that respond favourably to horizontal drilling”
Oil & Gas — EY’s global perspective
Source: 1Derrick and EY analysis
9
Asset level deals, specifically producing assets/ development asset, remain
favorite with PE firms
Breakup of deal type by number
Breakup of deal type by value (US$b)
Corporate deals
Producing assets
Developing assets
Corporate deals
Producing assets
US$8.2b
Developing assets
34
0.5
12
4.9
0.1
US$2.3b
0.1
3.7
2.9
1.9
19
US$3.8b
2014
2015
21
10
3
3
US$2.6b
1.6
0.9
0.2
2013
26
2016
12
20
14
15
6
1
2013
2014
2
2
2015
2016
Source: 1Derrick and EY analysis
Key points
Asset type deals dominate PE transaction landscape. Key drivers include:
► Majors
and independents coring down their portfolio of assets (not necessarily bad assets)
► Either
they need capital to shore up their balance sheets, or
► Drill
down to focus on one or two areas (basins or offshore/onshore) resulting in divestiture of the assets in
other regions/ segment
► Distressed
► Relatively
assets.
asset deals from operators in need to boost liquidity and pay down debt.
lesser technical/ exploration risk in producing assets compared with developing or underdevelopment
Oil & Gas — EY’s global perspective
Note: To analyse yearly trends in deal value, mega 2016 PE deals considered as outliers and excluded from analysis, which includes PE investment in Rosneft, Petrobras (NTS), NGGD and Essar Oil.
10
Industry structure
PE as a driver of behavior and change
Oil & Gas — EY’s global perspective
11
Key PE considerations
“Opportune time for deep pocketed investors with strong management teams, who can provide
innovative financing solutions and unlock value in an era of low-for-longer oil price”
123456
Right
management
Geology –
“good rocks”
Creative deal
structures
Balance sheet
strength
Exit type and
entry point
PE are backing strong
management teams,
with technical
competence and
experience in
managing capital
intensive business to
pursue both greenfield
initiatives and
consolidation
strategies.
PE focussed on
investing in producing
assets (with highquality reserves and
low marginal cost of
production).
PE firms getting more
flexible and innovative
in deal structuring.
Balance sheet
capacity for leverage,
an important
consideration for PE
investment.
PE firms start with
identifying a handful of
specific potential
acquirers that can
help drive value
creation throughout
the ownership period
of the asset.
Quality of rocks is
important, as PE firms
unlock value by taking
advantage of the
inefficiencies and
dislocations.
Examples of new
structures - JVs,
strategic partnerships
and structured debt
deals (upside from
warrants).
Higher volatility, lower
prices and increasing
debt burden of PEbacked companies,
among key factors
driving creative deal
structures.
“Bankability” of the
reserve base
(break-evens, PDPs,
PDNPs, PUDs) key
differentiator for
restructuring
opportunity.
Entry price is an equal
consideration as
overpaying (given stiff
competition from
strategics) may result
in decreasing the
returns generated.
Financial
sophistication
– hedging
PE firms have active
hedging programs in
place that provide
downside protection
for oil price volatility.
Specifically, for E&P
deals, majority of oil
and gas specialist PE
firms look to hedge
the majority of
production for 18-36
months.
Oil & Gas — EY’s global perspective
12
PE’s relentless and narrow focus on financial performance tends to promote high
performance behaviours in the unconventional ‘independents’
Relative performance by types of operators
►
Thorough understanding of basin
characteristics, nimbleness in
adopting new technology and
continuous learning are critical for
success in shale
►
Focused operators have a wide range
of performance, driven by the quality
of the management team
►
PE drive high performance at
independents that have tight
connection among different business
functions within the organization that
drive better decision making –
however, this connectivity is generally
informal rather than process enabled
100%
50%
0%
-50%
-100%
Focused
independents
Diversified
independent
Global
companies
Maximum
2nd quartile
Median
3rd quartile
Minimum
Oil & Gas — EY’s global perspective
Source: 1Derrick and EY analysis
13
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This publication contains information in summary form and is therefore intended for general guidance only. It is not
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Oil & Gas — EY’s global perspective
14