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Private equity firms eye Africa for oil investments

By on July 15, 2016

Private equity firms are increasingly looking to deploy more capital into the African oil and gas sector amid rising energy demand on the continent, a global survey of 100 PE firms active in the sector released by the advisory firm, Ernst & Young, has shown.

According to the report, about 25 per cent are planning acquisitions in the global oil and gas sector before the end of the year and 43 per cent by the first half of 2017.

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

With $971.4bn of PE dry powder from June 2016 still to be deployed, EY’s survey, ‘Capitalising on opportunities: Private equity investment in oil and gas,’ revealed that PE firms were preparing to increase investment in the sector.

“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,” said EY Africa Energy Lead, Claire Lawrie.

“There is an anticipation that deal-making will grow in Africa, with 80 per cent of survey respondents believing activity will increase.

“Investors are being drawn by the promise of new infrastructure initiatives across the continent, opening up new trade routes and enhancing regional integration, such as rail and port developments in Mozambique and Angola, as well as stronger regulatory systems in many countries such as Kenya and Ethiopia,” Lawrie said.

The report also pointed out that PE firms were set to become more involved in the midstream and upstream segments in the next two years. An equal share of respondents saw these two sectors as their best opportunity for a return on investment.

In today’s low oil price environment, PE firms were well-positioned to provide short-term and long-term financial solutions across the oil and gas sector, with 63 per cent saying they would provide value to corporate organisations through growth capital.

“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,” Lawrie said.

She added that greater consensus over future oil prices and more favourable asset valuations were, however, improving the conditions for PE and an uptick in deals were expected before the end of the year.

Owing to the debt burden of many PE-backed oil and gas companies, creative capital structures were on the rise, according to the report.

Of the 71 per cent of survey respondents exploring new capital structures, 62 per cent cited joint ventures and drillcos and 59 per cent cited contingent pricing as the most popular options.

As oil and gas companies tried to raise capital and reduce debt amid the lower-for-longer price outlook, exploring new capital structures and strategies had become almost mandatory for investors.

PE-backed companies were looking to JVs to help them cut costs, while others hoped contingent pricing would offer much-needed price stability.

 

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