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Investors’ shift from fossil fuels leaves the booming market to smaller players

It should be a good time for energy investors. Few of them are there yet to take advantage of it.

Years of appalling returns and pressure from customers to pull out of oil and gas operations have left fewer and smaller companies able to take advantage of rising prices and help increase production. The reluctance of some banks to grant energy loans has compounded the challenges of increasing energy supply.

Those who remain move to increase production, but they are relatively small players who will not be able to have a significant impact on production. Investors are diverting capital away from fossil fuels to companies that rank among the best in terms of environmental, social and governance measures, or ESG.

“Oil and gas have had the worst returns of any industry over the past five years; returns are volatile and investors are feeling ESG pressures, ”said Wil VanLoh, who heads Quantum Energy Partners, which manages $ 18 billion, making it one of the few remaining large energy private equity funds. “There has been a huge decline in available capital. “

Wil VanLoh of Quantum Energy Partners says there has been a significant decline in capital for the oil and gas industry.


Quantum energy partners

Oil and natural gas prices are skyrocketing as concern grows over potentially limited energy sources heading into next winter. U.S. crude prices are at a seven-year high of over $ 80 a barrel, after doubling last year, while natural gas prices have posted a similar gain in six months, now trading at- above $ 5 per million British thermal units.

Fossil fuels account for about 80% of US energy use despite the growth of alternative energies. The demand for oil, the main source of energy for transport, is expected to continue to increase in the years to come. Global oil demand is expected to increase annually through 2026, reaching 104 million barrels per day that year, up 4% from 2019 levels, according to the International Energy Agency.

In the past, higher prices and limited supplies have caused US oil and gas companies to turn on their taps. That’s exactly what private producers are doing, but state-owned companies, under pressure to please grumpy investors, have bought back stocks, raised dividends, and cut spending. They are on their way to spending a little more money pumping oil next year, but most are not ramping up production.

This makes private operators more important than ever. Today, 59% of the roughly 600 active U.S. oil and gas rigs are operated by private companies, up from 42% of 1,150 rigs in January 2019, according to Tudor, Pickering, Holt & Co.

“Growth in the US energy supply will need to come from private companies, as state-owned companies are under pressure from investors to repay capital and not to increase production,” says Doug Swanson, Managing Partner EnCap Investments LP, a private energy company. investment company in Houston.

Investors’ shift from fossil fuels leaves the booming market to smaller players

The demand for oil, the main source of energy for transport, is expected to continue to increase in the years to come.


Michael Probst / Associated press

But the private equity firms, which operate many of these companies, are downsizing or abandoning the energy business. Large companies including Blackstone Inc.

and global management of Apollo Inc.

no longer make as many traditional energy investments as before, preferring to make new investments in solar, wind or other less damaging sources for the environment.

Blackstone, for example, has invested in Altus Power Inc., a builder and operator of solar power installations on rooftops and parking lots of commercial properties. Since 2019, Blackstone has led a $ 500 million debt financing and has committed $ 300 million in preferred shares to Altus.

There are now nine energy-focused private equity firms, which together have $ 22 billion of capital available to invest in the sector. This is down from the 29 companies with $ 90 billion to invest in 2018, according to RBC Capital Markets.

“There’s no one left, everyone’s kind of gone,” says Sam Oh, who runs Mountain Capital Management LLC, an energy-focused private equity firm in Houston.

Investors’ shift from fossil fuels leaves the booming market to smaller players

The Bakken Shale area in North Dakota has recently attracted investment.


Daniel Acker / Bloomberg News

So far this year, $ 2 billion has been raised by energy funds investing in oil, gas and other so-called conventional energy investments, compared to nearly $ 6 billion raised by energy funds. renewable, according to data compiled by Pickering Energy Partners, a spinoff.

In contrast, in 2015, nearly $ 50 billion was raised for conventional energy funds, while more than $ 10 billion was raised for revolving funds. Pension funds and other traditional investors in private equity energy funds have reduced their allocation to the conventional energy sector to as little as 1% of their portfolios, according to Oh.

The remaining private equity firms are stepping up their activity, eyeing the best opportunities for years. Companies owned by EnCap, for example, operate 17 oil rigs, up from none during the depths of the Covid-19 pandemic last year and 14 before the pandemic.

In an interview with the WSJ’s Timothy Puko in April, US Special Climate Envoy John Kerry explains the roles he would like to see the private sector and countries play in tackling climate change. Photo: Rob Alcaraz / The Wall Street Journal

In April, EnCap spent $ 900 million to buy an oil producer in the Bakken Shale area of ​​North Dakota, which is expected to increase production over the next year.

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Pickering Energy Partners has spent about $ 200 million on oil producing acreage around Midland, Texas so far this year. The company saw little competition and was able to pay less than $ 5,000 an acre, down more than half of what it was a few years ago.

A company controlled by Carnelian Energy Capital recently bought an oil production asset in the Permian Basin and has only competed with a few rivals.

“Historically, you would have had about 15 parties bidding on such an asset,” explains Tomas Ackerman, partner at Carnelian.

Increasing oil supplies to EnCap companies and remaining energy-focused private equity firms will do little to increase supply in the global market, Swanson said.

Meanwhile, most investors and lenders refuse to get involved in the coal companies despite soaring energy prices.

Investors’ shift from fossil fuels leaves the booming market to smaller players

Companies, including TotalEnergies, are taking measures to increase their spending on renewable energies.


Christophe Archambault / Agence France-Presse / Getty Images

“Coal is dead, it’s untouchable,” says Mr. Oh of Mountain Capital, who recently bought an oil and gas producer in the Permian Basin but is among those who will not invest in coal-related assets. coal. “You can’t get a loan for coal today; you can hardly get an oil and gas loan, so many banks have left the business. “

Some energy companies, including TotalEnergies SE, are taking measures to increase spending on renewable energies. Companies like Total are more attractive to investors as they switch from oil to natural gas, says William Callanan, who heads Syzygy Investment Advisory Ltd.

Other types of investors take a fresh look at the energy sector. Hedge funds, junk bond investors and others have started to worry about accelerating inflation and see commodities, including oil and gas investments, as some of the most attractive in an environment. inflationary. Even some investment firms that are under pressure from clients to prioritize the environment have recently bought stocks in the energy sector.

But investors, who buy stocks but not land and oil rigs, are unlikely to do much to help increase the overall energy supply, analysts say.

Write to Gregory Zuckerman at

Energy markets: supply shortages, price pressures

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