The Economist - USA (2022-02-12)

64 Finance & economics TheEconomistFebruary12th 2022

Financinghydrocarbons

Fossil hunters

T

he firstlaw of thermodynamics states

that  energy  cannot  be  created  or  de­

stroyed, just transferred from one place to

another.  The  same  seems  to  apply  to  the

energy  industry  itself.  Pressed  by  inves­

tors, activists and governments, the West’s

six biggest oil companies have shed $44bn

of  mostly  fossil­fuel  assets  since  the  start

of 2018. The industry is eyeing total dispo­

sals worth $128bn in the coming years, says

Wood  Mackenzie,  a  consultancy.  Last

month ExxonMobil said it would divest its

Canadian  shale  business;  Shell  put  its  re­

maining  Nigerian  oilfields  on  the  block.

But much of the time these outmoded un­

its are not being closed down. Instead they

are moving from the floodlit world of listed

markets to shadier surroundings. 

Many  are  ending  up  in  the  hands  of

private­equity  (pe)  firms.  In  the  past  two

years  alone  these  bought  $60bn­worth  of

oil, gas and coal assets, through 500 tran­

sactions—a third more than they invested

in renewables (see chart). Some have been

multibillion­dollar deals, with giants such

as Blackstone, Carlyle and kkrcarving out

huge  oilfields,  coal­fired  power  plants  or

gas grids from energy groups, miners and

utilities.  Many  other  deals,  sealed  by

smaller rivals, get little publicity. This sits

uncomfortably  with  the  credo  of  many

pension  funds,  universities  and  other  in­

vestors  in  private  funds,  1,485  of  which,

representing  $39trn  in  assets,  have

pledgedtodivestfossilfuels.Butfewseem

readytoleavejuicyreturnsonthetable.

pe’sloveaffairwithoilisnotnew.Be­

tween 2002 and2015,risingglobaldemand

forthefuelpusheditspriceabove$100a

barrel,promptingfundsfocusedon“up­

stream” assets—explorationandproduc­

tion,especiallyfrackingwells—tomush­

room.ButthenSaudiArabiaanditsallies,

eagertocrushAmericanshale,floodedthe

market,causingdrillingfirmstogobust

anddealstosour.Buyoutfundstargeting

fossilfuelspostedten­yearinternalrates

ofreturn(irrs)of­0.7%attheendofJune

2021,reckonsPreqin,a datafirm.

Butthewindhasshifted.Asdemandfor

oilandgaspersists whiledwindlingin­

vestment in production limits supply,

pricesarerisingagain,boostingproducers’

profits.bp, forinstance,rakedin$12.8bn

lastyear,themostsince2013.Shellpredicts

irrs of20%forinvestmentsinupstream

projects,against10%forrenewableones.

Buyoutfunds,whichoftenhavea ten­year

life,canhopetomaketheirmoneybackin

halfthetime,mostofit fromtheoperating

cashflowstheacquisitionsgeneraterather

thanfromresellingassets.Theycansource

capitalcheaply:incontrasttothemajors,

whichhave anannual cost ofequity of

about10%,theytypicallyfinanceenergy

dealswith80%debt,atinterestratesof

4­5%.Anddiscountsimposedon“brown”

assetsbythestockmarket,linkedtosus­

tainability factors rather than financial

ones,arecausingalotofmispricingon

whichprivatefundsthrive.

pemanagershavealsobeencannyin

changingtheirstrategies.Manyarenolon­

germarketingenergyfundsexceptthose

witha focusonrenewables.Instead,up­

streamassetsarebeinglumpedwithoth­

ersintofundslabelled“growth”or“oppor­

tunistic”,which coverarangeofindus­

tries.Private­debtfundssnapupoiland

gasloansfrombanks.Thebiggestshifthas

been a swoop on “midstream” assets

(chiefly pipelines) by private­infrastruc­

turefunds.Becausetheirrevenuesarecon­

tractedandpaidforbybigclients—energy

majorsandutilities—theyaredeemedvery

safe,whilealsogeneratingattractiveirrs

inthehighteens.Somefirmsdoevery­

thing.InJunea fundmanagerownedby

Brookfield,whichisbasedinCanada,ac­

quiredjointownershipoftheentireport­

folioofNorthAmericanoilandgasloans

ofabnamro, a Dutchbank.InJulyBrook­

fieldagreed to pay $6.8bn for Canada’s

fourth­largest pipeline company—a day

aftertoutinga $7bnfundraisingroundfor

a green“transition”fund.

pefirmssaytheycanbetrustedtoman­

agethoseassetswell.Becausetheyown

controllingstakesandescapetheconstant

gaze ofpublic markets, they see them­

selvesasbeingina uniquepositiontoim­

proveefficiencyandreduceemissions.But

the incentivesto pocketdividends first

andworryabouttherestlateraregrowing.

Global private­capital “dry powder”—

moneyraisedbyfundsthathasyettobe

spent—hashita$3.3trnrecord.Withso

muchtospend,managerswanttodoa lot

ofdeals,whichinturnmeansmanydon’t

havetimetocraftconsidereddecarbonisa­

tionplansforassets.

Investorsseeminnorushtotightenthe

taps.ArecentsurveybyProbitasPartners,

whichhelpsprivatefirmsraisefundingve­

hicles,showsinvestorshavealmostnoap­

petitefor oilfundstoday. Butfewhave

policiesthatexcludecase­by­casetransac­

tionsbybroaderfunds.Usingdatafrom

Who buys the dirty energy assets public firmsnolongerwant?Itcouldbeyour

university or pension fund

Oil-spattered

Global, private-equity energy deal activity

By source, $bn

Source:PitchBook

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