PE investors revive appetite for fossil fuel deals

Oil and gas deals were on the mend during the first quarter of the year as private equity investors increasingly took advantage of market volatility and rising energy prices.

Funds in the sector also drew renewed interest from LPs following years of efforts to transition into a greener economy, according to PitchBook’s Q1 2022 US PE Breakdown.

While PE firms are under rising pressure to move the needle on ESG commitments, the recent run-up in energy prices underscores the global economy’s current reliance on fossil fuels, the report said.
 

 

In the first quarter, investors financed 40 US energy transactions totaling $11.2 billion in value, accounting for 5% of all US deal value, according to PitchBook data. Q1’s total deal value in the energy sector is higher than each quarter last year but below the typical figures of first quarters in recent years.

PE firms are walking the line between a clean energy transition and the near-term needs of the energy markets by increasing financing in both renewables and fossil fuel investments. The importance of the shift to greener energy production—and energy independence more broadly—is underscored by Europe’s dependence on Russian gas imports.

Last quarter was headlined by a number of energy buyouts. ArcLight Capital Partners acquired the fossil-generating portfolio of Public Service Enterprise Group for $1.92 billion. The deal came as ArcLight tapped top oil and gas dealmaker Angelo Acconcia from Blackstone.

In another deal announced in March, KKR and Pembina Pipeline agreed to combine their natural gas processing assets in western Canada via a joint venture, which will also acquire some assets held by US pipeline company Energy Transfer. The transactions totaled C$11.4 billion (about $8.9 billion) in value.

Meanwhile, for the first time in many years, LPs have shown revived interest in private equity funds that invest in the oil and gas sector. Lime Rock Partners raised $538 million for its fifth energy fund and related vehicle. The capital will be used to acquire and operate production oil and gas properties in the US, with an expectation that the firm will profit from strong commodity demand and lower competition in the sector. 

Rockland Capital, Riverbend Energy Group, NGP Energy Capital, Vendera Resources, and Cibolo Energy Partners all started to raise money for new investment funds focused on oil and gas this year.

“We have seen investor interest pull away from the traditional energy industry in the past several years,” said PitchBook PE analyst Jinny Choi. “Suddenly, the new volatility and higher energy prices are creating opportunities for investors in this space.”

Still, climate-friendly deals will likely continue their upward trajectory and become the main driving force of long-term growth in the energy sector, Choi said.

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