Private equity (PE) firms are readying to deploy capital into the global oil and gas sector with 25% planning acquisitions before the end of the year and 43% by the first half of 2017, according an EY global survey of 100 PE firms active in the sector.

With US$971.4bn of PE dry powder from June 2016 still to be deployed, EY’s survey, Capitalizing on opportunities: Private equity investment in oil and gas, reveals that PE firms are now preparing to increase investment into the sector.

“Access to financing is arguably the biggest challenge facing oil and gas companies,” says Claire Lawrie, EY Africa energy lead. “While many expected PE funds to swoop in with capital during the oil price downturn over the last 18 months, investment has fallen short. But the tide may be turning. Greater consensus over the oil price future and more favourable asset valuations are improving the conditions for PE, and we expect to see an uptick in deals before the end of the year.”

Deal structures

Due to the debt burden of many PE-backed oil and gas companies, creative capital structures are on the rise. Of the 71% of respondents exploring new capital structures, 62% cite joint ventures (JVs) and drillcos and 59% cite contingent pricing as the most popular options.

As oil and gas companies try to raise capital and reduce debt amid the lower-for-longer price outlook, exploring new capital structures and strategies has become almost mandatory for investors. PE-backed companies are looking to joint ventures to help them cut costs, while others hope contingent pricing will offer much-needed price stability.

Geographic and African growth

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

Claire Lawrie adds: “There is an anticipation that deal making will grow in Africa, with 80% 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.”

With regard to industry sub-sectors, PE firms are set to become more involved in the midstream and upstream segments in the next two years. An equal share (44%) of respondents see these two sectors as their best opportunity for return on investment. 

In today’s low oil price environment, PE firms are well-positioned to provide short-term and long-term financial solutions across the oil and gas sector, with 63% saying they will provide value to corporates 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.