PE-backed deals have turned the spotlight on newcomers like Siccar Point Energy, Chrysaor and Neptune.
One of the first ripples came in August 2016 when Siccar Point Energy acquired an 8.9% interest in the Greater Mariner Area.
Backed by US giant Blackstone and Blue Water Energy, Siccar Point went on to seal a deal to acquire OMV’s UK assets at the end of last year.
Chrysaor made a splash in January with its deal to buy Shell’s stakes in nine North Sea fields and 10% of Schiehallion for £3billion, a transaction made possible by EIG Global Energy Partners.
And Sam Laidlaw’s Neptune rose above the waves in May to buy Engie’s oil and gas exploration and production interests – harnessing the clout of Carlyle Group and CVC Capital Partners – for £2.9billion ($3.9billion).
Ally Scott, EY’s head of transaction advisory services, said several factors, including low oil prices, have combined to make market conditions more favourable than in previous years.
Mr Scott also said that while PE investment in upstream has dominated so far, he expects oilfield services to become involved.
The downturn, as damaging as it has been, has narrowed the valuation gap between buyer and seller for assets, while the North Sea’s maturity has also been a catalyst.
“Assets are approaching end of their useful life and therefore require more investment to maximise recovery,” Mr Scott said.
“That tends to be an environment that’s more suited to private equity than oil majors. Private equity is adept at buying assets at relatively low prices and squeezing out returns in a more flexible manner.”
What’s more, greater crude price stability, consensus on forecasts, declining production costs and the emergence of new technology have all combined to make oil extraction easier.
Those elements have also contributed to more positive recent conditions for PE, Mr Scott said.
Graeme Sword, a founder and partner of Blue Water, agreed that majors’ valuations had been a big hurdle for companies to clear.
“Despite efforts made to counter the impacts of lower oil prices, existing asset holders were seeing assets that had previously generated a lot of cash-flow,” he said.
“When new players were looking to acquire those assets, we had a very wide spread and so, for the first part of this downturn, it was actually quite difficult for PE-backed companies to acquire anything from majors.
“However, as the downturn became increasingly prolonged, majors have been forced to change their approach. They’ve become a bit more receptive to deals.
“Majors’ mind-sets had to change.”
Mr Sword also said recent activity had shown the power of PE and how it had moved away from the game of “a few bucks and quick kill” to serious money and a long-term investment.
It is an approach long advocated by Mr Sword, who spent 14 years at PE fund 3i, eventually leaving in 2009.
3i was a pioneering and significant deal architect having been involved in the engineering of the UK oil and gas juniors Venture Production and CH4.
Venture was formed in 1997 by entrepreneurs Larry Kinch, Bruce Dingwall and Dave Neely with early backing from 3i.
Venture focused on tight gas in the UK Southern Gas Basin before being sold to Centrica in 2009.
3i was involved with CH4 from 2002, providing the initial start-up capital followed by further funding and strategic support as the gas junior developed. CH4’s managers included Phil Kirk, current chief executive of Chrysaor, which is backed by EIG Global Energy Partners.
Mr Sword said the current downturn had changed behaviours not just among sellers, but also PE-backed buyers, and necessarily so.
He said: “Previously, these were companies of a smaller scale, often PE-backed with a bit of money to get themselves established and then, as and when they saw growth opportunities, they attracted a few more rounds of equity.
“But it was done in incremental, small steps. They would be sold on in five to seven years and that really did limit the scale of company you could build.
“Also, operators would ask who is going to run the assets, because they need to have safe transition of ownership, ensuring that anyone they sell to has the ability to operate to the same standards.
“That was always one obstacle. A second was that the major would ask, ‘Do you have the capital?’
“So, rather than the small incremental steps of the past, it has become necessary to commit up-front all the equity that a new junior may need over the next five years.
“As a result, rather than committing $5million, $10million, $50million, these new players are coming to the table with hundreds of millions.
“This has opened up a different financing model.”
Mr Scott described PE funds as “financial sponsors” which invest in specialist sectors.
Those targeting upstream would usually be specifically focused on energy and be run by industry specialists.
They will typically attract funds from a range of other financial investors and will be backed to find assets with good prospects of yielding a return.
Given the financial firepower PE funds have at their disposal, they can often operate with more flexibility than multinationals, particularly in mature basins like the North Sea.
Mr Sword said PE-backed companies were better equipped to do deals, invest and explore than AIM-listed oil juniors.
He said: “I don’t want to come across as biased, but for this type and scale of company, PE offers a better funding solution than public markets.
“Being able to build your business off-market, not being forced into continual fund-raising rounds; with The Market evaluating you on a daily basis by tracking share price performance.
“Being able to have your capital needs secured, dealing with a very limited number of investors around the board table that are wholly aligned allows you to move with certainty and speed.”
One trend that does distinguish the current uptick from earlier cycles is that PE investment has ignored the supply chain, for the time being, at least.
Previously oil services had been a target for PE. Lime Rock Partners’ initial investment in EnerMech in 2008 serves as a prime example.
Mr Scott said: “We have seen historically that when the oil price chases upwards there is sustained private equity investment in the Aberdeen-based North Seas oil market, particularly in oil field services.
“We’ve seen more investment in upstream recently than in oil field services.
“That’s a reverse of the trend we saw in 2006 and 2007 when there was a lot of investment in oil field services.
“We do expect – in step with previous cycles – that over time there will be more PE investment in oilfield service companies.
“Some of that confidence is taken from the recapitalisation of upstream companies, increased investment in upstream assets and assets coming under new ownership.
“That will drive increased productivity which will benefit oil services companies.”