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Energy MarketTrends | March 2019, Issue 1

Welcome to Foley’s quarterly Energy Industry newsletter, where we discuss the latest news in oil and gas, power and utilities, and renewables.

Private Equity Investors Return to Oil & Gas Industry

Q1 has shown a marked escalation of private equity (PE) investment within the oil and gas sector; 2019 projections indicate that private equity buyers will be key players in both upstream and midstream endeavors.

Some U.S. oil and gas industry experts hold the view that increased PE investment in the industry is a clear sign of the energy industry’s recovery. Others remain skeptical, believing instead that investors who weathered the downturn are simply seeking a return on their investment while prices are high.

Universally accepted is the rise of departments dedicated to oil and gas (or energy) within PE firms. Private equity investors who thoroughly understand the complexities of the industry are better suited to tolerate its high-risk, high-reward reality.

Research indicates that the recent market downturn (2014-16) is at least partially responsible for the surge in current PE investment, since it led to favorable asset valuations and exposed distressed asset sellers. Other factors include the tightening of public and debt capital markets and rising commodity prices.

Separately, advancements in technology allow companies to boost well production while simultaneously reducing drilling costs and operational overhead. Many PE investors see technological differentiation as the ultimate competitive edge, ensuring an investment becomes lucrative. Oilfield service companies that incorporate technology into their business models can be assured of interest from PE investors.

Market Intelligence

According to Bloomberg, favorable market conditions abound for the savvy PE investor seeking upstream oil and gas development opportunities. Interest rates are still relatively low. Institutional liquidity is on the rise. Public markets are not attractive options. Mergers and acquisitions will continue to encourage positive momentum in the oil and gas industry. PE firms are actively seeking to buy, rather than sell, in the upstream oil and gas sector, particularly in the Permian region.

As Bloomberg reported, PE firms are adapting to the market and becoming more equipped to bid on large-scale oil and gas asset packages. PE firms are participating in an increasingly larger share of upstream acquisition deals (in excess of $12.4 billion of equity commitments were made to 73 upstream companies in 2017, a 32 percent increase from the $9.4 billion committed in 2016, according to energy research and data provider 1Derrick Ltd.). In 2017, 375 active oil and gas startups were PE-sponsored. This level of PE investment, together with public equity and debt markets, provided capital to fuel an upward surge in U.S. oil and gas production. U.S. oil output surpassed 10 million barrels per day in 2018, and Lower 48 natural gas production reached an all-time high of 77 Bcf/d at year-end 2017.

PE-backed producers may find using all of their committed capital challenging due to competition and the consolidation of oil and gas exploration regions. Sellers are asking for higher prices in response to the increased demand for acreage by investment funds. Some publicly traded production companies are selling off non-core assets to PE plays to refocus their efforts on more profitable assets.

Despite a general slowdown in the oil and gas M&A market in late 2017, there is no shortage of available PE capital for upstream oil and gas investment. PE has continued to raise capital for energy and infrastructure investments, amassing well over $50 billion of committed capital. Some PE funds plan to offer capital infusions to large exploration and productions companies, with a view to structuring joint ventures between one or more strategic investors so as to limit public equity dilution. A number of PE fund-managed upstream deals have increased in scale. The rising trend has seen PE funds act as general partner and structure oil and gas investments as co-investments, syndicates, and joint ventures. A few adopt an acquire-and-divest strategy, where large upstream assets are acquired and subsequently divided among management teams and portfolio companies, with some assets then being sold.

1Derrick’s Mangesh Hirve expects the level of PE commitments and M&A activity to continue to grow during 2019. Crude oil, natural gas liquids, and natural gas production are growing to meet increased demand from both domestic and export markets. PE investors are realizing healthy returns on investments in upstream companies and are highly likely to continue to reinvest in the industry.

Private Equity, Renewable Storage, and Community Choice Aggregators

ACORE’s recent survey of prominent renewable energy industry investors, including private equity firms, revealed a confidence in the expected growth of this market segment and an approval of its positive social impact, particularly in local communities. Community choice aggregation is likely to remain a hot topic in renewable energy for the foreseeable future.

California communities have been active supporters of CCAs since 2010, with more than 20 currently active and five more preparing to launch. In October 2018, California announced its own government-run CCA for the city of San Diego, boasting a goal of 100 percent clean energy by 2035. If this current growth rate continues, CCAs could be the largest power source for California consumers within the next decade.

Beyond California, cities in Massachusetts, New Jersey, and New York are actively evaluating the benefits of CCAs, with Northampton, Massachusetts recently receiving a $75,000 grant to explore Community Choice Energy PLUS.

According to RMI’s The Economics of Clean Energy Portfolios report, “U.S. electricity generators may be committing their customers and investors to as much as $1 trillion in future investment and fuel costs through 2030 as they rush to build new gas-fired power plants. Yet advances in renewable energy and distributed energy resources offer lower rates and emissions-free energy while delivering all the grid reliability services that new power plants can.”

As the industry evolves, providers must be mindful of renewable storage requirements. Better storage improves the viability of wind and solar power, eliminating perceived obstacles to using these sources of energy. CCA projects need to demonstrate the ability to supply customers with power in all eventualities to avoid a reduction in consumer confidence.

Storage issues are particularly important when seeking regulatory or financial support. Regulators and investors prefer storage technology built into plans before adoption. If it is not already present, decision makers recognize traditional energy sources will be required in the event alternative sources are depleted.

Identifying city-specific solutions to storage challenges prior to a natural outage is instrumental in proving CCAs to be true members of the community.

Douglas Eyberg and Timothy Spear also contributed in this post.

© 2020 Foley & Lardner LLPNational Law Review, Volume IX, Number 88


About this Author

Jason W. Allen, Foley Lardner, Energy Industry Lawyer, Finance Attorney

Jason Allen is a partner and business lawyer with Foley & Lardner LLP, where he is a member and co-chair of the Energy Industry Team. He is a member of the Finance & Financial Institutions, Transactional & Securities, and Private Equity & Venture Capital Practices. Mr. Allen’s practice focuses in the areas of mergers and acquisitions, private equity, finance, and general corporate and commercial law, with a particular emphasis on transactions in the energy industry. 

Legal, Business, Jeffery Atkin, Foley Lardner, Environmental Attorney

Jeffery R. Atkin is a partner and business lawyer with Foley & Lardner LLP. His areas of practice cover a broad range of business and financial matters, including renewable energy, project finance, private placements, mergers and acquisitions, joint ventures, real estate development and equipment procurement and leasing. Mr. Atkin is chair of the Solar Energy Team, co-chair of the Energy Industry Team, and a member of the Latin America Practice.

Mr. Atkin’s experience in renewable energy and project finance includes representing developers, investors, lenders and landowners in the construction, development, acquisition and financing of renewable energy generation facilities, including wind, solar, hydro, geothermal and biomass facilities.

John A. Eliason, Foley Lardner, Tax Lawyer, Energy Industry Attorney

John A. Eliason is a partner and business lawyer at Foley & Lardner LLP. He provides tax, legal, and business advice to financial institutions, equity investors, manufacturers, and project developers in the energy sector and is co-chair of the firm’s Energy Industry Team.

Mr. Eliason regularly represents clients participating in wind, solar, and other renewable energy transactions that rely on tax and other federal and state incentives such as investment tax credits, production tax credits, bonus depreciation, and other government incentive...