Roll out the barrel

With oil and gas revenues predicted to remain strong, many in the private equity world will have cause to celebrate

Words by Mark Williams

News that US crude prices reached $100 a barrel grabbed headlines the world over in early January, with a solitary US trader accused of deliberately paying over the odds for 1,000 barrels (the minimum amount permitted for purchase) purely for fleeting notoriety. It was sold on quickly for $99.40 a barrel.

The oil price has risen considerably since 2007, when it averaged $72 a barrel. Although prices are currently approaching $100 (late-February), experts predict an average of $87 for 2008. "Oil prices have reached a new base level," notes Mike Beveridge, managing director of Simmons & Company International, specialist corporate finance advisers to the energy industry. "Primarily, this is driven by the supply and demand imbalance in the global market. There is continued growth in demand, particularly in China, India and other developing nations at the same time as the world is facing declining production in many of the more mature oil basins."

August Equity investment manager Keith Davidson says rising oil prices have continued to drive deal activity both by volume and value. "This is particularly true in the oilfield services sector, which is being driven by growth in both demand and utilisation rates for rigs, as well as the need for service companies to create global scale in a consolidating market."

Will Rowley, director of analytical services and publications at Infield Systems, one of the definitive independent sources of information on the oil and gas industry, says because prices have been high for some time, money within the oil industry has rocketed: "Expenditure by the oil companies has increased considerably, as has the value of projects, meaning a lot of money has flowed down the supply chain. Many small and medium-sized companies have become much more profitable, too, enabling them to invest, expand and, in some cases, consolidate. Private equity opportunities have also grown."

Chain reaction

Crucially, there have been many developments around the world. "There has been more drilling, more platforms and more pipelines," reveals Rowley. "The hotspots have been deepwater and ultra deepwater developments."

August Equity partner Sam Watkinson agrees, adding: "Existing infrastructure has got older, requiring additional service and support businesses. This has fuelled healthy, consistent cashflows throughout the supply chain. This is especially attractive for private equity."

Beveridge says private equity will have significant gas opportunities over the next few years: "The big themes include gas storage – there’s a clear demand for more in the main European hubs – gas-to-liquids technology and CO2 capture. There are also big opportunities in gas transportation and LNG (liquified natural gas), although these tend to be big capital projects. There was more deal activity in the oil and gas sector in 2007 than at any point in the recent past and that is continuing. Private equity is becoming increasingly active."

Davidson believes it will only get busier in 2008 and 2009: "Many small companies have become midsized, which opens up opportunities for private equity expertise to help them make the next step up."

Watkinson adds: "As a result of our keen focus on this space, August Equity is currently in exclusivity on an oil and gas sector-related deal. We hope this will be the first of many in 2008 and beyond."

Email sam.watkinson@augustequity.com or keith.davidson@augustequity.com if you have an oil and gas deal you would like to discuss.