NEW YORK: Oil’s plunge makes energy a great investment for the coming years, according to Blackstone Group LP (BX)’s Stephen Schwarzman and Carlyle (CG) Group LP’s David Rubenstein. For private equity firms, it’s also been painful.
More than a dozen firms – including Apollo Global Management LLC (APO), Carlyle, Warburg Pincus and Blackstone – have lost a combined US$11.7 billion in 27 publicly traded oil producers since June, when crude prices reached this year’s peak before beginning their six-month slide, according to data compiled by Bloomberg.
Stocks of buyout firms with exposure to energy have slumped, and bond prices suggest some closely held oil producers may struggle to pay for their debt.
“It’s been a really volatile period, and frankly that’s how Saudi Arabia wants it,” said Francisco Blanch, head of global commodity research at Bank of America Corp. “This is a battle of endurance.”
Brent crude oil slumped 47 per cent to about US$61 late last week from its high this year of US$115 a barrel, dragging down energy stocks, as the Organization of Petroleum Exporting Countries sought to defend market share amid a US shale expansion that’s adding to a global glut.
The group, responsible for 40 per cent of the world’s supply, will refrain from curbing output, U.A.E. Energy Minister Suhail al-Mazrouei said on Dec 14.
Kosmos Energy Ltd., Antero Resources Corp, EP Energy Corp (EPE), Laredo (LPI) Petroleum Inc. and SandRidge Energy Inc (SD), each of which is backed by a buyout firm as its largest shareholder, fell by an average of 50 per cent in US trading from oil’s peak through Dec 19 in New York.
Warburg Pincus is the top stakeholder in Kosmos, Antero and Laredo; Apollo is the largest investor in EP Energy; and Carlyle, with a partner, owns the biggest piece of SandRidge, according to data compiled by Bloomberg.
Apollo has US$5 billion invested in energy debt and equity, including companies that are closely held. Carlyle has directed 10 per cent of its US$203 billion in assets into the industry. Blackstone, the second-biggest shareholder in Kosmos, has backed drilling projects off Ghana’s coast and in the Gulf of Mexico.
The deals highlight private equity’s role in the debt-fuelled shale push, as hydraulic fracturing in search of oil and gas leads to higher production.
After investing billions of dollars, the firms are preparing to step in with more cash to fund development when prices stabilize.
Carlyle increased its exposure to the industry in December 2012 when it invested US$424 million to share revenue from NGP Energy Capital Management, an Irving, Texas-based investment firm that has stakes in at least six publicly traded exploration and production companies.
NGP’s holdings include Memorial Production Partners LP, which declined 39 per cent; Rice Energy Inc (RICE), which fell 21 per cent; and RSP Permian Inc, which dropped 17 per cent.
Warburg Pincus, the New York-based investment firm that hired former Treasury Secretary Timothy F. Geithner as president last year, saw its holding in Laredo decline 66 per cent, while Kosmos, a West Africa-focused exploration and production company, has held up better, dropping 26 per cent.
EP Energy was bought by New York-based Apollo and others for US$7.15 billion in May 2012 and taken public early this year.
Apollo and its clients, which put in about US$1.8 billion of equity, are down about 20 per cent on their initial stake, based on the latest closing share price.
Apollo cited EP as a key contributor to a 2 per cent decline in the firm’s private equity holdings during the third quarter.
“It could be worse from here,” Greg Beard, who oversees Apollo’s energy investments, said of oil producers at the firm’s investor day on Dec 11.
“When the market has been in excess like it is now, you see price declines. With a change in the stance of OPEC from one of price protection to the protecting of market share, we’re in excess for at least the next 12 months.”
The bonds of some closely held buyout-backed companies are falling as well.
Samson Resources Co’s US$2.25 billion of bonds due in 2020 dropped to 43.5 cents on the dollar from a peak of 103.5 cents in August.
KKR & Co. and its partners acquired Samson in December 2011 for US$7.2 billion, the most ever paid in a leveraged buyout of an energy producer, including US$4.1 billion of equity.
Heavily reliant on natural gas, the Tulsa, Oklahoma-based company suffered big losses after the deal when prices for the commodity slumped.
Standard & Poor’s and Moody’s Investors Service downgraded Samson’s junk credit ratings in the last two weeks. — Bloomberg