Private equity funds accelerate acquisitions of oil and gas assets

London – Private equity funds bought £11.9 billion of European oil and gas businesses in 2021, up from just £232 million in 2020, shows research from Mayer Brown, the global law firm.

Mayer Brown said recent years have seen many oil and gas businesses reshape their portfolios of assets, creating opportunities for some private equity funds to buy at attractive valuations.

For the biggest oil and gas majors, the transition away from fossil fuel extraction and towards renewable and alternative generation has led to them selling off some non-core assets, such as those that no longer fit their geographical focus. The shakeup in portfolios has moved through the industry as mid-sized and smaller players in the market restructure their own assets through acquisitions and divestments.

The Covid-19 pandemic has accelerated this trend, as a period of low oil prices saw some assets devalue sharply, particularly in mature basins such as the North Sea. Some private equity funds have used this as an opportunity to buy assets at knock-down prices.

Several oil and gas specialist PE funds have been active in acquiring assets in the past year, including Norway’s HitecVision, Postlane Partners of the United States, and North Sea Midstream Partners, owned by London-headquartered Wren House Infrastructure.

Mayer Brown’s study shows that UK businesses made up five of the 12 deals completed for European oil and gas businesses in 2021, for a total of £2.4 billion. This represents a significant increase on the one deal for £11 million completed in 2020.

Bob Palmer, oil and gas partner at Mayer Brown, said some private equity funds have been long-term investors in the oil and gas industry, as well as within the lower-risk midstream and services segments of the market. These segments insulate investors to a greater degree from volatility in oil prices. 

However, the devaluation of oil and gas assets since the start of the pandemic has made even the higher-risk exploration segment much more attractive to PE investors.

According to Mayer Brown, private equity funds’ investments in the oil and gas industry are only likely to continue to grow in the coming years. In particular, areas such as decommissioning are expected to see significant growth and will be attractive to PE investors.

“There are still excellent returns on offer in the oil and gas industry," said James West, private equity partner at Mayer Brown. "Majors are facing pressure to divest some of their assets as part of the transition to renewables and this is creating an opportunity for specialist private equity funds to pick up assets at valuations they like.”

Bob Palmer added: “Assets in the North Sea have been particularly popular acquisitions for some PE funds over recent years, but their opportunity is likely to be bigger than that.” 

“As the oil and gas industry continues to wind down less productive and profitable assets, growth in the decommissioning industry is likely to attract PE funds. The potential revenue streams from decommissioning are enormous over the coming decades.”