Friday Letter The world of energy still turns

The US is home to only some four percent of the world’s oil reserves, but it consumes roughly a quarter of the world’s oil – statistics anyone tuned in to this week’s US presidential debates heard frequently repeated.

A similar disproportion can be viewed in the private equity dollars focused on the energy sector. Most of the private equity firms specialising in energy are based in the US and have been focused on US companies. This is set to change though, given the tremendous opportunities these managers see in building and improving energy businesses around the world.

Most of the panellists at the Private Equity International Energy Forum held this week in New York expressed enthusiasm at the prospects for doing deals beyond the US and Canada – and noted that credit conditions are actually fuelling deal flow.

The energy market is the biggest market in the world, and so it’s not surprising that within private equity, the energy “niche” is by far the largest. Some energy-focused firms have grown to become among the largest private equity firms in the world, such as First Reserve which ranks 23rd in the 2008 PEI 50. Given the continuing LP appetite for exposure to the energy sector, it is safe to assume that these GPs will continue to outpace many generalist firms.

Actual oil in the ground tends to be owned by governments. But private equity firms have seen great success investing in the slew of companies that service the energy market, like Aquilex, a company purchased this week by Teachers’ Private Capital that provides cleaning and maintenance services to the energy industry. In North America and parts of Europe, such as the North Sea, these energy services markets are reasonably mature but still in need of capital, technology and good ideas.

In certain emerging markets, there is plenty of cash and natural resources, but expertise with global-standard best practices is in short supply. This is where private equity can play a role.

Not only are the Western energy specialists getting busier internationally, but local firms are adopting private equity approaches to energy investment.

Among the presenters at the recent PEI Energy Forum was Brad Bourland, head of proprietary investment at the recently formed Jadwa Investment, a Saudi investment bank backed by local families. The rejuvenation of the Saudi Stock Exchange has created a demand for Saudi energy services companies with the highest standards of corporate governance and business practices. This takes capital (which is not in short supply in the MENA region) but also a professional, systematic approach to investment and corporate oversight. Saudi Arabia wants to see the development of a thriving local services sector around its oil industry, and the private equity approach holds great appeal in this regard.

If Jadwa and other firms like it are successful, their models will be mimicked around the world and private equity energy may grow to a size that rivals the rest of the industry put together.

At a time when vast amounts of column inches continue to be expended on how the “credit quake” has paralysed the markets, PEO thought it salutary to visit a part of our industry that is still active, engaged – and investing.