Oil &gas reignites

In recent months, private equity firms have made a couple of investments in Asia’s oil and gas sector. In October, Templeton Strategic Emerging Markets Fund (TSEMF) III invested an undisclosed sum to acquire a 19.3 percent stake in Halcyon Energy, a Singapore-based engineering and construction services provider for the offshore oil and gas industry.

A month earlier, energy-focused private equity firm First Reserve invested $500 million for a 99 percent stake in KrisEnergy, a newly-established company that aims to build a portfolio of oil and gas exploration, development and production assets across Southeast Asia.

Besides the two deals completed, 3i scrapped plans for a sale of its stake in Singapore-based Franklin Offshore International this June, as the bids received were too low, according to Reuters. Bidders for the deepwater mooring specialist included Halcyon, HSBC Private Equity and, reportedly, Actis. 

That the oil and gas sector in the region is drawing private equity capital should come as no surprise, considering the gas and crude oil production capacity of countries such as Malaysia and Indonesia. Singapore, on the other hand, can lay claim to being the most highly-developed oil refining and trading centre in Asia.

“Southeast Asia has a huge deal flow in terms of production to exploration assets. It is a part of the world that consumes way more oil and gas than it produces, in fact, the region is a net importer of oil and gas. We believe that there is a large amount of undiscovered resources here,” Richard Lorentz, a KrisEnergy business development director, told PEI Asia at the time of First Reserve’s investment.

Most private equity firms that invest in the oil and gas sector invest in equipment and service providers or in the midstream part of the supple chain, Claude Illy, head of oil and gas for Asia Pacific at the corporate finance advisory arm of Deloitte & Touche Financial Advisory Services, told PEI Asia.

Broadly, upstream refers to the exploration and production of oil and gas assets while midstream refers to the transportation of the products of these assets, for example via pipelines and crude tankers. Downstream activities refer to the refining and distribution of oil and gas products.

Investing in upstream oil and gas companies requires strong technical skills and a large appetite for risk. “Exploration and production is not an exact science. You estimate an amount of oil in the ground and you try to produce it but sometimes there are surprises,” Illy said. These companies also rely on specialists such as geologist, geophysicist, reservoir and production engineers, who can be difficult and expensive to hire.

Investments that are exposed to commodity prices can also be very volatile. If private equity firms were to take oil and gas commodity price exposure, they may as well buy oil and gas futures instead of investing in upstream oil and gas companies, Illy points out.

However, global demand for oil and gas will only increase, particularly due to increasing demand from large Asian economies such as China and India. And despite the challenges of investing in this niche sector, as regional exploration and production activity rise, the demand for equipment and service providers in the region will similarly escalate as well.

Consequently, the growth of these providers may present interesting investment opportunities for private equity firms.