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Being the buyer of last resort is a recipe for getting a good deal. Take Carlyle’s latest foray — a good, old-fashioned private equity roll-up in oil and gas.
The European private equity group has tapped Tony Hayward, former chief executive of BP, to build a new oil and gas company focused on the eastern Mediterranean. It kicked off this endeavour this week, with a deal worth up to $945mn to buy Energean’s assets in Egypt, Italy and Croatia.
Carlyle is rushing in where others fear to tread. While buyers in the US are inking multibillion-dollar shale deals, Europe suffers from a dearth of willing buyers of oil and gas assets.
Oil majors have to manage sections of their shareholder roster that would balk at any deal that increases upstream production. Smaller exploration and production companies also are in the mood to sell, rather than buy. Witness, for instance, Energean itself. It has chosen to unlock value for non-core assets, which it in turn picked up cheaply. Instead it will focus on its big Israeli project, return $200mn to shareholders, and amass some firepower for its next big venture.
That creates a gap for Carlyle to step into. The group is acquiring assets at about $5.4 dollars per proven and probable barrel, below the net present value of the reserves according to analysis from Wood Mackenzie. To look at it another way, it is getting fields capable of generating perhaps $400mn of ebitda a year at steady state production. Assuming they require ongoing capex of up to $200mn, that leaves plenty of cash to pay down the initial investment over the four- or five-year private equity lifecycle.
So far, so slick. Almost by definition, however, the problem for a financial buyer of last resort is what an exit might look like. Private equity roll-ups in the North Sea went through contortions to realise value. While Carlyle’s Neptune ended up with trade buyer Eni, EIG backed debt-laden Chrysaor into Premier Oil to create Harbour Energy — which it then catapulted into the major league through the acquisition of Wintershall’s assets.
By rights, finding a willing buyer should be even harder this time around, as the energy transition progresses. But the process of weaning the world off oil and gas has turned out to be anything but straightforward.
Recent backpedalling, in policy and on corporate decarbonisation targets, may give Carlyle hope that an oil and gas revival could mean buyers in the future after all. This is a bet that energy transition will happen — just really rather slowly.