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North America -   Where does private equity find its energy? While the energy industry has always enjoyed the attention of investors and speculators alike, a confluence of global events has lead to an even greater focus on the industry and, in turn, is driving M&A activity globally. These events include an increased focus on cleaner, more sustainable energy sources as a result of greater exposure on environmental attention and risks, and a great fluctuation in oil prices. 

 

Additionally, private equity funds have been relatively inactive for quite a while and have significant uncommitted capital to put to work. Those funds need to improve on returns on investments (ROI) and believe that the energy sector can deliver it. Not only are existing private equity firms chasing these deals, but new funds formed by established private equity firms are entering the market. These private equity funds, along with traditional multinational energy companies, will drive competition for opportunities in the energy sector.

 

The lucrative upside (for example, chasing the shale and oil and gas distribution systems) as well as the long, steady plays (solar, wind and photovoltaic (PV)) are currently getting the most attention. In the US, the total value of oil and gas mergers and acquisitions increased significantly in 2011 due to continued investment in US shale opportunities and related infrastructure, and sustained and new interest from foreign buyers and private equity entrants, according to PwC. 

 

This increased deal value reflects a shift towards more investments in oil and liquid plays in light of natural gas prices being depressed after hitting a 10-year low in 2011. This was shown as recently as 19 March when Williams Partners LP agreed to pay approximately $2.5bn for Caiman Energy Midstream LLC, a gathering and processing business in the Marcellus Shale, as well as entering Ohio’s Utica Shale via a newly formed joint-venture.

 

Deal opportunities presented by the emerging role of renewable energy continue to evolve and gain more market visibility. In August of last year, Blackstone and KKR teamed up to make an investment of €2.5bn in the construction of Germany’s two largest offshore wind farms. More recently in February, Mitsubishi Corporation acquired a 34 percent stake in Mareña Renovables’ wind project, Latin America’s largest wind farm project, to be jointly developed by Mitsubishi and its partners, Macquarie Mexican Infrastructure Fund and pension fund PGGM of The Netherlands, with an approximate project cost of $1.0bn.

 

Government support is a big incentive for investors in the broader renewable energy market, while on a corporate level acquirers are looking to overtake rivals and gain market share as well as to achieve economies of scale.  At the same time, in either case, private equity firms are attempting to build a platform company comprised of facilities/plants, delivery systems and contracts with producers for an exit to a larger operator or private equity fund.

 

Another factor that will impact M&A activity this year is the belief that financing conditions are improving and will be a core M&A driver.  While still very fragile, economies appear to be steadily rebounding, allowing for the debt markets to become more accessible.  While the current renewables environment could be still be described as challenging at best, all the signs are pointing in the right direction as the deal competition, and resulting scrutiny that projects have had to undergo, has served to improve the industry and its marketability overall. Nonetheless, the availability of financing will admittedly depend upon the specific sector and country in question.  For example, with solar technology being less established than wind, solar M&A activity and related financings are susceptible to reductions in government incentives as are predicted feed-in tariffs in Germany, Italy, France and the UK over the course of the coming year.  This will adversely impact the M&A environment within these countries. 

 

Within the renewables sector, onshore wind projects have an easier path as the preferred sector for debt providers, as onshore wind remains an established and well understood technology compared with solar and offshore wind projects. This was particularly evident in the Mareña Renovables wind project which was able to obtain debt financing for the project from a syndicate of commercial lenders, including Banorte, BBVA Bancomer, Credit Agricole, HSBC and Santander, and development banks including Inter-American Development Bank (IDB), Banco Nacional de Obras y Servicios Públicos (Banobras) and Nacional Financiera (Nafinsa). Eksport Kredit Fonden, the Danish export credit agency, also provided a guarantee for a portion of the construction term loan.

 

Years of innovative development and the increased usage and pricing of existing energy sources has focused the world’s spotlight on the energy sector over the past few years, and it shows no signs weakening in the near future.  This focus and resulting upward trend has caught the attention of not only existing corporate players looking to gain market share but also private equity funds looking to capture and capitalise on a piece of the market. Opportunities, and money, are out there and ready to move forward.

 

 by David R. Yates │ Hunton & Williams LLP