Private equity (PE) investors are accelerating a shift away from the US shale oil sector amid diminishing returns caused by the Covid-19 pandemic.
Over the past decade, private equity firms have poured tens of billions of dollars into the US oil and gas industry, especially as the shale revolution gained full steam. Their funding helped spur the shale oil boom that followed the last market slump in 2015-16. But the lustre was already wearing off shale oil before this year’s slump as returns diminished, with PE capital invested in oil and gas firms falling by 45pc between 2017 and 2019, from $118bn to just over $64bn, Pitchbook data show.
And PE is unlikely to underpin an investment revival this time. To get PE dollars, “the industry is going to have be consistently profitable for the first time”, US bank Stephens’ managing partner Jim Wicklund, says.
PE firm Warburg Pincus recently told investors it is pulling back from investments in the oil and gas sector. Earlier this year, PE giant Carlyle Group sold its nearly 8pc stake in Chesapeake Energy, just before the producer filed for bankruptcy protection with nearly $12bn of debt. In total, 90pc of the combined debt — or $46bn — from producers filing for bankruptcy this year belonged to PE-backed firms, US law firm Haynes and Boone says. The average debt held by bankrupt PE-backed producers was more than four times that of their non-PE-backed peers.
Some observers argue that PE’s exit from oil and gas is only temporary, and that investors will return once the industry recovers. But others say the situation has permanently shifted. Institutional investors have been exiting the oil sector in favour of technology firms with higher growth potential, fewer regulatory burdens and lower costs. Covid-19-related oil price volatility and the growing environmental, social and governance (ESG) stigma of fossil fuel firms have scared off investors already tiring of shale’s dismal record on shareholder returns.
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