Private Equity’s Exposure to Fossil Fuels

As the oil industry shudders through cratering demand and rock-bottom prices, analysts are expecting a wave of bankruptcies,[1] a particular vulnerability for companies carrying a heavy debt load.

Private equity firms poured $65 billion into oil investments in 2019, according to Pitchbook.[2] Last year’s investments were the continuation of the trend of private equity investments flowing into oil & gas after a wave of dislocation in 2014-2016,[3] meaning that over the past five years, PE has picked up significant exposure.

Our list of fossil fuel investments by some of the largest private equity managers is here:

Fossil Fuel Investments – Largest Private Equity Managers, February 2020

Private equity firms have current exposure to energy investments through a combination of energy-focused funds and infrastructure funds as well as diversified buyout funds.

Current private equity investments include upstream, midstream, and downstream investments as well as fossil fuel-fired power generation held by some of the largest firms such as Blackstone, Apollo, Carlyle, KKR and Warburg Pincus, infrastructure firms like Macquarie and Brookfield, and energy-focused firms like Kayne Anderson and EnCap.

Through the first quarter of 2020, largely before markets felt the impact of the coronavirus pandemic, private equity-owned companies represent 3 of the 7 oil bankruptcies filed,[5] with all three carrying a debt load exceeding $500 million.

Private equity has joined the chorus of oil industry players seeking regulatory intervention[6] and federal government loans to help ride out market turmoil, and they are seeing some success with the Federal Reserve relaxing criteria for the Main Street lending program to permit loans to heavily indebted companies.[7]

But even with government bailouts and low-interest loans, the financial picture for oil and gas is highly uncertain. The International Energy Agency has projected oil demand will be down 9% in 2020.[8] As a result of drastically reduced energy use, the IEA projects that carbon emissions will drop throughout the remainder of the year, reaching a reduction of 30.6 gigatons compared to 2019 – and the largest reduction ever, “six times larger than the previous record reduction of 0.4 Gt in 2009 due to the financial crisis and twice as large as the combined total of all previous reductions since the end of World War II.”[9]

Predating the coronavirus pandemic, in 2019 Private equity was already facing some headwinds to exiting oil investments as prices softened.[10] At the same time, in public markets, oil majors have faced increasing pressure from shareholders to make commitments on emissions reduction and sustainability.[11]

Our list of fossil fuel investments by some of the largest private equity managers is here:

Fossil Fuel Investments – Largest Private Equity Managers, February 2020

Asset managers covered:

Diversified Private Funds Managers:

• Blackstone Group
• Apollo Global Management
• Carlyle Group
• KKR & Co
• Ares Management
• Oaktree Capital (part of Brookfield Asset Management)
• TPG Capital
• CVC Capital
• Warburg Pincus

Private Infrastructure Managers:

• Macquarie Infrastructure & Real Assets
• Brookfield Asset Management
• Global Infrastructure Partners
• IFM Investors
• Stonepeak Partners
• iSquared Capital

Energy-focused Private Equity Managers:

• Kayne Anderson Capital Partners
• Riverstone Holdings
• Encap Investments
• Energy Capital Partners
• ArcLight Capital Partners
• NGP Energy Capital Management (owned by Carlyle Group)
• Quantum Energy Partners

[1] https://www.reuters.com/article/us-global-oil-usa-restructuring/bankruptcy-looms-over-u-s-energy-industry-from-oil-fields-to-pipelines-idUSKCN2250FQ

[2] https://pitchbook.com/newsletter/as-oil-plunges-bankruptcies-loom-for-private-equity-portfolio-companies

[3]https://www.sprioilgas.com/blog/list-of-top-oil-and-gas-private-equity-firms Feb 19, 2018

[4] https://www.buyoutsinsider.com/energy-pe-fundraising-at-an-ebb-in-2019-as-lps-rethink-allocations/

[5] https://www.haynesboone.com/-/media/Files/Energy_Bankruptcy_Reports/Oil_Patch_Bankruptcy_Monitor

[6] https://www.institutionalinvestor.com/article/b1l5tcly7mtfs7/Private-Equity-Firms-Plead-With-Government-to-Help-Salvage-Oil-and-Gas-Industry

[7]https://thehill.com/policy/energy-environment/495549-feds-expanded-lending-program-opens-funding-to-oil-and-gas-industry

[8] https://www.iea.org/reports/global-energy-review-2020/global-energy-and-co2-emissions-in-2020#abstract

[9] https://www.iea.org/reports/global-energy-review-2020/global-energy-and-co2-emissions-in-2020#abstract

[10] https://www.forbes.com/sites/woodmackenzie/2019/11/13/private-equity-assesses-its-options-for-exiting-oil-and-gas/#14a982756f04

[11] https://www.wsj.com/articles/oil-companies-pushed-to-address-climate-disagree-on-how-11569144602