Blackstone and Carlyle take different sides on oil and gas investment

(DJN) Profits from oil-and-gas production have surged as crude prices hover at elevated levels, but volatile returns and a fraught political climate have created a divide among the biggest private-equity firms about whether investing in the sector is worth the headache.

Many public pension funds and endowments that invest in private-equity funds have put pressure on their managers to stop backing producers of fossil fuels and invest more in cleaner sources of energy. The energy market’s boom-and-bust cycles also have translated into poor investment returns over the long term.

That has caused some of the biggest buyout firms to dial back their investment in the sector. Blackstone Inc. has said neither of its energy businesses will make new investments in oil-and-gas exploration and production. Apollo Global Management Inc. forswore new fossil-fuel investments in the $25 billion buyout fund it is in the process of raising.

KKR & Co. hasn’t drawn a line in the sand. Its private-equity business hasn’t invested in a traditional energy company in years, but its energy team continues to buy and manage oil-and-gas assets through the publicly traded Crescent Energy Co., which is focused on making those businesses more climate-friendly and isn’t developing any new oil or gas fields.

All three firms will still invest in pipelines and other infrastructure to transport or store traditional forms of energy — and some are investing in repositioning those assets for cleaner uses — but they are increasingly putting their money behind faster-growing renewable sources.

Investment in the sector has fallen since private-equity firms have chilled on it. The aggregate transaction value of private-equity and venture-backed investments in oil and gas has been just $4.4 billion so far this year, according to data from S&P Global Market Intelligence; at the peak in full-year 2014, it totaled $49.5 billion. Meanwhile, there has been nearly $11 billion worth of investments in renewable-energy sources such as solar and wind so far this year, the data show, putting them on track to surpass oil and gas for the first time.

Not every firm is rushing away from buying heavy carbon emitters: Executives at Carlyle Group Inc. and Brookfield Asset Management Inc., two other big private-equity firms, argue that private-equity firms should use their capital and know-how to transform traditional energy producers, whose products are still crucial to the global economy, into more climate-friendly businesses.

Carlyle also invests in renewable energy, and Brookfield has one of the biggest private renewables portfolios in the world. Both firms have committed to achieving “net zero” greenhouse-gas emissions across their portfolios by 2050, setting themselves apart from peers such as Blackstone that have set more short-term decarbonization targets.

“Our approach is to invest, not divest,” said Macky Tall, chairman of Carlyle’s global infrastructure group, which includes energy.

The risks to that approach abound. It can be difficult to get debt financing for companies that produce fossil fuels because banks are wary of lending to them now. The limited pool of willing buyers — not just among investment firms, but among other oil-and-gas companies, which are consumed with their own energy-transition efforts — means there also are significant hurdles to exiting from such investments. Bankers and private-equity managers say it is nearly impossible to take a fossil-fuel producer public these days.

To have any hope of selling an oil or gas asset at a profit, a firm has to have a plan to make it greener.

That is the aim at Carlyle, where former Chief Executive Kewsong Lee made investing in the energy transition a strategic priority, hiring Mr. Tall from Canadian pension fund Caisse de dépôt et placement du Québec and merging infrastructure and energy into one business unit. Mr. Lee has since left Carlyle, but the firm says its board and leadership remain committed to the strategy.

One example of Carlyle’s transition strategy is Spanish oil company Compañía Española de Petróleos, in which it took a 37% stake in 2019, at a $12 billion valuation. Carlyle and the oil company’s co-owner, Abu Dhabi sovereign-wealth fund Mubadala Investment Co., plan $7 billion to $8 billion in capital expenditures over the next decade, with almost two-thirds of that going to measures such as installing electric-charging stations at many of the company’s 2,000 gas stations and developing green hydrogen and so-called sustainable aviation fuels.

Cepsa, as the company is known, had $1.8 billion in earnings before interest, taxes, depreciation and amortization in 2021 on $24.5 billion in revenue.

Because of the company’s strong cash flow, Carlyle believes it can recoup its initial investment while it owns the business and have cash left over to invest in decarbonization efforts for additional upside, according to Bob Maguire, who oversees the investment as co-head of the firm’s international energy fund. The owners could also opt to carve out certain rapidly growing Cepsa businesses and sell them off or take them public, though Carlyle has no immediate plan to exit from the business, he said.

Cepsa CEO Maarten Wetselaar, who joined from Shell PLC at the start of this year, said he finds working at a private energy company with only two owners easier than at a public company, where shareholders tend to only be interested in owning either a fossil-fuel business or a renewables business.

“The journey is very hard to interest public investors in,” he said.

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