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Baker Botts’ Lawyers comment on Private Equity Trends in the Oil and Gas Sector

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HOUSTON AND LONDON – March 27, 2018 - Private Equity (PE) investment in oil and gas companies has raised $100 billion since 2014 and is predicted to continue to bridge the funding gap as a key source of capital vs. more traditional lending sources in North America and Europe during 2018.
Baker Botts’ lawyers predict that the recent trend of PE companies purchasing legacy E&P assets, undertaking drillco joint ventures (JVs), investing in midstream and downstream infrastructure projects will continue as investors seek new growth opportunities in the oil & gas sector.
“The funding landscape of the oil and gas industry has shifted dramatically over the last five years in the US, as private equity players have both entered the market as competitors to strategic oil & gas companies but have also partnered with them in developing many of the shale plays. Infrastructure investments are also on the rise around the oil & gas sector, as the expansion in drilling is driving a new round of midstream and other infrastructure development to handle the resulting hydrocarbons. Private equity involvement in the oil & gas upstream and midstream sectors has been good for the industry and will continue to grow,” said Jason Bennett, Chair of the Global Projects Practice, and a partner in Baker Botts’ Houston office.
“The main driver for PE activity outside the US has been low valuations, with the upstream sector generating the most interest. In mature regions like the UK, a particular challenge is how to manage decommissioning costs, and this has had a big impact on the structuring of recent deals,” added Paul Exley, a Corporate partner in Baker Botts’ London office. Mr. Exley commented, “The scale and uncertainty around these costs makes it difficult to ‘price them in’, so parties are having to be more creative to get the deals through.”
“Analysts are predicting that by 2020 many private equity oil & gas sector investors will have progressed investment portfolio diversification, and we will have seen a major shift in the location of infrastructure spending from the West to the East. Portfolio companies and funds with a better understanding of these trends in the international markets will be well positioned to capitalise on stabilised oil prices over the medium to long term, making their investment in longer cycle projects more attractive. Whilst some more established IOCs, and strategic players are ahead of the investment community in this regard, and are already replenishing their inventories in projects with first production post 2020, there remain significant opportunities for private equity in this more diverse and developed energy and infrastructure investment environment,” added Hamish McArdle, a Global Projects Partner in the London office.
Jason Bennett, Paul Exley and Hamish McArdle are available to discuss the increasingly pivotal role of PE firms in the oil and gas sector and examine what the future holds for larger E&P or upstream players looking to pursue JVs or divest their assets.

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