By Keith Behrens, Head of Energy & Clean Energy Transition, Stephens
Since 2017, the US has been the top oil producing country in the world. Yet European commercial banks, US private equity funds and even some hedge funds have exited the oil and gas sector due to environmental, social, and governance (ESG) concerns, instead of for purely economic reasons.
Natural gas prices are soft compared to their levels during most of the last decade. According to the US Energy Information Administration, Henry Hub natural gas spot prices averaged $3.32 per million BTUs between December 2013 and December 2023. Prices were $2.52 per million BTUs in December 2023. Oil prices are healthy but well below their levels seen during much of the past two years. According to the Federal Reserve Bank of St. Louis, WTI crude spot prices averaged $85.63 per barrel between December 2021 and December 2023. Prices were $71.90 in December 2023.
So why are UK-based family offices exhibiting greater appetite for the space?
Many UK family offices that have been active for years in both oil and gas globally, and in the US specifically, are now showing more interest in the space. In addition, some newer UK family offices whose wealth does not originate from oil and gas, but from sectors such as real estate, more recently have expanded their investment thesis to include US energy.
How UK Family Offices Evaluate Potential Investments in Oil and Gas
From the point of view of UK family offices hydrocarbons will remain essential to global energy needs for the foreseeable future despite growing ESG concerns, as traditional sources of capital leave the oil and gas sector. Therefore family offices may have opportunities to invest in US oil and gas firms at attractive valuations.
It’s worth noting that most hedge funds are predominantly fundamental and opportunistic investors, much like family offices. Hedge funds such as Elliott Investment Management, Fortress Investment Group, and Oaktree Capital Management have noted that oil and gas is an undercapitalized sector, and that now may be a good time to invest.
Significant oil and gas M&A activity transpired in 2023. This includes major deals such as Exxon Mobil agreeing to acquire shale rival Pioneer Natural Resources for $59.5 billion in an all-stock transaction, and Chevron agreeing to acquire Hess in an all-stock transaction valued at $53 billion. Entering US onshore oil and gas production for the first time, UK-based INEOS Energy also acquired from Chesapeake Energy approximately 172,000 net acres and 2,300 wells of its Eagle Ford asset in Texas for $1.4 billion.
Deal Types
Potential opportunities exist for family offices of different sizes. It is not unusual for family offices to invest anywhere from $25 million to $200 million per transaction, with total allocations to US oil and gas in some cases of over $500 million. Besides the US, investments also have come to market across Europe, for example in the North Sea and in Germany.
Similar to US family offices, UK family offices typically have longer holding periods than private equity firms. Although they tend to underwrite around five-year exits mainly to generate returns in their models, in practice many UK family offices will hold promising investments for considerably longer than that through various economic and market cycles. Indeed, UK family offices view this ability as a competitive advantage over PE firms that must exit quicker.
Many UK family offices are looking for either common equity or structured equity deals, yet some do engage in debt deals by lending to oil and gas companies as part of syndicates.
Clubbing Up
Also similar to US family offices, UK counterparts have been known to “club up” on larger deals. Certain London-based family offices have tapped pre-existing relationships with each other to follow the lead of more experienced family offices active in US oil and gas. They also have sometimes clubbed with US family offices, when introduced by trusted third parties with in-depth knowledge of the space.
For example, transactions that require approximately $200 million in equity are sometimes addressed by a club in which one family office tends to act as an experienced and credible anchor by funding at least one third of the deal. That anchor also often serves as the lead for other family offices to follow, as a result of its ability to properly value opportunities or its access to technical talent that can assist with valuations.
The rest of the family offices in the club may provide at least $20 million per deal. Of course, these followers will conduct their own due diligence, albeit usually to lesser extents than the initial anchor.
Many Variables
Although these trends are expected to continue in 2024 and beyond, market participants are assessing a wide array of variables.
For instance, taxation is a financial consideration for UK family offices engaging in cross-border oil and gas deals. However many of the groups already have US-based investments – potentially in other sectors – and therefore are somewhat familiar with how to structure deals to minimize US tax obligations.
Regulatory issues, such as plugging and abandonment liabilities for working interest owners and operators, may induce family offices to pursue investments in oil and gas minerals that have less exposure to such liabilities.
The COP28 UN Climate Change Conference in Dubai from Nov. 30 to Dec. 13 included a nonbinding roadmap for “transitioning away from fossil fuels.” Even so, the language from COP28 lacked country-by-country specifics on steps to achieve that goal.
