Russ Steenberg likens how easy it is to find lucrative energy investments to what happens when a little boy throws a big rock into a pond.
“There are incredible numbers of ripples that go out from the splash,” the head of BlackRock’s $18.8 billion Private Equity Partners said in a recent interview. “Well the energy revolution right now is the rock. The ripples are all of the things in the economy that support the energy revolution, … that provide all kinds of investment opportunity.”
That opportunity has the private equity industry salivating. PE funds have raised $157 billion since 2009 to invest in energy, according to data from intelligence firm Preqin. And they’re in the middle of raising even more, with nearly $32 billion collected by 33 funds this year. Energy-focused PE funds that launched between 2002 and 2011 average net returns of nearly 14 percent annually, versus 9.5 percent for the industry generally, according to Preqin.
Warburg Pincus, for example, announced in October that it raised $4 billion for a new energy fund, $1 billion more than it had originally sought. Energy Capital Partners said in April that it collected more than $5 billion for its latest offering, blowing by the original $3.5 billion target. And Carlyle Group is making “great progress” to its goal of gathering nearly $8 billion for two energy funds by 2015.
“It’s an unlimited opportunity set,” Steenberg said of dramatic changes he anticipates in energy.
Gas, coal, oil
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“Three letters: L-N-G.”
That’s what David Foley, CEO of Blackstone Energy Partners, said when asked what investors are doing now that will shape the future of energy.
Indeed, natural gas appears to be private equity’s biggest play (the L refers to “liquefied”). Thanks in large part to advances in drilling technology, the U.S. now dominates production of natural gas. Despite environmental concerns around fracking, production has surged because of the country’s large shale reserves in places like North Dakota and Texas. BP projects that shale gas supply will continue to be dominated by North America: the continent produces 99 percent of it today; in 2035, it will still create 70 percent.
Foley said that the low cost of natural gas compared to crude oil represents a major arbitrage opportunity. “In commodity businesses where there’s usually easy substitution, that’s amazing to have that kind of difference in price per Btu,” he explained. “Btu” refers to British thermal unit, the most common gas metric.
In 2012, Blackstone invested $1.5 billion in Cheniere Energy Partners to help it build the first natural gas liquefaction export facility in the continental U.S. The project, still under construction, will be one of the first links between massive American gas reserves and the global oil market. Blackstone has approximately $8 billion of equity invested in energy globally.
Foley estimates that gas will generate about 35 percent of electricity worldwide in 2039. Coal will account for 35 to 40 percent, wind and solar 20 percent, and the rest a combination of nuclear, biomass and other sources (biomass refers to plant-based sources of power, such as corn or wood).
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William Macaulay, chairman and CEO of PE energy pioneer First Reserve, agreed that natural gas will be a “dominant factor” in 25 years.
He said one major play for First Reserve, which has raised more than $30 billion since its inception in 1983, is backing companies working to improve the producing, moving, storing and processing of natural gas. The firm’s current investments include Aubrey McClendon’s American Energy Utica, a exploration and production company focused on natural gas in Ohio; Caliber Midstream Partners, which offers oil and gas pipelines to harvest Bakken Shale in North Dakota; and First ECA Midstream, which owns “natural gas gathering systems” serving the Marcellus Shale in Pennsylvania.
“The trends are in place for you to see more natural gas,” Macaulay said about the future of global power generation. Combined with renewables—which Macaulay expects are unlikely to generate more than 20 or 30 percent of global power supply—he thinks gas will continue to gain share as the use of oil declines. Gas will ultimately dominate, he said, especially in the U.S.