PE executives will spend 2012 privately telling anyone willing to listen that the Obama Administration is trying to work them over a barrel. However, they’ve got one thing going for them, at least.
It sounds as if the President is going to lend more support to natural gas extraction, AKA “fracking,” through which the fuel is more easily extracted from geographic regions that rendered machinery incapable of mining in the past. And, as if they needed a break, some of the biggest and best-backed PE firms in the country are set to benefit from it the most.
“I’m directing my administration to open more than 75 percent of our potential offshore oil and gas resources,” President Obama said during his State of the Union address last week. “We have a supply of natural gas that can last America nearly 100 years [and]…my administration will take every possible action to safely develop this energy.”
He certainly didn’t need to throw private equity a bone; the White House was thinking more about Joe Natgas than about Henry Kravis when President Obama announced the stateside frack-a-thon. It is expected that more than a half-million jobs could be created in the near term in the natural gas space—the stuff of which politicians’ dreams and campaign promises are made. And it’s only getting easier to frack, baby, frack. Yes, with bipartisan support, it looks like all of Washington is set to frack pretty much anything it can get its hands on.
Clearly, private equity firms can still get deals done in the energy space. (Prediction reports at the end of 2011 suggested we’d see a continuation of M&A in the industry.) In fact, traditional investors in the space like Avista Capital, TPG and Riverstone have, in aggregate, racked up several investments throughout last year and into 2012 as pundits drone on that these prices were the lowest natural gas would have to offer. Still, of course, high operational cost remains a steep barrier to entry, to say nothing of the need for operational expertise.
“Natural gas should continue to play a larger role in the energy mix,” said an executive at one of the country’s larger PE firms, which has made a number of investments in the natgas space in the last 12 months. “Natural gas prices remain under pressure due to production growth, surplus inventory and warm weather.”
Even if the Obama Administration didn’t want to throw private equity a bone, it looks like Mother Nature did. The Northeast’s tropical winter has spared many Americans the home heating expense, and, perhaps, even provided a little jolt to the economy in other spots as balmy temperatures have prevailed in typically freezing months.
Fortunately for sellers, strategics like Kinder Morgan and international players—most recently, French Total SA—have kept private equity firms honest in bidding. But since the Obama Administration isn’t standing in the way of our domestic would-be frackers, the only question that remains is how much resources, precisely, lay underneath the earth in the US—and who will be extracting them at the best margin. Perhaps no one will take notice of the answer more than LPs.