Private equity and the low price of natural gas

by Moris Beracha

Natural gas is playing a leading role in the global energy matrix because is considered as a clean source and does not face so negative criticism.

Investors perceive that the US gaseous hydrocarbons market does not show the volatility of the oil market and regard investment in exploration and production projects as safe, but not in storage.

By Moris Beracha
Specialist in financial markets and capital management

Natural gas is playing a leading role in the global energy matrix because being a hydrocarbon it is considered as a clean source and does not face the so negative criticism which is burdened by its brother oil by environmental organizations.

That is why we consider that they could continue to boom, as has happened in recent years underpinned financially by private equity, because they have the advantage of being low-gas emission energy generators and in many cases with access to money without the obstacles or delays that have traditional schemes such as bank loans, the issuance of fixed income securities or the capital contribution by the shareholders. In short we are talking about a commitment to innovation, technology and of course the risk both for gas companies – especially shale gas – and private equity.

A report from the PWC firm highlighted that the shale boom would practically not have been possible without private equity because the responsiveness is faster to streamline a project and the result has been significant in boosting a natural gas sector that only in The United States has driven production and is now an exporting country.

Let us look at figures from the US Energy Information Agency. Until 2006, natural gas production in that country grew but at very low levels, insufficient to meet demand or serve as a substitute for other energy sources, reaching a daily volume of 63 billion cubic feet per day. In the 10-year period, which closed in 2016, that production increased 40 percent to reach 88,700 cubic feet per day, mainly due to the rebound in the states of North Dakota and Ohio, and to a lesser extent in Oklahoma, Pennsylvania and West Virginia.

In terms of exports, again with the EIA data, the United States has come to play a fundamental role in the supply of natural gas because it has more than tripled its shipments abroad during the same 10 years we are considering, by increasing its dispatches from 1,983 million to 6,398 million cubic feet.

We do not want to dwell on an explanation of natural gas production and trade, but we highlight this growth in such a short time, which found in private equity a fundamental tool for obtaining resources. Therefore, if we could replicate that experience in other parts of the world – for example in Argentina, Brazil or Venezuela with the potential of gas reserves that these countries have – we are confident that a similar phenomenon could occur.

Private equity, however, requires a stable macroeconomic environment, legal certainty and that the operation allows them to work, because success in the United States involves a private financial fund that assumed the risk of natural gas projects driven by individuals, there is a clear legal framework and the regulation aims to favor these projects, both for obtaining financing and for their operations.

The future with low prices

The PWC report I am referring to (we have already referred to another similar report made by EY in a previous article) tells us the investment options that have been found by private equity in shale projects, whether natural gas or oil, focused on the use of a technology known mainly in English as frakking or hydraulic fracturing, but also in other areas of the hydrocarbons business.

“The resulting capital requirements offer investment opportunities

for each risk within the energy sector: start-ups and companies that need capital to grow; projects that are exposed to the common variation of the price of commodities, including those that are only subject to macro aspects, or short-term assets that can be altered by significant volatility,” the PWC report noted.

The study highlights how in upstream projects – both in natural gas and in oil – there is a low risk in investment by private equity, as long as it runs in the United States, not out of that nation.

“Deepwater, shale or conventional exploration opportunities in the United States can be done with minimal risk, while investments in other parts of the world are dominated by large oil companies,” the report highlighted.

In the case of natural gas, one aspect that benefits the participation of private equity is the low prices in the United States, which cheapens production costs and this is beneficial for exploration, extraction and trade activities; therefore, we fully share what the PWC people assert: “investors are playing a long cycle with this commodity” and “the market believes that natural gas prices will remain low for the foreseeable future”.

An advantage offered by this prediction is that it seems that the volatility perceived in the oil market is not gained by natural gas and that makes it feasible to better provide a profitability forecast.

However, not all natural gas projects generate the same interest for private equity. In some cases, the risk level within the United States is again high, as in the case of gas storage because studies show that in these cases the solidity of the company that is in charge of the operations is chosen.

“Some funds have been interested in storage when the opportunities involve companies with fully contracted services, with a solid cash flow, and are in a good geographic location where cycle times to inject and withdraw natural gas are relatively fast,” said PWC.

 

 

 

 

 

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