Energy has explored the impact of the credit crunch and stock markets rout with the energy bank, Simmons & Company International. But how does private equity view the current, and possibly deepening, shambles?
We approached Graeme Sword, of 3i, as this is the P/E player most associated with upstream oil&gas in the UK, and especially around Aberdeen. For sure, he is deeply worried that the double whammy of the massive oil-price slide coupled with the global financial crisis could hit the offshore industry hard.
And he has come swiftly to the view that P/E itself will have to change its model, both to protect existing commitments and with a view to bringing more clients on portfolio.
Basically, the message is that P/E will have to think longer term and create real value within the businesses it invests in rather than seeking the fast buck through dismembering and selling off target companies in bits to harvest that fast buck. This practice has been all too prevalent in private equity.
“People were working out whether one was going to happen, but the two combined, and the speed at which they happened, has shocked everyone and led to a lot of fear in the sector,” said Sword, who agrees that Opec holds the key to global offshore oil&gas prosperity, especially the North Sea.
He thinks that the industry has been brought back to earth with a thud and that this might be no bad thing given how blase some had become about $140-plus oil.
“I think the whole equation has changed,” said Sword.
“Two or three years ago, the story was Chinese and Indian demand. I think the story now is Opec supply.
“Non-Opec isn’t going to be able to cope with even flattened demand due to decline. Where are future supplies going to come from, and therefore I think the keys are firmly back in Saudi hands?”
But does he believe that Opec can manage the price back up?
“I think so. I was at the Oil and Money Conference a few weeks ago and there was a lot of discussion on the topic, with very differing opinions emerging as to the power of Opec. I think a lot of oil consuming countries are not wanting to publicly recognise the power and stranglehold that Opec has.”
Sword is convinced that, no matter how successful Opec is at forcing oil prices back above $70, a 20-30% cut in global capital expenditure over the next 12-18 months by the upstream sector is more or less inevitable.
He thinks, too, that despite the slump from $147 to sub-$50 oil, supply and demand are still very finely balanced.
“Analysts are talking about what might happen next year. Consensus seems to be that oil demand globally could be up 500,000bpd, or down 500,000bpd. That one million barrels a day in an 85million bpd market is a very fine balance.
“And you see the impact of such small changes on the price.
“But I think that Opec, and especially Saudi, can manage the price upwards, and I wouldn’t be surprised to see another million or million-and-a-half barrels per day taken off the market.”
Sword is certain that North Sea prosperity hinges on Opec’s actions, but that possibly the “point of pain” has not been quite reached – the point at which companies dive for cover and bang down the hatches.