The global oil and gas industry has regained the attention of private equity firms as the high energy needs of generative AI become more evident.
Private equity and venture capital deal value in the oil and natural gas sector from January to mid-August have already surpassed the $6.61 billion reached at the end of 2023, according to S&P Global Market Intelligence data. The year's private equity-backed deals are on track to reach the highest annual value for the sector since 2020.
Private equity firms announced 47 investments in oil and gas companies in the year to Aug. 20. The US and Canada had over half the total with 25 deals, while Europe, including the UK, had 11 transactions.
Acquiring fossil fuel assets is a strategic move for private equity since AI datacenter infrastructure requires levels of energy that intermittent renewable power, such as weather-dependent solar and wind, cannot fulfill alone.
AI datacenters are forecast to use 8% of US power by 2030, more than double the 3% used in 2022, according to a report from Goldman Sachs.
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Large oil and gas deals
The largest private equity-backed transaction in the industry in the year to Aug. 20 was Apollo Global Management Inc.'s acquisition of oil and gas equipment and services company U.S. Silica Holdings Inc. for $1.92 billion. U.S. Silica went private July 31.
The second-largest was Bernhard Capital Partners Management LP's planned acquisition of New Mexico Gas Co. Inc. from Emera Inc. for $1.75 billion. Bernhard will pay $1.25 billion in cash, plus about $500 million in assumed debt, for the US gas utility.
Renewables still favored
Private capital did not directly pivot to fossil fuels from green energy. From January to mid-August, private equity transactions in renewables totaled almost $21 billion, more than triple the $6.91 billion of oil and gas deals in the same period.
Private equity firms announced 69 deals in renewables. Europe had the most renewable deals, with 30. Asia-Pacific followed with 19 deals, while the US and Canada logged 17 deals.
Large renewables deals
The largest transaction in renewables in the year to Aug. 20 was Energy Capital Partners LLC's pending purchase of UK-headquartered Atlantica Sustainable Infrastructure PLC for $7.87 billion. Seller Algonquin Power & Utilities Corp. opted for the divestment after launching a strategic review of the renewables energy business.
The second-largest deal was Brookfield Asset Management Ltd. and Temasek Holdings (Pvt.) Ltd.'s proposed acquisition of France-headquartered renewable power producer Neoen SA for $7.86 billion. Brookfield Renewable Partners LP's CEO said Neoen would enable Brookfield to enter multiple European countries at scale.
Fundraising for energy sector
Several of the biggest global private equity energy funds seeking capital are from China.
The largest is Dongguan Financial Holdings Group Co. Ltd.'s Dongguan Emerging Strategic Industry Investment Partnership Enterprise LP fund with a target of $1.4 billion. The fund seeks to invest in China's Guangdong province and Dongguan government-supported industries.
The second-largest is GEF Capital Partners LLC's South Asia Growth Fund III LP with a fundraising goal of $380.2 million. The fund targets companies in South and Southeast Asia.
Industry dynamics support investment
Oil and gas companies are also attractive targets for reasons other than AI energy demand.
"We're seeing the demand for [electric vehicles] dropping significantly," North Carolina State University professor Robert Handfield told Market Intelligence. "People are moving much more toward hybrids, so that's another factor encouraging investments."
Listed oil and gas companies have generally reduced capital expenditures yet still have high cash flow, a dynamic that attracts private equity investors, added Rob Thummel, a senior portfolio manager at Tortoise Capital Advisors LLC.
"The public [oil and gas] companies have significantly cut back their capital spending over the last several years and become more capital disciplined," Thummel told Market Intelligence. "That's opened opportunities for private equity to get involved."
Analysts also expect demand for both gas and renewable energy to rise as AI spreads through the global economy.
"We expect higher natural gas demand in the short term for the next two to three years to meet datacenter power needs, and new renewable and natural gas power generation equipment sales to ramp in the medium to long term," Mizuho Securities analysts wrote in a research note.