There are perceptions of high prices and low performance when it comes to investing in oil and gas assets in Europe. But there is a lack of competition from private-equity players—with low entry prices for investors—and good value if you know where to look, said Kerogen Capital’s Tushar Kumar.
Privcap: What is the level of M&A activity in Europe’s energy market?
Tushar Kumar: It’s been a tale of two halves—2015 to early 2016—and then, a marked change this year. As you know, a lot of investors and the markets are very momentum-driven, which you as a long-term investor can take advantage of. [From] 2015 to 2016, the market, oil companies, M&A, financing—all of these were largely paralyzed. That meant that we could get into some very interesting opportunities at very distressed prices.
Now, as oil prices started recovering towards $50 from the first quarter of this year, as it hit the bottom and as it has recovered, you have started seeing some of the activity in that market come back. So, what you’re seeing right now is a resurgence and a very large volume of activity. You might not get the distressed prices, but the prices are still attractive enough for you to make a return.
Privcap: What kinds of energy investments are available in Europe?
Kumar: It is a non-shale play. If the Lower 48 is 90% shale [and] then everything else, it’s the opposite in Europe: 90% conventional, maybe 10% shale, [and] largely driven by the evolution of shale industries in Europe.
It’s several years behind the U.S.; therefore, our focus and the industry focus are still largely on conventional. Which is fantastic, still, in terms of the opportunity set—very large opportunity sets across the U.K., Norway and some other parts of Europe, selectively.
Privcap: As a U.S. investor, where are there opportunities?
Kumar: The key things that are different are competition and entry prices. There are very deep and liquid capital markets, both debt and equity, here in the U.S. Now, in Europe, that’s very different. For example, in all of 2015, where tens of billions of dollars were being raised by U.S. oil companies for their balance-sheet repair, the sum total of all capital raised by oil companies in Europe was less than $1 billion.
What does that mean? If you have capital to invest as a private-equity investor--your capital in its demand--you can price things, you can select assets, and you get set with some very good assets at low, low breakevens for the next cycle.
Privcap: What are the key things to know about the North Sea opportunities?
Kumar: A lot of investors would say, “Why would I invest in that? It’s high cost, high breakeven, very high taxes, and there is very high decommissioning risk.”
Now, a lot of that may have been true at the peak of the cycle. Our thesis has been based on, and it’s largely been borne out of, how things have evolved in the last 24 months, where there’s been a very dramatic change in how we have seen things evolve.
Previously, it was a market that was very, very expensive in terms of people, labor costs, service sector. You’ve seen cost deflation anywhere from 25% to 60%, depending on what service sector and what part of the market you are talking about.
Breakevens from project redesign and cost deflation from the service sector have come down from anywhere in the 50s and 60s to as low as the 20s and 30s and, maybe for the larger projects, low 40s.
It might come as a surprise to a lot of investors that taxes in the U.K., for example, where we are invested in quite substantially in the last 12 to 18 months, are actually lower than [in] the Gulf of Mexico.
The third thing is decommissioning risk. Now, that stands as a risk if you are investing in some very old platforms and assets. We have a strategy that means we’re focused on subsea tiebacks, and that is something we have been very selective and very clear about.
Privcap: How does Kerogen mitigate performance challenges in oil and gas investments?
Kumar: The industry and investors have learned a pretty tough lesson from a lot of the investments that were made at the peak of the market. You saw a large amount of capital-chasing opportunities that had marginal economics, unless the oil price was priced at $100 per barrel.
What is different today is that the lower breakeven projects are available. Previously, it was a fully priced market, so to get into these projects you would have to pay $10, $15, $20 or $30 per barrel just to enter. And, by the time you added in all the other costs, your break-evens on a full cycle basis would be $50 or $60.
Now, there’s been a very remarkable change in these entry costs from $10 or $15. You can actually buy assets for $1 or $2. For example, we bought one of our pre-producing assets at 30 cents on the dollar.
So, our strategy has been very focused on ensuring that we have assets that have low entry costs and lower breakevens. We’ve focused on the subsea tiebacks, as we discussed, and that means you are not taking the beta risk of oil prices staying high.
For the entire video interview, please visit Privcap.com.