The U.S. oil and gas market offers something that virtually no other market in the world does—easy entry for non-traditional investors, who are helping to bolster the capital available for much-needed infrastructure buildout.
The U.S. oil and gas market is one of few in the world, if not the only one, that features all of the following: a growing oil and gas sector, relative ease of market entry for players of all sizes, strong institutions and a stable political environment (the last one is arguable). That mix of characteristics has made the U.S. the target of a growing class of non-traditional oil and gas players, such as Asian electricity providers and small-scale, pure-play financial investors.
The makeup of the investment community in the U.S. oil and gas industry has undergone a shift over the last five to eight years, Clark Sackschewsky, a Principal in the Natural Resources practice at accounting and consulting firm BDO, told Breaking Energy. It is no longer solely the purview of oil and gas companies with the financial firepower and on-the-ground management capabilities to buy other companies or their choicest assets outright in multi-hundred million- or billion-dollar deals.
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"It started out with mergers and acquisitions, then progressed to joint ventures, and now it's trickled down to smaller investors looking for a way to get into the U.S. market," Sackschewsky said. "You have a return on investment that has rule of law, a legal system, and great infrastructure," he said. "There is a court system, there is police, and investors own the land—instead of buying the right to explore, they can own the land, which is not the case everywhere."
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"You still have to worry about project success, but you're not worried about nationalization of your assets. That allows people a degree of protection, reducing the risk associated with investing in these types of projects," Sackschewsky said. "This is a good place to come park your money."
And the relatively recent discovery that previously untapped resources in non-traditional oil- and gas-producing areas of the U.S. are economic to develop has generated a slew of new projects in need of funding. "You can't ship natural gas by rail," Sackschewsky said. "Buildout of the infrastructure in different shale plays around the country presents a unique investment opportunity."
The option to take a share of these opportunities through smaller-scale deals, such as join ventures or private equity investments, offer these non-traditional investors a means of participating in the growth of the sector—and the returns it offers—without taking on all the attendant risk.
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By entering into a JV instead of buying a company and its assets outright, "you're not taking on all the liabilities and all the sins of the acquired company that may have occurred in the past", Sackschewsky said. Taking over an entire company or a chunk of its operations would come with new management and integration needs, "which require more capital, a team on-site, etc."
Investing through a private equity firm offers an even further reduction of risk. "These are the guys looking to invest $5-10mn and not take 100 percent of the risk, just invest in capital-intensive projects with a great return on investment," Sackschewsky said. "If you go through private equity, there will be multiple projects involved, you'll have a management team that's aligned with your interests—they make money when you make money—it's a lower cost of entry and a much safer play."
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And benefits to investors are not limited to financial concerns. Japanese electricity providers that have taken stakes in gas fields, pipelines and proposed natural gas liquefaction plants appear to be seeking benefits that are geopolitical as well as financial. "If I were a Japanese electricity generator, and I knew I could get 20 years of supply at 'x' price, I have a known, set stream of fuel for 20 years at a set cost, Sackschewsky said. "The risk has gone down for everyone."
While the U.S. oil and gas sector is by no means starved of capital, these additional sources, when viewed in aggregate, can provide a great deal of funding. Many of the joint venture deals announced in U.S. oil and gas in the last few years have been valued in the $1 billion-$5 billion range. And while small investors may not individually move the needle in the oil and gas sector, their contributions to the pool of available capital add up. "$5 million is a small chunk of change, but 100 people with $5 million to invest—now we're talking," said Sackschewsky.
—By Conway Irwin, Breaking Energy