Private equity shifts its attention to renewable energy

Private equity is watching the consolidation of the North American oil and gas sector from the sidelines, instead focusing its energy efforts on renewables.

Driving the news: Cenovus Energy on Sunday agreed to buy Husky Energy for $2.9 billion in stock, in a deal that would create Canada’s third-largest oil and gas producer.

• Last week, ConocoPhillips agreed to pay $9.7 billion for Concho Resources, and Pioneer Natural Resources signed a $4.5 billion deal for Parsley Energy.
• In each case, the purchase price was well below what the target companies were worth pre-pandemic, due to the vicious confluence of oversupply and demand destruction. The basic idea is that consolidation could pull costs out of the system, thus letting companies maybe eke out a profit at $40 per barrel prices.

Private equity helped drive the shale boom, buying up acreage and expanding oilfield services companies. But most of that activity has dried up, with new oil and gas investments focused more on propping up existing deals than on expanding production.

• "Everyone is getting into renewables," a top energy private equity investor tells me. "It's just a smarter long-term play, particularly as the macro economics of fossil fuels get worse and the macro economics of renewables get better."
• "Some areas have become too crowded, like newly built, operating renewables assets, but overall there's plenty of opportunity," says a veteran renewables backer. "Beyond the pandemic, it's that wind and solar have become much more cost efficient — or even cost competitive in some places — at the same time that coal and nuclear plans in the U.S. are being decommissioned."

The election is also being closely watched, with private equity believing that a President Biden could usher in a new era of renewable energy subsidies. Plus his pledge to ban fracking on public lands.

• But, but, but: Investors caution that it can take a while for campaign rhetoric to be translated into signed legislation; possibly longer than their anticipated holding periods.

The bottom line: Private equity is exiting fracking just as quickly as it entered.