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https://www.wsj.com/articles/blackstone-carlyle-take-different-sides-on-oil-and-gas-investment-11662024781


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BLACKSTONE, CARLYLE TAKE DIFFERENT SIDES ON OIL-AND-GAS INVESTMENT


PRIVATE-EQUITY FIRMS RETHINK EXPOSURE TO CONVENTIONAL ENERGY AMID HIGH CRUDE
PRICES AND FRAUGHT POLITICAL CLIMATE

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CARLYLE GROUP BELIEVES CASH FLOW FROM ITS INVESTMENT IN SPANISH OIL COMPANY
CEPSA IS ENOUGH TO BOTH RECOUP ITS INITIAL INVESTMENT AND FUND DECARBONIZATION
EFFORTS.

Photo: JON NAZCA/REUTERS
By
Miriam Gottfried
Sept. 1, 2022 5:33 am ET

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Profits from oil-and-gas production have surged as crude prices hover at
elevated levels, but volatile returns and a fraught political climate have
created a divide among the biggest private-equity firms about whether investing
in the sector is worth the headache.

Many public pension funds and endowments that invest in private-equity funds
have put pressure on their managers to stop backing producers of fossil fuels
and invest more in cleaner sources of energy. The energy market’s boom-and-bust
cycles also have translated into poor investment returns over the long term.

That has caused some of the biggest buyout firms to dial back their investment
in the sector. Blackstone Inc. BX -6.40% has said neither of its energy
businesses will make new investments in oil-and-gas exploration and production.
Apollo Global Management Inc. APO -3.87% forswore new fossil-fuel investments in
the $25 billion buyout fund it is in the process of raising.

KKR & Co. hasn’t drawn a line in the sand. Its private-equity business hasn’t
invested in a traditional energy company in years, but its energy team continues
to buy and manage oil-and-gas assets through the publicly traded Crescent Energy
Co. CRGY -1.20% , which is focused on making those businesses more
climate-friendly and isn’t developing any new oil or gas fields.

Nord Stream: How Russia Has Turned Its Gas Into a Global Economic Weapon
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Nord Stream: How Russia Has Turned Its Gas Into a Global Economic WeaponPlay
video: Nord Stream: How Russia Has Turned Its Gas Into a Global Economic Weapon
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Western leaders are preparing for the possibility that Russian natural gas flows
through the key Nord Stream pipeline may never return to full levels. WSJ’s
Shelby Holliday explains what an energy crisis could look like in Europe, and
how it might ripple through the world. Illustration: David Fang
Created with Highcharts 9.0.1Fossil-Fuel FlightAggregate transaction value of
private- equity and venture-backed investmentsSource: S&P Global Market
IntelligenceNote: 2022 data are as of Aug. 23
Created with Highcharts 9.0.1Oil and gasRenewable energy2011'15'2001020304050$60
billion

All three firms will still invest in pipelines and other infrastructure to
transport or store traditional forms of energy—and some are investing in
repositioning those assets for cleaner uses—but they are increasingly putting
their money behind faster-growing renewable sources.




Investment in the sector has fallen since private-equity firms have chilled on
it. The aggregate transaction value of private-equity and venture-backed
investments in oil and gas has been just $4.4 billion so far this year,
according to data from S&P Global Market Intelligence; at the peak in full-year
2014, it totaled $49.5 billion. Meanwhile, there has been nearly $11 billion
worth of investments in renewable-energy sources such as solar and wind so far
this year, the data show, putting them on track to surpass oil and gas for the
first time.

Not every firm is rushing away from buying heavy carbon emitters: Executives at
Carlyle Group Inc. CG -5.75% and Brookfield Asset Management Inc., BAM -3.78%
two other big private-equity firms, argue that private-equity firms should use
their capital and know-how to transform traditional energy producers, whose
products are still crucial to the global economy, into more climate-friendly
businesses.

Carlyle also invests in renewable energy, and Brookfield has one of the biggest
private renewables portfolios in the world. Both firms have committed to
achieving “net zero” greenhouse-gas emissions across their portfolios by 2050,
setting themselves apart from peers such as Blackstone that have set more
short-term decarbonization targets.

“Our approach is to invest, not divest,” said Macky Tall, chairman of Carlyle’s
global infrastructure group, which includes energy.

The risks to that approach abound. It can be difficult to get debt financing for
companies that produce fossil fuels because banks are wary of lending to them
now. The limited pool of willing buyers—not just among investment firms, but
among other oil-and-gas companies, which are consumed with their own
energy-transition efforts—means there also are significant hurdles to exiting
from such investments. Bankers and private-equity managers say it is nearly
impossible to take a fossil-fuel producer public these days.

To have any hope of selling an oil or gas asset at a profit, a firm has to have
a plan to make it greener.



That is the aim at Carlyle, where former Chief Executive Kewsong Lee made
investing in the energy transition a strategic priority, hiring Mr. Tall from
Canadian pension fund Caisse de dépôt et placement du Québec and merging
infrastructure and energy into one business unit. Mr. Lee has since left
Carlyle, but the firm says its board and leadership remain committed to the
strategy.

SHARE YOUR THOUGHTS

What is your outlook on investing in oil-and-gas production? Join the
conversation below.

One example of Carlyle’s transition strategy is Spanish oil company Compañía
Española de Petróleos, in which it took a 37% stake in 2019, at a $12 billion
valuation. Carlyle and the oil company’s co-owner, Abu Dhabi sovereign-wealth
fund Mubadala Investment Co., plan $7 billion to $8 billion in capital
expenditures over the next decade, with almost two-thirds of that going to
measures such as installing electric-charging stations at many of the company’s
2,000 gas stations and developing green hydrogen and so-called sustainable
aviation fuels.

Cepsa, as the company is known, had $1.8 billion in earnings before interest,
taxes, depreciation and amortization in 2021 on $24.5 billion in revenue.

Because of the company’s strong cash flow, Carlyle believes it can recoup its
initial investment while it owns the business and have cash left over to invest
in decarbonization efforts for additional upside, according to Bob Maguire, who
oversees the investment as co-head of the firm’s international energy fund. The
owners could also opt to carve out certain rapidly growing Cepsa businesses and
sell them off or take them public, though Carlyle has no immediate plan to exit
from the business, he said.

Cepsa CEO Maarten Wetselaar, who joined from Shell PLC at the start of this
year, said he finds working at a private energy company with only two owners
easier than at a public company, where shareholders tend to only be interested
in owning either a fossil-fuel business or a renewables business.



“The journey is very hard to interest public investors in,” he said.

Write to Miriam Gottfried at Miriam.Gottfried@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved.
87990cbe856818d5eddac44c7b1cdeb8

Appeared in the September 2, 2022, print edition as 'Private-Equity Firms
Diverge On Oil Assets.'




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