There is a growing menu of oil and gas assets for private equity firms to snap up as the energy industry downturn drags on.
The hard part is finding those that will eventually pay off, says the head of a well-known oil-patch investment firm.
Azimuth Capital Management, formerly known as KERN Partners, is scouting for new ideas to complement its current portfolio of energy production, service and technology firms. Its investments include such companies as Seven Generations Energy Ltd., Cequence Energy Ltd., Altex Energy Ltd., Black Swan Energy Ltd. and Steelhead LNG.
"Opportunities have come available – there's no question. And we're reviewing a range of very interesting opportunities in entry valuations that are very attractive compared to the last couple of years, and you'll see us position capital in that regard," said Jeff van Steenbergen, Azimuth's co-founder and managing partner.
"But in our business, we build to sell and these assets will have to be sold again at multiples that reflect our capital performance targets. The market for interesting exits is challenged right now and is going to be challenging for some time."
Indeed, private equity firms such as Azimuth, ARC Financial Corp., Riverstone Holdings LLC and Warburg Pincus LLC have maintained investments in the Canadian oil patch as collapsing crude prices have scared many public investors away.
The value of such investments in energy climbed to $8.2-billion in the first nine months of 2015 from $7.5-billion in the same period in 2014 and $3-billion in 2013, according to the Canadian Venture Capital & Private Equity Association.
The biggest deal of the year was the Ontario Teachers' Pension Plan's $3.3-billion acquisition of Cenovus Energy Inc.'s royalty lands, announced last summer. Last week, another hefty transaction, the Canadian Pension Plan Board's $900-million (U.S.) purchase of Encana Corp.'s Colorado shale assets, was delayed with scant explanation.
Azimuth has been active as well. It currently has $1.6-billion (Canadian) of investments under mangement and another $1.7-billion of co-investments. In November, it invested an undisclosed sum into Kaisen Energy Corp., a privately held junior heavy-oil producer.
However, despite what is becoming a bargain basement of available oil and gas assets as crude prices hover in the mid-to-high $30s (U.S.) a barrel, the company is not on a shopping spree.
"We haven't felt a need to rush," Mr. van Steenbergen said. "Entry valuations at this moment in time look more interesting than they did six months ago. With respect to the lens on Canada, with the potential consequence of changing royalties, how that affects the economics, how that affects investor interest in the future – we're watching that carefully."
The Alberta government is expected to release details of its new energy royalty framework in early 2016, following intensive study by a panel led by Dave Mowat, head banker at government-owned ATB Financial. It is one of several major initiatives by Premier Rachel Notley's NDP that have added new uncertainties for energy investors as the sector's fortunes have dwindled.
However, Mr. van Steenbergen said the government's approach to fulfilling its election promise on royalties has not been done in a vacuum. "When the NDP government came into office, they very pro-actively reached out to a number of investors, including us. We're encouraged by that. We felt our voices were respectfully considered," he said.
Jeffrey Jones