In recent years, European family offices have begun channeling investments into the traditional oil and gas sector, a pivot from the dwindling interest shown by private equity firms. This shift was identified by Keith Behrens, the head of the energy group at the private investment bank Stephens, who observed a surge in enthusiasm among family offices in Europe towards the end of last year.
The trend away from private equity investments in oil and gas began three years ago, amidst the COVID-19 pandemic. This was primarily due to key investors, such as endowment funds, pulling out of the sector for environmental, social, and governance (ESG) reasons. Behrens noted, “There was a period when the performance of some funds was under scrutiny, as investments made by private equity were held for longer than anticipated due to a stagnant IPO market.”
This change in investment landscape led to dissatisfaction among limited partners, particularly endowment funds, who were eager to recoup their investments. The combination of performance issues and ESG concerns led to a significant withdrawal from the energy sector.
Behrens anticipated that this shift would open opportunities for family offices to engage in lucrative oil and gas transactions in the United States. In 2022, Stephens successfully raised $90 million from a family office for traditional energy investments, and by 2023, had closed deals totaling $165 million.
Stephens, with a team of 17 professionals based in Dallas, has a long history of facilitating private equity investments for its clients, which include funding acquisitions and drilling operations. The Stephens Capital Partners family office, though operating independently from the banking team, has been making investments in the energy sector since the 1950s.
Behrens points out that the appeal for family offices lies in the historically low valuations of traditional energy assets, with US oil prices hovering around $70 per barrel. This environment results in favorable cash to cash flow multiples, a concept well-understood by these family investors.
Aside from Stephens’ clientele, notable oil and gas transactions have been completed in the latter part of 2023. For instance, Pears Partnership Capital, an advisor to the Pears family with a long history in property investment, acquired non-operated interests in the Delaware Basin’s oil and gas sector.
The interest in traditional energy is not limited to family offices. Ineos Energy, a segment of the conglomerate owning 25% of Manchester United, purchased a portion of Chesapeake Energy’s assets in the Eagle Ford Shale, Texas, for $1.4 billion.
Despite the global shift towards renewable energy sources, Behrens emphasizes that oil and gas will continue to play a crucial role in the energy landscape for decades to come. He notes a stagnation in oil rig counts, attributing it to underinvestment, which could signal a bullish outlook for commodity prices over the long term.
This cycle differs from historical patterns where an increase in commodity prices led to a rise in rig counts, followed by a crash in prices. The current discipline in the industry, marked by controlled cash flows and shareholder returns through distributions or dividends, hints at a more stable market.
Behrens highlights the valuation disparity between large and mid-cap exploration and production companies, which trade at three to five times cash flow, and S&P 500 companies, which trade at twice this rate. This valuation gap, according to Behrens, underscores the investment appeal in the energy sector, particularly at a time when cash flow multiples are at historic lows compared to a decade ago.
With a network of 350 family offices typically engaging in transactions ranging from $10 to $100 million, Stephens has become a conduit for private equity funds seeking introductions to potential family office investors, further illustrating the growing interest in traditional energy investments amidst a changing financial landscape.
