Energy Investment in the US: Seizing Opportunities in a Changing Landscape

Global energy markets are going through a period of significant change, but the US continues to dominate supply growth. The Energy Information Administration (EIA) forecasts that over the next five years, America will account for 70% of the increase in oil production globally and 75% of the expansion in the liquefied natural gas (LNG) trade.

With the Organization of the Petroleum Exporting Countries (OPEC) restricting production and the geopolitical tensions between the US and China, oil prices have rallied to a five month high since the beginning of 2019 to a WTI of $65.55 per barrel. Bolstered by strong economic growth in the US and the nation’s commitment to investing into energy and infrastructure projects, investors are optimistic about the thriving energy sector. Many general and limited partners are expanding their energy and infrastructure teams to profit from upstream oil opportunities; they are also rapidly diversifying their portfolios with renewable energy, midstream gas and power investments.

Due to the large amount of capital required to run a physical commodity trading business and its assets, a number of US commodity trading merchants are backed by private equity. In recent years, commodity trading markets have been volatile and traditional trading margins are shrinking as a result. New technologies, machine learning and automated trading have played a role in disrupting the markets. Recently, energy-related private equity funds have enjoyed improved performance as a consequence of rising oil prices, increased demand and the growing appetite of investors.

To take advantage of this, commodity traders are reassessing their strategies. Many commodity merchants that previously applied an asset light trading approach are once again investing in physical assets – this is because they can own, move around and generate a stronger return with something tangible. There is a wave of new opportunities for private equity investors to financially support commodity trading firms that are searching for a new angle of growth.

Throughout 2018 and the beginning of 2019, the US experienced a number of weather events that caused volatile movements across natural gas and power markets. Commodity traders generated strong profit and loss (PnL) returns as a consequence. In this year’s Annual Energy Outlook, the EIA reports that the natural gas share of the energy mix will continue to grow from 34% in 2018 to 39% in 2050 and the renewable share, including hydroelectricity, will increase from 18% in 2018 to 31% in 2050. This is driven mostly by growth in wind and solar power. Renewables growth is set to become a larger share of US electricity generation than nuclear and coal in less than a decade.

Because of these predictions, we have seen a surge of private equity investors looking to capitalize from niche natural gas and power trading strategies across the US. Elite commodity traders are leaving traditional trading merchants and banks to join specialist gas and power hedge funds backed by private equity investors. Alternatively, they are creating their own trading entities backed by a private equity investor.

The changing energy landscape is driving US private equity investors into pioneering growth markets. With ride hailing services on the rise and increased interest in energy conservation and sustainability, private equity investors are moving into innovative public private partnership (P3s) transportation projects – especially in fast growing regions – to offer more services between US cities.

As investors take notice of the shifting global energy market and the projected movement towards renewables across the next few decades, there is no better time for private equity firms to grow their energy and infrastructure teams; but to seize opportunities in the commodity trading markets, businesses must ensure that they have the right teams in place now to react to these changes.

References:

https://www.eia.gov/outlooks/aeo/