Big Investors Reconsider Oil and Gas Upside as Supplies Remain Tight

Big investors are starting to get enthusiastic about energy.

For more than five years, endowments, pension funds and other so-called institutional investors have shunned the oil and gas industry because of huge losses and concerns about climate change.

Now, some investors are turning back as energy emerges as the stock market’s best performer — the S&P 500 Energy Sector Index is up 40% so far in 2022 — and Predictions that the world could face shortages in the coming years suggest continued gains in the short term for those willing to bet on fossil fuel producers.

Southern Methodist University is considering new investments in US oil and gas producers.


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Moment Editorial / Getty Images

The lack of new investment capital is one of the reasons that oil and gas supplies have not kept pace with soaring demand and the loss of output due to Russia’s invasion of Ukraine.

Short-term factors and a growing perception that new sources of supplies will be crucial, even as the world transitions to cleaner energy sources, has prompted some investors to reconsider their aversion. their for energy.

New money can boost production, although there are other factors limiting supply. And any increase in investment is likely to be modest, as some groups like university endowments or public pension funds continue to steer clear.

Last year, when Houston-based private equity firm Quantum Energy Partners met with large investors ahead of the launch of a potential new fund, they heard concerns that the transition to cleaner energy sources could be harmful. That means there will be very little need for new oil and gas development, Wil said. VanLoh, the founder of Quantum.

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After the Ukraine war began and European nations began to feel pressure to find new energy sources, Quantum began to receive calls from many of the same investors — who expressed their interested in oil and gas. The company recently started fundraising for a new fund with a target size of $5.6 billion. Quantum also plans to set up an energy credit fund amid growing investor interest.

“The difference in tone and receptivity since the Russian invasion is staggering — it’s a 180-degree shift within three months,” Mr. VanLoh said. “Last year, we had to convince people that the oil and gas business was going to be around in five to seven years.”

Southern Methodist University in Dallas is one of a number of schools to shun new deals in recent years. Like others, it lost money from investments made before the 2015 recession. Brad Demicco, SMU’s director of private markets, said the field was looking at new investments in US oil and gas producers, including new projects and likely to announce new investments in the coming months.

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The announced mergers of companies including Whiting Petroleum are seen by some investors as a sign of health.


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Elliott Woods for The Wall Street Journal

“For a long time, the industry has had crickets,” Mr. Demicco said. “Uncertainty around energy is mind-numbing and endowment and others have stepped back from energy, but there is renewed interest and investments coming in.”

The new money won’t lead to a production boom in the short term, suggesting prices could continue to rise for some time, as long as the US and Europe don’t slip into recession. Over time, however, new investments will boost oil and gas supplies, helping to lower prices, analysts say.

“The combination of high commodity prices and increased geopolitical relevance is forcing many institutional investors to rethink their aversion,” said Dan Pickering, founder of Pickering Energy Partners. for hydrocarbon investments,” said Dan Pickering, founder of Pickering Energy Partners. “The upside is too tempting to ignore, so they’re dipping their toes back in the water.”

A flurry of energy deals, including a March merger between rival shale drillers Oasis Petroleum Inc..

and Whiting Petroleum Corp.

, helped spark investor interest. Some investors say buyouts in the energy sector could be a sign of health, showing that executives have confidence in future prospects.

More hospitable capital markets could encourage energy companies to drill more oil and gas wells, analysts say. But factors stand in the way of any surge, such as the difficulty many companies face in finding workers and the rising costs of sand and mining equipment.

As Europe races to phase out Russian energy, US natural gas producers are struggling to meet rising demand and prices. Factors including extreme weather and equipment demand have created a bottleneck in the midst of the war in Ukraine. Illustration: Laura Kammermann and Sharon Shi

At the same time, it is difficult to determine how long investors will continue to bet on energy prices, which have been volatile lately. And if the US or European economies slow down, or go into recession, energy prices are likely to come under further pressure.

“There was a slight shift in investment appetite last month, with the fund going to be largely focused on investment,” said Tomas Ackerman, a partner at Carnelian Energy Capital, a Houston-based private equity firm. focused on traditional energy investments last month.

In marketing the fund, Carnelian was having trouble attracting new funding sources from universities, which were feeling pressure from students and others to avoid investing in oil and gas. But other investors who have shown an interest in the fund, including some of the major pension plans, do not feel the same pressure to avoid the industry and want to invest in companies that increase domestic energy production in a way that makes sense. environmental awareness.

“The importance of energy security and poverty is taking a more prominent place in the psyche of the people after Ukraine,” said Mr. Ackerman. “That said, new capital flows have yet to open up.”

According to research firm Two Rivers Analytics, shares of oil and gas companies, including producers and general oil companies, show one of the highest levels of new net shortfalls of all. sector, according to research firm Two Rivers Analytics, an indication that some investors believe there is too much recent enthusiasm regarding the industry.

However, the pessimism that enveloped the business in recent years has been lifted, which is likely to support energy producers.

“Last year was like pulling teeth for people to start a conversation with us,” said Sam Oh, who runs Mountain Capital Management LLC, an energy-focused private equity firm in Houston. “Starting around February, people started calling. Now we have one call per week. ”

Write to Gregory Zuckerman at Gregory.Zuckerman@wsj.com

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Edmund DeMarche

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