Big four sponsors say they’re seeing little pain from lower oil prices

  • KKR, Carlyle, Blackstone and Apollo see opportunities with $80 oil
  • Prices stabilized after quick drop early in October
  • Energy investing thesis mostly intact at current prices

The big four sponsors all tackled questions from analysts about energy, a place of increasing investment as the U.S. boosts domestic oil and natural gas production to avoid imports.

Most said the drop wasn’t entirely unexpected given the historic volatility in the commodity space. Lower prices could actually make the energy sector more appealing for investments, some said.

Across the private equity industry, energy and natural resource funds have drawn about $20 billion in commitments thus far in 2014, according to fundraising totals compiled by Buyouts. About 13 percent of all the money raised by buyout funds so far in 2014 has gone toward energy, up from less than 10 percent for all of 2013.

Against this backdrop, oil prices dropped about $20 a barrel to the $80 level in early October and held there in recent weeks, partly due to concerns about oversupply.

“In general, lower energy costs and lower feedstock costs, for a lot of our companies, actually is helpful for (profit) margins,” Stephen Schwarzman, chairman and CEO of Blackstone Group, said on Oct 16. “Our long-term view of energy prices was below most of the price levels in the last two years…Our investments that we’ve made in energy will be quite successful if oil prices even stay at this level.”

Apollo Global Management co-founder Josh Harris said it’s unlikely that the price will stay this low over the next five years, the firm’s typical investment horizon.

“In energy, we always look at the long-term fundamentals, not the short-term market fluctuations,” he said on Oct 30. “So the move down in oil is not surprising to us.”

Bill Conway, co-CEO of Carlyle Group, said the drop in energy prices could provide consumers with billions more to spend on other things. “Consumer goods companies tend to do pretty good when energy prices are falling,” he said on Oct. 29.

As for energy producers, about 95 percent of the wells in the United States can still cover costs at $80 a barrel, he said.

Scott Nuttall, global head of capital and asset management for KKR, said the firm manages about $8.7 billion of capital in its energy and infrastructure business across its funds, balance sheet and separate accounts.

“While falling oil price can adversely impact some of our existing investments, we feel the firm’s overall oil exposure is limited compared to the available opportunities,” Nuttall said on Oct 23. “The capital needs within the energy complex are material, and if short-term commodity price swings create supply/demand imbalances, that is generally good for our business.”

Some private equity firms have nevertheless absorbed share price losses in energy companies in their portfolios.

Blackstone Group and Warburg Pincus, for example, own shares in Kosmos Energy, which saw its share price fall below $9 a share, its lowest point since it went public at $18 a share in 2011. Since then, the stock has risen to about $9.50. Apollo Global Management and Riverstone Holdings own shares of EP Energy, whose share price recently fell to below $15 after trading at more than $17 in September.

(Correction: In the attached file KKR saw its AUM grow 7 percent in the third quarter. The original version said AUM was flat.)