Shifting Sands - The future of the oil industry
A track record of sucess
Investments in oil and gas companies pose very particular challenges because of the complexity of the sector.
3i is one of very few private equity firms with a sector-focused team. “Our track record in Europe is unrivalled, having helped to build and realise value in many of the most successful independent oil and gas businesses in Europe’s oil services and E&P sub-sectors,” says Sword.
Since 2000, 3i has funded a distinguished list of high-growth oil and gas businesses, including companies such as: Wood Group, Venture Production, Revus, Petrofac,
and Vetco. What distinguishes 3i is its capability to invest throughout the business lifecycle, from start-ups such as CH4 Energy, through to growth capital deals such as Salamander and buyouts such as Vetco.
In 2002, 3i provided start-up capital to CH4 Energy, a UK-headquartered E&P company, and followed it with further funding and strategic support as CH4 developed its portfolio of infrastructure, exploration, development and production assets. 
In August 2006, CH4 was bought by Venture Production – which had been backed from start-up to IPO by 3i – for €224m. “We’re very proud of what the CH4 team has achieved with 3i’s help,” said Phil Kirk and Mark Routh, ex-joint managing directors of CH4.
“3i has been instrumental in developing CH4 from a start-up business into an E&P business with a diverse asset portfolio,” says 3i Investment Director, Colin Burnett. “The development of the Chiswick field is an example of how CH4’s focus has delivered results. From a standing start in January 2006, Chiswick will produce its first gas by the first quarter of 2007 – a North Sea record.”
The challenge for investors is to help create the next Petrofac or Vetco – a new generation of ambitious companies capable of taking advantage of changing market conditions. The industry is going through a period of change: the balance of power is shifting in favour of NOCs who control the majority of reserves; Western oil companies face a chronic shortage of skilled staff; reserves uncertainty; and the future of price clouds strategic decision making.
“We have to question how we grow our own business,” says Sword. “This is about continual evolution – constantly searching out new business models and finding ways
to deploy capital successfully to make market-leading returns.”
“In the same way that Petrofac has changed its business model and now has an investing arm – creating a new model between services and E&P – we need to think creatively about what we can do with our business model and available capital to come up with new models that are applicable to how the industry is changing.”
Global reach
Internationalisation is one aspect of that change. Fifty nine per cent of 3i’s current portfolio is held outside the UK and this will continue to increase, especially with growing investment activity in Asia.
“We are truly global, well established in Europe and the US and we continue to expand our Asian network through offices in Mumbai, Singapore, Hong Kong, Shanghai and Beijing. We cannot ignore the sheer scale of China. It’s going to be a huge market – the issue is timing, not whether there will be opportunities,” says Sword.
Recent investments in Asian E&P companies Pearl and Salamander are excellent examples of how 3i’s understanding of a region and itsculture combine with its sector
knowledge in a way that is unique in the private equity industry. “It has to be smart private equity,” says Sword.
“We have unparalleled experience of building independent, fast-growing businesses. We support and challenge existing strategies, bring our corporate finance skills to bear, implement best-practice governance, support and strengthen management teams and introduce them to people from our network. Funding is obviously crucial, but those are the skills that really make the difference. We can prove that the value we’re able to add is worth a lot of money.”
3i invested $40m in Petrofac in May 2002. During the investment 3i helped strengthen the board and management team. It also helped Petrofac to make two acquisitions and restructure its business to take advantage of new co-investment opportunities. The highly successful flotation in London in 2005 created an initial market capitalisation of $1.3bn and provided a clear example of the power of private equity expertise and capital working alongside a high quality team, led by Ayman Asfari.
An ambitious agenda
3i is broadening its remit and is now building its gas and power investing capabilities, in addition to its core services and E&P sub-sectors. “We think there is an opportunity for us to build a market-leading position quite quickly, as we did with E&P. We’re developing our strategy and our network, going about it in a similar way to how we approached E&P in the North Sea,” says 3i’s Colin Burnett.
“We’re making quite good progress in what is traditionally a complex area for private equity. There’s a high capital requirement for many projects, so we need to identify
opportunities in areas where we can provide more than just capital, where we can genuinely add value.”
Sword says 3i plans to grow its oil, gas and power portfolio, taking advantage of the firm’s international network to bring its expertise to new geographic markets and sub-sectors. It is an ambitious target, but he believes the climate is ideal for smart private equity: “This is a business that is absolutely capable of delivering both consistent investment levels and – more importantly – consistent returns throughout the cycle. Our track record of returns since 2000 proves this.The average annual return on all our oil
and gas investments has been 41%.”
With unrivalled market access, understanding and insight into the dynamics of companies and the sector – as well as a strategy of creating value by being active owners – 3i is
a committed and proven partner.