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ESG a growing factor in valuation, lending for oil and gas asset deals


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ESG a growing factor in valuation, lending for oil and gas asset deals

Although the market for oil and gas assets is warming up, energy investment bankers say sellers need to reduce emissions from their wells and pipes to achieve quick sales at high prices. Like in real estate, operators need to clean up the house before the agents arrive.

"ESG is a huge part of our business now," NGP Energy Capital Management LLC principal Peter Ray told an audience of industry executives Sept. 29 in Dallas. "We've really tried to embrace [ESG, or environmental, social and governance goals] as a fund ... to make sure that we're executing on our portfolios' goals. We receive feedback from our [limited partners], and we're delivering businesses that have improved" emissions performance.

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Drillers backed by private equity have supplied bigger players in the market with new assets, but now they are competing with international oil companies and with large U.S. majors and independents, the bankers said. The U.S. majors are shedding assets to rationalize their portfolios, while the internationals, such as Royal Dutch Shell PLC, are unloading assets with higher carbon emissions profiles to meet regulatory and corporate goals in their home countries.

"The private equity markets changed," Ray said. "We were unable to sell our businesses to equity investors for cash."

Now public equity investors and financiers want "good assets," Ray said.

"We're in the business of buying and selling assets," Ray said. "We need to be able to sell this asset in the future — so we need to clean up the emissions profile."

Art Krasny, the managing director and head of oil and gas finance for Wells Fargo & Co., said lowered emissions improve the marketability of oil and gas assets, but that requires reliable emissions data and industry benchmarks that buyers and sellers can use to assess operations.

"If we can get a level playing field for how to measure emissions and environmental impact across oil and natural gas but also with solar ... I think the industry is going to do a lot more in 10 years than in the past," EnCap Investments LP partner Kyle Kafka said. "What is the data that can be measured and captured? How do you measure and capture it consistently across the board?"

"I think in a lot of cases, we're still learning and making sure that we have the right data," Ray said. "That's a big part of the problem, I think, the lack of concrete data across all businesses, across all the basins. ... We need to figure out the baseline and then figure out the right way to improve on it."

Emissions profiles are important not only to buyers but also, increasingly, to banks, who are now being judged by their lending habits, Selenite Energy Partners LLC Managing Partner and CFO Margaret Franks said. "It is going to be increasingly important for borrowers to be able to track emissions and to be able to point to a strong ESG track record."