Private Credit Energy Deals Surge as Banks Retreat due to Climate Risks

As banks shy away from fossil-fuel deals because of perceived climate risks, private credit managers have stepped in to plug the gap, taking down meaningfully more energy deals than in years past.

Blackstone is growing its AUM with a new focus on wealth management products

Private credit completed more than $9 billion in cumulative oil and gas financings for the 24 months through year-end 2023, up $450 million from the proceeding two years, according to a report by Preqin.

In Canada and the U.S., banks that used to service oil and gas borrowers have been retreating, leaving a financing hole that the private credit market has been filling. The shift is even more pronounced in Europe, where climate-based regulations are stricter than in the U.S.

Sydney, Australia-based Whitehaven Coal Ltd. recently attempted to secure a new $1.1 billion loan and received offers from 17 direct lenders and only one bank, per Bloomberg. The lack of competitive syndicated loan proposals often means borrowers pay a higher rate thanks to private credit financings that are typically more expensive.

“If banks continue to abandon these deals, private credit will step in,” one private credit manager said.

Private equity firms are also benefitting from the aversion to legacy energy assets. Investors have accelerated their purchases of upstream oil and gas assets from large producers, who are offloading their most carbon-intensive operations in an attempt to reduce their overall carbon footprint (and ease related public and regulatory pressures).

For oil and gas companies, divesting less productive assets allows them to claim reductions in their overall carbon footprint. It also allows private equity firms to continue operating these assets in the less regulated private markets, which are exempted from most disclosure requirements. It’s a growing trend that investors believe is still in its early innings.

In one such deal, Exxon Mobil sold approximately 5,000 less lucrative, non-core natural gas wells and related infrastructure in Arkansas to Flywheel Energy, a portfolio company of Kayne Anderson. In another deal, EIG Global Energy Partners spent $4.8 billion to buy a 25 percent stake in Spanish energy group Repsol’s oil and gas division.

In total, private equity acquired at least $25 billion in public markets energy assets in 2021 and 2022. KKR alone closed $14.5 billion in energy take-private transaction value.

Current industry expectation is for a gradual increase in the restrictiveness of climate regulations, which will likely lead to even more deals for private equity and private credit.

Bob Clair

Bob Clair is a reporter at Transacted covering private equity and investment banking. He has covered breaking M&A news for several years and is a general assignment freelance reporter for The New York Times, where he shared in a 2021 Pulitzer Prize win.