Exclusive: ICG mulls ‘infra-like’ oil and gas strategy

The UK firm is looking for co-investment partners with an infrastructure background to target derisked production assets in Australia and New Zealand.

London-listed asset manager Intermediate Capital Group is exploring a niche strategy for mature oil and gas assets which it classifies as “infrastructure”.

The firm has backed Sydney-based Questus Energy, founded by a team of oil and gas professionals, to build and implement the energy strategy as part of its plan to expand into real assets.

The Australian company will look to acquire conventional mid- to late-life oil and gas fields to optimise their operations and minimise their exposure to commodity prices through hedging, Simon Daniel, chief executive of Questus, explained to Infrastructure Investor.

“Through aggressive hedging on the commodity prices, plus high levels of cashflow, equity is typically paid back in the first five years of investment,” said Daniel. “As the assets deplete, it means that exits will become less impactful on the overall returns of the investment, thereby reducing exposure to market risks that are typical for private equity.”

In addition to hedging, uncertainty will be mitigated through securing long-term fixed-price contracts for other products such as gas, while the assets themselves present no exploration risks. “In some sense, the risks associated with this niche strategy are similar to infrastructure,” he said, adding that these oil and gas assets sit at the low-risk end of the upstream spectrum and are therefore considered less interesting to typical upstream investors.

Daniel admits that such investments will be shorter-term in nature, compared with traditional infrastructure assets such as ports and roads which investors usually hold for decades before returning their initial investment – typically taking 10 to 13 years.

The strategy will target IRRs of between the high teens and low twenties, Daniel said, with Australian assets deserving a premium because they are typically trading for the first time, in contrast to more mature markets such as onshore US and the North Sea.

ICG has committed balance-sheet capital to acquire seed assets for the strategy in Australia and New Zealand. The firm expects about $5.5 billion of these mature assets to come up for sale in these markets in the next six months as major oil companies, local utilities and investors are looking to exit their investments in oil and gas fields.

While the team is seeking to enlist co-investors among core-plus and value-add infrastructure groups and investors with oil and gas exposure, the strategy also resonates with a broad range of investors from local authorities in the UK to larger US pension funds who understand the benefits of real asset investments generating yields and high returns. Questus looks to eventually launch a fund for the strategy after demonstrating a track record as a manager in the coming months, Daniel said.

ICG managed $23.8 billion of assets at the end of 2016, with investments spanning private debt and equity across the capital structure.