Research

Erik Bethel, Managing Director, Darby Private Equity

Over the past several months, no news has garnered more attention than the spirited decline in the price of oil and its effects on trade, markets and politics. Naturally, oil’s tumble has affected the markets in which Darby operates, as well as our private equity pipeline. There are winners and losers in a world of lower oil prices, and emerging markets are not immune from these challenges.

The dramatic oil price changes represent an enormous wealth transfer. Global oil production amounts to roughly 90 million barrels/day. At US$100/barrel, the sector’s market size is around US$3.6 trillion annually. However, oil priced at US$50/barrel results in a meaningful drop of US$1.6 trillion. The principal beneficiaries of this wealth transfer are not difficult to spot; they are the net importers of oil. China, the world’s second largest net importer of oil, is a clear winner. With 5.6 million barrels/day of net imports, China stands to save more than US$100 billion per year, equal to 1.1% of nominal GDP. In an economy that is being restructured to become more consumption-driven, cheaper oil should go a long way to ease this transition and support the government’s efforts to maintain stable growth. Similar to China, India depends heavily on imported crude oil, with net imports of nearly 2.5 million barrels/day. At US$50/barrel (versus US$100), India saves more than US$45 billion per year – a whopping 2.3% of nominal GDP.

Other notable net importers in Darby’s markets include South Korea, Thailand, Indonesia, Brazil and Turkey. Imports and exports aside, countries heavily dependent on agriculture, like India, Brazil and Turkey stand to gain, as agriculture is more energy dependent than manufacturing. For commodity exporters like Brazil, low oil prices also shave meaningful costs from shipping the country’s bulk exports such as iron ore, cattle and soybeans.

Weaker currencies in many of the emerging markets mitigate some of the benefits of lower oil prices, which are U.S. dollar-denominated, but the net positives are very strong, and we believe that lower energy prices will stimulate growth in many markets so long as oil prices remain low.

Certain countries are more reliant on oil exports, such as Colombia and Mexico. In Mexico, oil accounts for roughly 40% of Mexican government income, and sustained lower oil prices will be monitored closely to understand the economic impact of cheap oil on the economy. In the short term, lower oil prices seem not to have stymied investor appetite in the initial phases of bidding rounds for exploratory oil blocks in the shallow waters of the Gulf of Mexico in the newly opened Mexican energy market because these blocks can still produce oil at a relatively low cost. In Colombia, the country has roughly six years of reserves left. Many of the country’s important fields are in the Llanos Basin, an area characterized by relatively small reservoirs, high decline rates, and by extension, a constant need to drill new wells. In a low oil price environment, capital for new exploratory wells could dry up. Given lowered revenues in the oil and gas sector, more capital is required. As a result, Darby has seen its pipeline of transactions growing as private equity financing could fill the funding gap.

 

Read More  Views from the Field on Assessing the Impact of Declining Oil Prices on Emerging Markets Private Equity, including:

The LP View
Richard Rincon, Investment Officer, EM PE, UTIMCO

The Global View
Erik Bethel, Managing Director, Darby Private Equity

The View from Russia
Mike Calvey, Founder and Senior Partner, Baring Vostok Capital Partners

The View from Southeast Asia
Andrew Affleck, Managing Partner, Armstrong Asset Management

The View from Nigeria
Cyril Odu, Executive Partner and Head of Energy, African Capital Alliance

Two Views from MENA
Amjad Ahmad, Chief Executive Officer, NBK Capital Partners, and Nabil Triki, Co-Head of Private Equity, Swicorp