Hedge funds eye Asia energy opportunities

With the already low price of oil predicted to be subdued for some time, opportunities in the Asia energy sector have seen alternatives credit managers break new records in the size of the funds they are raising.
Hedge funds eye Asia energy opportunities

Low oil prices are proving to be a boon to hedge fund managers as well as Asian economies, according to developments in recent days.

Cheap oil is now likely to raise Japan’s GDP growth, while post-Fukushima uncertainty over its energy policy has given a boost to the distressed debt market in Asia.

And the ramifications are likely to continue - a leading oil expert predicted on Monday that the price of oil could fall to as low as $20 a barrel.

With Brent crude at around $56, the cheap price was cited by the Organisation for Economic Co-operation and Development when it raised its forecast for Japanese growth last week. It revised up its 2015 GDP growth estimate to 1%, from a 0.8% forecast last November.

But the flipside for Japan is that it has complicated the government’s energy plans. The urgency of restarting nuclear power generation in Japan was highlighted last Monday, when the country’s audit board raised its estimate for the cost of interest payments on state aid given to a beleaguered power firm.

State aid to Tokyo Electric Power Co (Tepco) has amounted to ¥4.5 trillion yen ($37.8 billion) since the Fukushima nuclear meltdown four years ago, in March 2011.

The audit board had assumed a resumption of Tepco’s Kashiwazaki-Kariwa nuclear plant in its latest estimate of the costs. This has not yet materialised. Without funds from operating nuclear power stations, Tepco’s revenues have been lower than expected. The continued closure of all 48 of Japan's operational nuclear power plants has raised doubts over the viability of any plans for the country’s long-term energy mix.

Uncertainty over the mix has provided opportunities in an otherwise muted distressed debt landscape in Asia. “There are only eight power companies in the whole country, not hundreds in each state like in the US,” said an executive at a $1 billion-plus Asia-based hedge fund. He said that the concentration of power at just eight companies left the country vulnerable and meant the sector needed to diversify its energy mix and 'normalise'.

Debt issued by utilities companies in Japan have been a big portion of distressed debt opportunities in Asia, he said.

“The energy and special sits opportunities are two of the opportunities that are extremely attractive in global investing right now within alternatives” observed US-based Clifford Chiu, senior advisor to Neuberger Berman.

Recent fundraisings bring together the two themes. Credit opportunities in the energy sector have seen alternatives credit managers raise new funds. Blackstone’s GSO Capital Partners is reported to be targeting $2.5-3 billion for its first energy fund. Blackstone raised $4.5 billion for its second PE energy fund in February, almost double the $2.4 billion the first fund – Blackstone Energy Partners I – raised back in 2012.

On March 20, private equity manager Carlyle Group raised $2.5 billion, the largest fundraising in its history for a first-time fund, for an international energy fund which will be entirely invested outside the US.

The growth in US shale production has underpinned the current low oil prices, and oil expert Dr Fereidun Fesharaki sees them remaining subdued for at least the next decade. “We will need to wait 15-20 years until we return to higher prices, if ever,” FACTS Global Energy (FGE) chairman Fesharaki told Credit Suisse’s Asian Investment Conference on Monday in Hong Kong.

Fesharaki sees downside pressure on prices this year. He said he believes that a US-Iran nuclear agreement will be reached by the end of March deadline. That would lead to a rapid ramp-up in Iranian oil production to pre-sanctions levels,  said Fesharaki, who is a member of the National Petroleum Council, which advises the US energy secretary.

He sees little prospect of Saudi Arabia cutting production any time soon. The country's production is currently close to an all-time high of around 10 million barrels of crude per day, according to data the Saudi oil minister Ali al-Naimi revealed last Sunday.

“You need to wait until the end of 2015 for Opec to do anything,” said Fesharaki. That is because the extent of any slowdown in the growth of US shale production will only be clear by then, he said. “Until there is a need for the Saudis to cut their own production, along with other people, we’re not going to get out of this environment,” he predicted.

And without Saudi Arabia acting as a swing producer, the market’s floor is the $20-25 cash cost of producing shale oil, said Fesharaki, because at prices above these levels US shale production will continue to grow.

It will take “two, three, four years – if at all” for Saudi Arabia to return to its role as the “policeman” of the oil market, said Fesharaki. Fesharaki sees a $5-10 drop in the price of oil by the end of June before the Brent benchmark reverts to $50-55 in the third and fourth quarters of this year.

Brent fell below $55 per barrel on Monday following al-Naimi's remarks the previous day that Saudi Arabia will not cut output without the cooperation of non-Opec producers.

The best case is for the price of oil to range between $50-80 over the next decade, said Fesharaki. “It’s more likely to range between $40-60 over the next ten years,” he said.

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