Energy prices (USO) saw a 45% rise in 2016 as OPEC (Organization of the Petroleum Exporting Countries) and Russia struggled through excess inventories and entered into an agreement for an output freeze.
Rising oil prices have boosted the valuations of upstream companies and the energy holdings of alternative asset managers. Brent crude oil is currently trading around $55 per barrel and is expected to hover around $50–$60 per barrel in 2017.
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Alternative fund managers are holding on to their investments and are expecting a reversal of unrealized losses. These companies have also infused fresh funds into select segments of the energy sector. Blackstone’s (BX) credit division benefited from a recovery in oil prices and reported a rise in revenue to $266 million in 3Q16, up 384% from the prior year’s quarter. The division’s economic net income rose to $130 million.
The Carlyle Group (CG) saw high unrealized losses in 2016 due to the steep fall in oil prices. The company has registered an 11%–12% rise in its natural resources holdings in the last couple of quarters. However, its legacy energy portfolio continues to see 1%–3% growth and negative net accrued performance fees.
This trend is expected to reverse in 4Q16 and 2017, mainly due to falling inventories and rising profits. US shale plays are adding rigs amid falling inventories from the Middle East, which could be beneficial for alternative funds with exposures in the United States.
KKR’s & Co.’s (KKR) energy portfolio formed 7% of its total investments on September 30, 2016, reflecting lower exposure. Apollo Global Management (APO) also invests in energy-related investments, mainly in certain distressed investments.
Next, let’s study alternative asset managers’ credit divisions.