How Could Energy Prices Impact the Holdings of Alternatives?

Output freeze

Energy prices (USO) have seen some revival from their lows in the first quarter of 2016. However, commodities are still trading at a huge discount to the highs in 2014. OPEC (Organization of the Petroleum Exporting Countries) members have finalized a deal on oil output after a long battle on the output front. This has led to some recovery in oil prices. Brent crude oil is trading above $50 per barrel and is expected to hover around $40–$60 per barrel. The market, however, seems to be skeptical about whether these OPEC countries will meet their oil production cuts.

Metal giants such as Anglo American and BHP Billiton (BHP) have also seen falling operations and capital spending due to weak commodity prices. However, the rebound in oil and metals in recent quarters has led to some recovery of valuations for alternatives. Fund managers are continuing to hold on to their investments and are expecting to see further recovery and coverage of investment losses.

How Could Energy Prices Impact the Holdings of Alternatives?

Alternatives have also deployed fresh capital in select segments of the energy sector. Among alternatives, Blackstone’s (BX) credit division reported a rise of 9% in revenues to $264 million on a year-over-year basis, mainly due to the rise in oil and other energy-related commodities. The division saw a 7% rise in income during the June quarter.

Sharp recoveries

Carlyle Group (CG) has seen a significant fall in investments in the energy space. However, in the June quarter, investments in its Natural Resources and Legacy Energy segments rose 11% and 3%, respectively. However, the company’s Global Market Strategies (or GMS) carry funds fell 2% in the quarter, reflecting investments at high valuations. The company saw negative performance fees in the first quarter of 2016 across its Natural Resources, Legacy Energy, and GMS segments.

KKR’s (KKR) major holdings, Samson Resources and Energy Future Holdings, are expected to see devaluations of $5 billion on low energy prices. Apollo Global Management (APO) also deploys funds in energy-related investments, especially in select distressed investments.

Next, let’s look at the credit divisions of alternatives and how there’s been some improvement in performance.