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A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide for wealthy investors and consumers. Register to receive future editions, straight to your inbox.
The war in Iran propelled oil price to more than 94 dollars per barrel, an increase of around 30% since the start of the conflict at the end of February. The rally has been a boon for the investment companies of ultra-rich families who have made opportunistic bets on oil in recent years.
Since the pandemic, private equity funds and other institutional investors have shied away from oil and gas, partly under pressure from environmentally conscious players. Family offices have stepped in to fill some of that void, investors and advisors told CNBC.
Although many family offices are environmentally conscious — a September survey by Citi Private Bank showing that more than half of respondents said they would be likely to make sustainable investments in the next five years — they are not subject to the same ESG mandates as private equity firms or endowments, which have faced pressure to divest from oil and gas.
“Family offices are contrarians. Many investors have left the sector for non-fundamental reasons, such as endowments, which led to student protests,” said Keith Behrens, head of energy and clean energy investment banking at Stephens. “Family offices saw this flight of capital, and it created some really good investment opportunities for them. They were able to come in and invest at pretty reasonable cash flow multiples.”
Family offices also have an advantage over private equity players because they typically hold their investments for longer periods, meaning they can withstand swings in oil prices and deal slowdowns, according to Jeff Peterson of Gillon Capital.
“We support teams looking to build businesses for the long term, because that’s where we really differentiate ourselves. A fund can only truly hold a business for the life of its fund,” he said. “We invest with generations in mind so we can analyze current cycles.”
Peterson has managed the investments of the descendants of oil magnate HL Hunt for 14 years. About five years ago, AG Hill Partners, one of the family’s personal investment firms, doubled down on oil and gas to take advantage of attractive valuations.
Industry multiples typically range between two and three times cash flow, according to Peterson, now chief investment officer of Gillon Capital, a family office spun out of AG Hill Partners a year ago.
Peterson said the family has taken the lead on major deals in the industry, such as forming a consortium of family offices and a few private equity funds for the $2 billion acquisition of natural gas producer PureWest Energy. The family is also a major investor in a minerals and royalties fund that has raised about $500 million in capital and has a substantial position in the Permian Basin, which is the most productive oil field in the United States, he said.
The sector is increasingly attracting interest from family offices unrelated to energy, according to Doug Prieto of Tailwater Capital. He leads upstream energy funds, which support oil and gas exploration and production, for a mid-market private equity firm. Prieto said the funds have raised about $500 million from family offices with no experience in energy and that last week he took on a commitment from a family office built from a fortune in options trading.
Family offices without energy expertise typically seek to diversify their portfolio with assets uncorrelated to stocks and bonds, Prieto said. Oil and gas are also attractive as a hedge against inflation, he added.
The Trump administration’s efforts to prioritize oil, gas and nuclear power over clean energy have given investors more confidence in the sector, according to Ellen Conley, an attorney and co-chair of Haynes Boone’s energy finance practice group.
Additionally, the potential for cash dividends appeals to family offices, she said.
“Family offices view these assets as real cash-generating assets rather than a speculative bet on commodities,” she said. “We’re dealing with real assets, especially in Texas, where you have repeatable cash flows and predictive models.”
Conley said investor interest in energy was already on the rise before the recent oil surge. But headlines about oil prices linked to the Iran war have sparked questions from family offices looking to invest, according to Vicki Odette, global chair of Haynes Boone’s investment management group.
However, investors who are new to the business can realistically only take advantage of the current price surge by hedging, Peterson said.
“For anyone starting a drilling program today, it’s not really about this calendar year’s production. It’s more about next year,” Peterson said.
Analysts generally expect the current rise to be temporary.
And while high prices are beneficial for existing investors, they make it harder to close deals, according to Behrens.
“If someone is selling a property, they will want to sell it for the highest price possible and get the closing as late as possible,” he said. “The buyer is going to say, ‘Hey, it’s great that oil is $115 a barrel, but three months ago it was $60.'”
Prieto added that it’s possible to have too much of a good thing. High oil prices for a prolonged period pose a risk of recession, he said.
“We like to see a robust U.S. economy. I think for us, $75 to $85 a barrel is definitely a good thing,” he said. “When you get more than $100, you start to have negative impacts that don’t benefit anyone.”