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Private Equity Firm Apollo’s Profits Plunge Because of Oil

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February 6, 2015

The drop in oil prices has caused problems for the energy sector and the private equity industry’s next oil victim was announced on Thursday, as Apollo Global Management released its profit results. The firm’s profit recorded a sharply lower profit in the final three months of 2014. Despite the news, the industry is not about to give up on the energy sector.

 

Apollo’s Announcement
Apollo announced its profit on Thursday, stating that its economic net income after taxes had fallen by 79% in the final quarter of the month. The firm’s net income after taxes stood at $93.8 million, which is 79% less compared to the previous year’s result. Reuters had previously predicted the firm’s profit to stand at 32 cents a share, but Apollo recorded a lower profit. On a per-share basis the firm only managed to provide a profit of 23 cents a share.

 

If you count the cash profits and the unrealised losses, the firm carried interest loss of $5 million at the end of 2014. This is remarkable if you compare the firm made a profit of $526.8 million during the same period in 2013.

 

All About Oil
According to the analysts, the main reason behind the fall was Apollo’s investments in the energy sector, which has seen its overall results decline in the recent months. The New York Times’ Dealbook pointed out the example of EP Energy, one of Apollo’s major holdings, which saw a 40% decline it its stock price during the final quarter. Apollo has a near 23% stake in the oil and gas company. Although these losses are not realised, it still affects the investment profit.

 

Focus Remains on the Energy Sector
Despite these difficult news and results by many private equity firms, the firms still count on the energy sector for future profits. Many of the big and medium-sized private equity firms are set to find troubled energy sector companies to invest in. The Canadian Venture Capital & Private Equity Association (CVCA) published its outlook on Thursday and it highlights a strong trust in the energy sector, especially a continued support in oil and gas companies. CVCA’s report said, “Almost two-thirds (61 per cent) of private equity members believe that depressed oil prices improve their business outlook for this year.”

 

Fees to Boost Profit
On top of this, Bloomberg noted on Thursday that private equity firms have also started using fees as a cushion against the declining oil prices. The report points out the example of Apollo and EP Energy Corp. The firm was able to counter the effects of a relatively modest initial public offering (IPO) with the fees and dividends it was able to reap before the listing.

 

Bulent Ozcan, an analyst with RBC Capital Markets, told Bloomberg that fees offer the firms transparency since “it’s predictable”. “It’s a very high-quality earnings stream,” Ozcan told Bloomberg and pointed out that deal profits can be much more dependable on markets and therefore provide unfavourable results. The coming days will most likely see other firms report similar news regarding the fourth quarter results. But it is unlikely the firms’ appetite for the energy sector will waver.

 

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