Energy private equity industry looks inward for options as asset buyer universe contracts

Provided by Mergermarket

Private equity sponsors invested in North American oil and gas are increasingly looking at PE-fueled exits and re-combinations as they struggle to find likely buyers for their portfolio companies, PE executives and advisers said.

Unlike during the downturn of 2014, commodity prices have not been the main challenge to exits, as WTI crude oil traded above USD 60 for most of 2018. Instead, institutional investors’ calls for capital discipline have removed public strategics as a significant buyer pool for upstream assets even as it has driven significant corporate consolidation.

Now PE firms are pursuing unconventional alternatives, such as selling to other energy PE sponsors, consolidating existing portfolio companies, or even raising new funds to buy up older investments.

Cash is king

Sales between PE sponsors has emerged as a major trend in recent months. In prior years, transactions between private equity sponsors were frowned upon, said Kayne Anderson Energy Funds Managing Partner Chuck Yates during a December panel discussion at the PrivCap Energy Game Change conference in Houston.

Such deals would have had stakeholders “screaming,” and essentially no assets exited through a sale to another PE firm, he said. Now, one-quarter of A&D transactions involve a private equity seller and buyer, he said.

Vinson & Elkins’ Garrett said that where PE-to-PE deals may have once carried a stigma, that concern is gone as long as the deals are funded with cash.

Brad Thielemann, managing director, EnCap Investments, noted that he sees the potential for a “considerable” number of PE to PE deals in the future.

When it comes to selling to public companies, however, one of the few types of acquisitions that their investors want to see are lower growth but cash flow producing holdings, said NGP Partner James Wallis. Public investors are willing to accept modest growth in return for good dividends, he said, and, of course, at a reasonable valuation.

In early November, NGP’s publicly traded special purpose acquisition vehicle (SPAC) Vantage Energy Acquisition [Nasdaq: VEAC] announced an agreement to acquire a large portfolio of such producing Bakken assets from QEP Resources [NYSE: QEP] for USD 1.725bn.

Keep it in the family

Private equity also is finding ways to manage through these challenging times by developing in-house solutions.

NGP is consolidating its portfolio companies. In late 2017 and early 2018, NGP-backed Camino Natural Resources merged with two other portfolio companies Rebellion Energy and 89 Energy to form a “multi-billion-dollar” scale upstream company focused on the MERGE/SCOOP plays in Oklahoma, according to a company presentation in August. The company will look to go public once the capital markets return, CEO Ward Polzin said during the presentation.

As part of that deal, NGP also acquired a majority share of Cardinal Midstream, backed by EnCap Flatrock, which served Camino, and renamed it Iron Horse Midstream, said Wallis.

James Mark Garrett, partner at Vinson & Elkins, noted that portfolio consolidation transactions are not without challenges. If the companies are held in different funds, there is a separate duty to each group of LPs to ensure a proper valuation is assigned. Additionally, the management teams themselves are often against such transactions.

Given the current conditions, private equity has to be “very patient,” said Will Franklin, managing director of Lime Rock. The PE sponsor in June extended its holding timeline for Midland-based CrownRock through raising a new acquisition fund, he said.

Lime Rock announced a USD 1.9bn acquisition fund to buy out the remaining assets of Lime Rock Partners IV, a 2006 vintage fund. HarbourVest committed USD 741m and is lead investor for the fund but, as a group, employees of Lime Rock are the largest investor, according to a company release. CrownRock holds more than 90,000 acres in the Midland Basin and produces more than 40,000 barrels of oil equivalent per day, the release showed.

by Mark Druskoff in Houston

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