HOUSTON-- There is no question that private equity is a huge source of capital, one that seems to be ever-replenishing itself for those seeking financial backing in the oil and gas business.
In fact, Murphy Markham, an EnCap Investments LP partner, said the availability of private equity today is somewhere near $30 billion. That alluring stack of cash has cranked up competition among private-equity providers, which in some ways has altered the profile of who wants to go prospecting.
“We’re seeing more entrants. Some buyout firms are coming in and even some generalists. But I think what they’re coming into are the existing asset plays,” said Markham, who added that several experienced management teams are returning for another run.
Markham, along with James Burgoyne, a managing director for GE Energy Financial Services, and Phillip Pace, the managing director of Chambers Energy Capital, gathered for a panel discussion about private equity at Hart Energy’s Energy Capital Conference last month.
Chambers Energy is primarily involved in $20 million to $200 million deals, Pace said. Even though Chambers is situated in the lower end of the market, Pace said competition among lenders of similar stature is sizzling.
“Energy markets have been overbanked since the dawn of time. But it’s always competitive out there. The only difference between now and 2006 is that there are not 50 hedge funds providing private equity,” he said.
Burgoyne also noted the competitiveness trend, and he acknowledged that private-equity fund managers have a lot of money to lend. Yet, he warned, the deal landscape doesn’t come without some frustrating twists.
“The thing we’ve struggled with the most is that it’s been hard during the past couple of years to get access to really good properties,” he said.
While oil- and gas-producing properties are high on GE’s preferred list, so is partnering with smaller, private companies that may not have access to public equity markets or might want to stay private. “We can provide acquisition and monetization equity capital, as well as drilling capital,” Burgoyne said. “We tend to be more PDP [proved developed producing]-heavy and PDP-focused because we’re looking for assets that can be hedged, as opposed to just outright drilling assets.”
GE is interested in financing both oil and gas projects, Burgoyne said. “The one sector we’re not spending a lot of time on is offshore. We have found that to be a lot more volatile.”
Pace said Chambers tends to favor debt structures, “although we’ll do equity as well.” The company prefers to partner with single-basin players. “We are rate of return-focused and somewhat agnostic about whether it’s oil or natural gas,” he added.
“Our portfolio has more oil today than probably I wish it did. We’re a little different than some, in that we’ll do some downstream deals and oilfield service deals because there are opportunities across the energy landscape and not just in E&P [exploration and production].”
Markham said the company is agnostic on oil and gas prices. “We’re really just focusing on the most economically advantaged plays. Today, those are primarily oil- and liquids-rich gas plays, he said.
Markham also said portfolio companies have two paths to choose: acquire-and-exploit or lease-and-drill. Early on in EnCap’s history, he said the company’s strategy was acquire-and-exploit. “At one time it was 80% acquire-and-exploit. Today it’s 80% lease-and-drill.”
In deciding who will get private-equity dollars, EnCap puts emphasis on management teams. GE and Chambers, however, are more focused on assets.
“Most of who we are backing are startup management teams that really do not have any assets,” Markham said. Yet, he added, a management team needs to have a successful record. Markham said he likes doing business with repeat teams, particularly “teams we invested in before and have made money with.”
The successful management team will have a clear business strategy, and it will be able to clearly articulate how it can manage risk, he added. “We spend a lot of time talking about how to build a business, and we [and the management team] become like-minded. We back the team, provide them capital, and they are the ones who go out and find the opportunity.”
While Pace doesn’t dismiss the importance of selecting an appropriate management team, he said that his company is mostly interested in projects with attractive returns. “We tend to start from the asset and work from there.”
Burgoyne has a like-minded opinion. “We typically work with companies that already have operations, as opposed to a pure management team."
The groups that GE works with, he said, have strong local knowledge, operations know-how and production experience. “We like for them to invest something alongside us.We’ve certainly found over the years that the key differentiator is management expertise and operating expertise in a specific region. If you look back at the deals that didn’t work as well as you wanted, inevitably it was a group that didn’t have as deep of knowledge about a certain basin or certain region.”