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Those peddling their commodity trades on the public markets may be wringing their hands as the price of crude continues to decline, but private equity types are looking forward to what 2015 might have to offer their clients.
A panel of three private equity experts, each with experience throughout the oil and gas supply chain, said during a recent panel, “Private Equity’s Competitive Edge in Energy,” that unlike public companies, lower commodity prices could equate to opportunity for private investors.
Jason DeLorenzo, a managing partner at EnCap Investments LP, told an audience at PrivCap’s Energy Game Change 2014 conference that, “Being private, the way that we run our companies is different than you would see in a public context. The timeframe is different. Today’s environment is a perfect example of a timeframe in which we can operate our businesses and look for opportunities in a way where the public markets may be reacting to an environment that’s actually an opportunity-rich environment context where we don’t have to worry.”
It’s an opportunity for us to fund our companies, and take advantage of these opportunities because we have the capital and also for the companies to make longer-term decisions that look through the current environment.”
Carl Tricoli, a founder, managing partner and co-president of Denham Capital Management LP, noted that private equity firms typically have a more flat decision-making process that involves the management team and the investment professional, which allows those companies to act with more agility.
What’s more, those decisions are made outside the eye of the public—that of the analysts and the press, particularly.
“You can literally just make a decision based on what you think the spreadsheet says, and what you think about the long-term viability of the company,” he said. “The elephant in the room here is the current environment and the prices. I think to distinguish, there is a business model that looks at variations in commodity prices and tries to profit from that, and it’s called trading. It’s not actually the business that [we] are in.”
Tricoli said private equity is in business to create intrinsic value in these assets over a longer period of time.
“Our focus is on making sure we’re in low-cost assets, that we’re conservative with leverage, and that we have long life properties, so that we’re making investments that transcend the short-term movement in prices, and looking at the much longer term,” he explained.
Gary Reaves, managing director at First Reserve, explained that his group looks at investment opportunities as transformational capital.
“We look for opportunities where we’re either building businesses or fundamentally transforming businesses. That can be in the upstream space where we’re significantly de-risking a good position or spending significant development dollars once the position has been de-risked to move into mature production,” he said.
On the more midstream side of the business, Reaves noted a First Reserve investment in TPC Group, a specialty petrochemical group processing business. The company needed a cash infusion to bring a unit in need of refurbishing online.
“That project was transformational for the TPC Group business because it was going to increase cash flows by over 50%. Relative to TPC’s base business, the capital project was significant,” he said. “For us, it’s really about looking for opportunities for significant growth, transformational change to happen.”
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