Consolidation has been good to KKR. The New York-based investment firm has made two investments in privately held shale-focused companies, and exited the deals merely a year later with sizeable returns.

First, KKR partnered with East Resources in the Marcellus shale with an approximate investment of $330 million for a 35% interest. The duo exited 11 months later to Royal Dutch Shell for $4.7 billion. Subsequently, KKR invested $400 million for a 40% interest in a carve-out entity with Hilcorp Energy Co. in the Eagle Ford shale. Again, a year later this past June, the combo sold to another integrated oil company, Marathon Oil Corp., for $3.5 billion.

“The shale plays, once derisked, require meaningful capital to develop, both to drill and complete the wells, and with respect to the gathering and processing infrastructure,” says Jonathan Smidt, a senior member of Kohlberg Kravis Roberts & Co.’s Energy and Infrastructure team. “There’s a huge amount of capital needed to do that.”

As much as $1 trillion to fully develop the shale resources has been estimated by various industry experts, he noted. “It’s hugely capital intensive. Therefore, companies that have shale acreage today need meaningful capital to help them develop their positions. We’re making investments to provide capital to grow those businesses.”

But in contrast to the quick exits in its first two investments, Smidt insists, “We’re patient investors. We don’t have a need for a liquidity event or an exit in the near term.” He says the company generally targets a five-year-plus holding period, but “circumstances presented where there was an opportunity to exit KKR’s investments in East and Hilcorp Resources sooner than expected.”

Separate from its larger private equity fund, the company has also raised $1.5 billion in capital for its KKR Natural Resources fund, which actually takes ownership of reserves with high PDP (proved developing producing) components.

“We don’t consider that traditional private equity, since they are lower risk” says Smidt. “We’re looking to acquire direct interests in oil and gas properties. Our goal is to operate the properties and produce them out over their life.”

The company has partnered with Premier Natural Resources, an experienced E&P operating team headed by Charlie Stephenson and Chris Jacobsen, to operate the properties while participating in the profits.

The investment strategy targets either conventional assets that have become noncore for the operator, or older shale positions with few drilling locations remaining. It has acquired two positions in the Barnett shale, one from ConocoPhillips for an undisclosed amount, and another from Carrizo Oil & Gas for $104 million.

Coming at the shales from yet another angle, KKR has partnered with RPM Energy LLC, a start-up led by Claire Farley and David Rockecharlie that seeks to provide capital to operators with shale positions.

“This venture looks at investments that may be of a smaller size and scale than we would traditionally do directly out of our private-equity fund,” says Smidt. “RPM will hold direct interests in those assets. It’s quite flexible in the types of investments it will make.”

The company is also capitalizing the midstream build-out, where it has partnered with El Paso Corp. to develop infrastructure in the Marcellus, Eagle Ford and Altamont plays.

“There is a meaningful amount of capital needed. That’s what creates opportunity here.”

-"Steve Toon"