The View from NYC

Among these six New York-based investors, a good idea in just about any area of the energy industry has a chance of winning funding: oil and gas, conventional and unconventional, North American and abroad; E&P, oilfield-services, midstream and refining; and power generation.

What won't capture their attention today is the deepwater Gulf of Mexico. A few won't even touch the shallow Gulf right now; some will, but with trepidation and deep scrutiny. Renewables have lost their luster as government support of the sector has waned and wind, in particular, has taken it on the chin.

And, U.S. unconventional gas plays are interesting, but few have had a chance to bring a holding into the fold, as competition for these is dominated by foreign oil companies and current gas prices don't add up.

In all, they have more than $10 billion to deploy in energy and other industries, and one has another $14 billion at the ready upon committing the balance of its existing fund. Here's their view of the space, their investment strategies, and how a strong management team with a succinct business model and a record of execution can win favor.

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Where There's Fire

Among its E&P investments, newly formed energy private-equity firm White Deer Energy LP will be found onshore the U.S., and possibly in the shallow Gulf of Mexico; among its oilfield-services investments, there may be some international exposure.

Where it won't make headlines is in heated unconventional-resource plays—not while they're still hot. "We prefer to focus on areas that are less competitive and more attractively priced on a risk/return basis," says Tom Edelman, New York-based co-founder.

"If something is being written about in the press, we are not likely to be interested. Historically, a series of plays have been perceived as sexy. Their value eventually overshoots the mark."

Edelman founded Snyder Oil Corp. in 1981 and sold it to Devon Energy Corp., took the helm of Lomak Petroleum Inc. in 1988 and merged it with Range Resources Corp., and founded Patina Oil and & Gas Corp., now part of Noble Energy Inc.

Houston-based White Deer co-founder Ben Guill is a Princeton friend of Edelman's of 40 years and was president of energy private-equity firm First Reserve Corp., growing commitments from $812 million to nearly $8 billion. Previously, he led investment banking at oilfield-services-focused Simmons & Co. International.

White Deer partners include Jim Meneely, who oversaw acquisitions for Halliburton Co.; Jamie Saxton, who headed oilfield-services I-banking for Lehman Brothers and most recently for Bank of America; and James Bennett, who worked with Guill at First Reserve and was a partner at The Blackstone Group's GSO Capital Partners.

The firm's first fund was closed in June with $821.4 million of commitments from roughly 40 institutions and 50 high-net-worth individuals and families.

Edelman and Guill have committed a combined 12%, totaling some $100 million, and are tied with a major institutional fund as the largest investors. Partners and advisors have committed an additional $5 million.

The first fund was practically wrapped in August 2008 with strong interest from investors with whom Edelman or Guill had relationships, but virtually all were sidelined by financial-markets turmoil in September 2008 and ensuing months. After an extended period, investors began to commit.

"It was not nearly as much a 'club deal' as we expected," Edelman says. "A good number of friends and associates participated, but most of the investors were introduced to us by marketing agent Credit Suisse, which did a remarkable job in a terrible market."

Deployment to date is $60 million in publicly held, Oklahoma City-based PostRock Energy Corp., formed from the restructuring of gassy Cherokee Basin, Kansas, operator Quest Resource Corp., and $50 million in privately held, Houston-based Fiberspar Corp., which manufactures a patented, spoolable, plastic-and-fiberglass pipe that is used in lieu of steel in numerous oilfield applications.

For PostRock, it has $30 million set aside for bolt-on growth opportunities; for Fiberspar, $25 million. In each, it owns some 60% interest on a fully diluted basis. "To date, we have deployed about 15% of the fund's capital. As we ultimately expect to make 10 investments, that is roughly in line with expectations."

Among E&P opportunities, the White Deer team is oil and gas agnostic, as commodity markets have priced in the market risk of each. "The price of gas per Mcf is currently 1/20th the price of a barrel of oil. Historically, the average has been 1/8th to 1/10th. Consequently, projected revenues and asset-purchase prices reflect the far more challenging supply/demand picture for gas.

"In our view, the risks and returns of investing in oil versus gas are currently quite similar. We simply look for the highest risk-adjusted-return transactions."

Within the firm, Edelman generally leads the E&P effort, while Guill spearheads the service side. The portfolio will eventually consist of 40% to 45% exposure to E&P, a similar amount to oilfield services, and the balance to midstream assets that are of interest to the E&P holding.

Control or co-control of the portfolio company is also essential. "We are not passive investors. We want to work closely with management to strengthen operations and strategy as well as enhance the financial structure of the companies."

Consequently, investments that lean on White Deer partners' experience, expertise and relationships are particularly attractive. "We are looking to materially assist the managements of small and midsize companies in executing a growth strategy. For us, the key is to figure out how to help our companies expand their market position as they seek to develop a clear competitive advantage in their niche."

White Deer will likely be found where it isn't fashionable, he adds, and shale-gas plays, particularly the liquids-rich, are currently in vogue. "It's what investors and analysts want. Unfortunately, if you look back at similar trends, their premium value tends to eventually dissipate. Late-comers generally pay far too much for their positions."

Instead, White Deer looks to consolidate assets in secondary basins that aren't sexy, seeking to become the most efficient producer in that area and then consolidating less efficient neighbors. It's the tack Edelman deployed at Snyder, Range and Patina.

"It has been a fairly standard pattern, and it is what we hope to pursue at PostRock and in most of our E&P investments. It is simply easier to succeed at things you have already done."

On the oilfield-services side, investments will be far more management driven. "Throughout his career, Ben has been superb at selecting management teams and talented people to work with. He looks for those uniquely suited to grow and run larger business, both through internal investment and consolidation in their geographic and product niche.

"Just as importantly, he is someone managements are anxious to work with."

Besides chasing fire, Edelman says an error in energy investing is to lose focus on execution. "As very few people are geniuses at finding new oil and gas reserves, most of us must simply run our business more efficiently than our competitors. That focus gets a lot less attention than we think it deserves. It usually comes down to day-to-day blocking and tackling."

He is not surprised by financial markets' continued interest in energy through the past two years of reduced public-equity-market liquidity: unconventional resources have attracted their attention, while world monetary policies have backstopped some non-hard-asset adventure-seeking.

"Sophisticated investors frequently regard oil and gas as a natural inflation hedge. As inflation is almost inevitable with the Fed continuing to flood the market with liquidity, oil and gas, along with other real assets, have become unusually attractive.

"You invest in the area to obtain superior returns but, as a bonus, you own commodities that should protect you from inflation and currency devaluation."

A Rigid Strategy

It's structured as a hedge fund, but Vedanta Energy Fund doesn't work in shorts of individual stocks, derivatives, futures and options.

"I have learned over time that leverage never makes a bad investment good and it almost always makes a good investment bad," says New York-based fund co-founder Barry Sahgal. "That's why we base our model on using no derivatives, no options, no futures, no individual stock shorts—just lots of cash to simplify investing while reducing our risk and complexity."

Sahgal and fellow former sellside analyst Mark Bononi founded the fund to invest in their own stock recommendations. Sahgal has recently been chief strategist in the energy group for Gilford Securities Inc.; Bononi was an oil analyst with several large investment banks.

Using an investment-partnership type of mandate, Vedanta operates with a long-wait-time, private-equity-type mindset with a three- to five-year return horizon. But unlike private equity, it invests only in public companies.

"With private companies, valuation becomes a conundrum, and we want to remain within what is very transparent to our investors," Sahgal says. Vedanta also has a concentrated portfolio holding of no more than 20 names. "It keeps us acutely focused."

Currently, Vedanta has some $25 million under management, with cash balances of upwards to 25% in good times and 50% or more in distressed markets. "The best clarity during difficult times is to have meaningful cash balances."

Besides using only cash, Sahgal says much else has held true through the energy cycles. "In the 1980s, the '90s, the aughts—whatever period you want to pick—you had to go global for the best opportunities."

Past Vedanta investments have included Australia-based Arrow Energy Ltd., which built a portfolio of Queensland natural gas assets, and Geneva-based Addax Petroleum Corp., which discovered huge amounts of oily reserves offshore Nigeria and Gabon and in Kurdistan. Current investments include London- based Tullow Oil Plc, which is developing world-scale projects offshore Ghana and Uganda, and Calgary-based Niko Resources Ltd., an oil and gas producer in India with the largest deepwater acreage-holding in Indonesia.

"Over the past five years, we've invested in roughly 50 companies, of which eight have been bought out. We go to jurisdictions where most U.S. investors overlook opportunities, but where companies capitalize on reserve-growth potential through acquisition."

Each was picked for being a pure play with a concentration of assets that are easy to exploit, Sahgal says, and for having an experienced and credible management with an ability to translate the assets into profitable production.

Arrow, a small-cap when Vedanta invested in it and recently bought for $3.1 billion by Royal Dutch Shell and PetroChina Co. Ltd., was singled out because "we saw how the management was visualizing a very deliberate process of arbitraging stranded coalbed methane in Queensland into LNG exports earmarked for Asia." Meanwhile, Addax was bought in 2009 by China's Sinopec for $7.2 billion to gain access to ramping oil production.

The fund mostly sticks within energy's E&P window. "Resource exploration and appraisal provide the best value-creation propositions in the space. Technology companies, generally over time, will find their business models get commoditized rather quickly."

Within E&P, Sahgal prefers exploration to production. "Value creation is predominantly in the resource-discovery part of the cycle, not in the development portion. Many companies actually destroy shareholder value when it comes to development."

In North America, where Vedanta holds an interest in a Canadian in-situ oil-sands security, Sahgal prefers oil to natural gas stories. "Natural gas is much more of a continental commodity, with transportation and logistical bottlenecks that interfere with its valuation; oil is global and much more readily transportable. Its economics are more robust—from North America to South America, the Middle East and Asia. Wherever you go, there are very intriguing oil opportunities."

Specifically, he is down now on North American shale gas, saying its current economics are corrosive. "You generally need to have $6 pricing for gas shales to be economic in the U.S., and I just don't see how you can have that in the absence of robust demand or a cutback in activity to manage supply downwards.

"The economics of the gas industry as a whole are going to go through a pretty cathartic and heart-searching two to three years, and there's likely going to be a pretty cruel shakeout."

Vedanta isn't invested in the Gulf of Mexico, and never has been. "I don't want to say we will never invest in the Gulf of Mexico. It's just that we don't see how we can get capital efficiency and repeatability when there is such a rapid production-decline curve. It seems that it is a treadmill and, consequently, difficult to create a return on investment—if you get a return of investment, you're lucky."

Elsewhere offshore, the fund is eager to participate. "Certainly Nigeria has been a very rewarding place for us. Right now, one of our favorite positions geologically is Southeast Asia where there have been very substantial discoveries by majors offsetting acreage held by Niko Resources."

Vedanta's business plan might appear rigid, he adds. "Frankly, it has kept us on the straight and narrow and we have avoided the errors that invade people's minds when the going gets tough."

What are some possibilities that worry Sahgal? Whether Iraqi oil production really will be 10 million barrels a day in 10 years; whether China will decide to slow its growth, resulting in severe and rapid compression in energy prices; and if there will be industry fall-out due to overproduction of shale gas in the U.S. and, eventually, Europe.

He finds the right price for oil is between $60 and $90. A lower price upsets world political dynamics; a higher price upsets economics. "Anything over $90 probably destroys value for energy investors—service costs go through the roof, efficiencies come down, people start doing really dumb things, money starts flowing to the sector willy-nilly and irresponsible operators start coming back.

"We are in the zone right now, in the sweet spot."

To Oil, and Not to Gas

With a generalist private-equity investment mandate, CCMP Capital Advisors LLC has some $1.7 billion invested currently in industries ranging from consumer/retail and media to healthcare to energy, including in privately held Midcontinent- and Permian-focused E&P Chaparral Energy Inc.

Remaining to deploy is approximately $1.5 billion in its current fund, and energy both in North America and abroad is on its radar. With some caution—either due to valuations or fundamentals—the firm is reviewing deals in U.S. midstream, natural gas-weighted unconventional plays, and the Gulf of Mexico.

Capturing greater attention among the principals is North American onshore oil and potential investment in Europe-based energy firms that aim to build assets yet farther abroad. CCMP recently brought on Bob McGuire, who led deal making in large-cap energy companies out of London for JPMorgan Cazenove and has already surfaced a number of interesting energy opportunities. "The U.S. and Europe are our two core investment areas," says Chris Behrens, New York-based managing director of the energy portfolio.

Houston-based energy-group partner Karl Kurz, recently Anadarko Petroleum Corp.'s chief operating officer, sources deals, vets ideas, and aids in portfolio-company operations and strategy support. Behrens has been in private equity for more than 20 years and provides, with his team in New York, additional deal sourcing, and financial and capital-structure analysis.

"That's one of the ways I think we differentiate ourselves from other private-equity firms and from energy-specific PE firms. Karl gives us a good weapon to source and evaluate opportunities, but to also execute on creating value."

In Chaparral, CCMP picked up conventional oil assets with a $345-million investment in March. Chaparral had become mired in 2008 in a bid to go public and then the financial-markets crisis and freefall of oil prices, while in the midst of a merger with Edge Petroleum Corp. that eventually failed, with Edge filing Chapter 11.

"There are valid reasons why those transactions didn't work out. Both Mark Fischer (Chaparral chairman and chief executive) and we are on the same page with respect to growth. What he needed most was a capital provider to give him the resources to execute on his plan, taking the leverage down and creating liquidity," says Behrens.

Chaparral's revolver was recently paid down with a $300-million senior notes offering. With new commercial-borrowing capacity and cash on hand, its liquidity has improved to some $400 million. "We're real excited with that investment."

CCMP's interest in Chaparral is less than 50%. "We will do minority growth equity versus traditional, control buyouts. We are happy to look at either. In Chaparral, we are the largest shareholder, but we work closely with Mark and the other investors."

Its other energy holding is in Noble Environmental Power, a renewables company. "For the most part, we've been sellers in the past three or four years," he says of the broad energy portfolio. Past investments have been in Bill Barrett Corp., Carrizo Oil & Gas, Encore Acquisition Co., Latigo Petroleum, Northern Border Partners, Patina Oil & Gas and Vetco International.

"The small-cap E&P sector probably has, for us, the greatest proportion of investment ideas. However, we are looking at some select service players, companies that are well positioned in some of the growth plays, and we are selectively looking at some organic-growth midstream ideas."

At times, CCMP's portfolio is weighted as much as 20% to energy; at times, 10%. And, its energy holding may include vendors to the energy sector, such as Brand Energy & Infrastructure Services, which provides refinery and power-plant turn-around services.

"There have been times when the macro-environment forces you to be a net seller and times that present the opportunity to build up assets. We've had the benefit of being able to play cycles, unlike a dedicated energy-only fund—not that those funds don't do well, but we have found that being a generalist fund works well for us."

The current environment is a bit challenging for new private-equity investment in U.S. gas-centric assets, unconventional plays, acquisition-based midstream and the Gulf of Mexico, he says. In each, CCMP has yet to come upon an attractive deal lately, but it is aggressively looking.

"We were fortunate to find, in Chaparral, long-lived conventional assets at a reasonable price. We haven't found an entry opportunity in the unconventional shale plays. It just will take a bit of work to find them."

In unconventional plays, pushing aside private-equity investment are the large sums joint-venture partners are paying to enter and capture a portion of the reserves and revenues. "We are trying to find opportunities that are a bit off the radar, maybe smaller, such as backing management teams with specific expertise or angles in the unconventionals."

In the Gulf of Mexico, too much uncertainty about future valuation remains. "Prices for Gulf assets have been beaten down so much it forces you to look, but we're not ready to jump in until there is a little more regulatory and cost certainty.

"What ultimately may prove out is that you will need to be a substantial player to operate in the Gulf, so mid- and small-cap players just may not have the balance sheets and wherewithal. It's just a much bigger game when you have both the regulatory and cost exposure like what we're expecting in the Gulf."

In the midstream sector, asset-acquisition prices are generally fully valued. "Twelve to 18 months ago, pricing for midstream assets was a little more realistic. Now we've seen sellers asking for pretty steep multiples, so we're spending time on the midstream sector in the area of development or operational capital."

CCMP has also remained cautious in its deployment in renewables. "We're still in an environment of government uncertainty, and low electric-power prices make that trickier and less attractive for us right now. Also you have some sector-specific funds in renewables and clean energy that are more competitive for investments, given their fund mandate."

Refining to Power to E&P

The Blackstone Group is not currently invested in U.S. unconventional oil or gas plays, but that's not for a lack for looking. "We've been very close on a couple of shale deals, but the final terms didn't end up where we wanted," says David Foley, New York-based senior managing director, private equity.

"The foreign, strategic buyers have been pretty aggressive in terms of the price they have been willing to pay."

Although Blackstone has billions of dollars at the ready to deploy in industries globally, "we are patient, disciplined investors and we don't have any interest in trying to top a CNOOC or Reliance Industries on a simple, straightforward deal. We'll keep looking for the right combination of exceptional management, high-quality acreage and a fair price.

"At some time, some froth will come off the valuations and that would be a better entry point than right now."

Point of entry is a hallmark of the Blackstone investment strategy, as well as waiting for the cycle. "You can't do the same thing all the time, repeating the same things in the playbook. It works for a while and then it doesn't work."

In the merchant-power market, for example, it invested in the $3.74-billion acquisition of power-generator Texas Genco LLC in 2004 in a down market in that space. It was sold in 2005 to NRG Energy Inc. for $5.9 billion, generating a 6.9-time return on Blackstone's part.

"But we didn't continue to buy U.S. merchant-power assets. We recognized the cycle was peaking." U.S. merchant-power markets have since crashed due to excess capacity and low natural gas prices, providing Blackstone a potentially attractive re-entry point. In August, it announced plans to acquire the publicly held shares of Dynegy Inc. for $542 million (Editor's Note: Since the article was printed in the December issue, the deal failed to win shareholder approval.).

"We made money acquiring merchant-power assets before. We got in; we got out. Now, with the power markets being really disastrously bad, we're getting back in."

The petroleum refining industry is another highly cyclical business in which Blackstone has won returns for its investors. Its investment in Premcor Inc. that was taken public in 2002 and sold in 2005 to Valero Energy Corp. for $8 billion made Blackstone a 5.9-time return.

"We made tons of money on that deal, but it required the stomach to live through the down-cycle of refining in 1999 and again in 2003, and discipline in committing capital to acquire more refineries," Foley says.

Blackstone returned to the refining space in 2008, committing $668 million to back Tom O'Malley, the former Premcor chief executive, to form PBF Energy. Waiting to strike, as the refining-cycle downturn became progressively worse, it made its first purchase—approximately $1 billion for two East Coast refineries—earlier this year from Valero.

"We think the sector's near-term fundamentals and profit margins have become so bad that you can actually buy cheaply enough relative to replacement cost to make a good return, once growing petroleum demand from the emerging markets eventually brings demand back into balance with production capacity."

In the E&P space, Blackstone has invested more than $450 million in Kosmos Energy LLC, the 2004 start-up that has discovered more than 1 billion barrels of light, sweet oil offshore Ghana. First production is expected by year-end, and buyout bids for the Kosmos portfolio surfaced last year, including potential interest from the Ghanaian national oil company itself.

"We've had some differences of opinion with Ghana, but Kosmos continues to discover more oil, both within Ghana and in other African countries, so we are increasing the value of the business the longer we hold it. At some point in the future, we may choose to either do an IPO of Kosmos or sell assets within specific countries to fund the continued growth of the business and provide a return to our investors."

It has also invested C$150 million in Osum Oil Sands Corp., which has booked 2 billion barrels of in-situ recoverable reserves in the Cold Lake region in Canada. First production is expected in 2013.

"We try to participate in early-stage E&P opportunities, where there's still development risk or there's still exploration risk. We find there's more upside there for the incremental risk. With a little bit of money to put to work on exploration drilling, a great management team with the right technical skills, and a little bit of luck, you can actually, perhaps, find something big."

In the oil sands, breakeven costs are higher. "But there's actually no exploration risk. It's all about managing development risk and staying efficient to minimize your cost of production."

The firm has had interest from time to time in shallow Gulf of Mexico investments, but it isn't keen to invest in the deepwater Gulf right now. "The deepwater Gulf risk/return has fundamentally changed post-Macondo. You're going to need a lot more money. Look at what it cost BP—most other companies would have been bankrupted by that. I think that gave everyone a reality check."

Within unconventional U.S. gas plays, Blackstone is interested, but not in all of them. "Some of these shale plays haven't been around very long. The question is: What's the type curve going to be? How fast will production fall off? What is the total recoverable volume?"

He believes mistakes have been made already. "Time will tell who's right and who's wrong. Operators with outstanding, rigorous, technical skills and efficient field operations will tend to make the fewest mistakes."

Blackstone currently has some $4 billion left to deploy in its Fund 5, and its Fund 6 has more than $14 billion committed to begin investing when Fund 5 is fully deployed.

In E&P, its investment horizon is long term. "If you find something, you don't want to be held hostage if financial markets turn down in continuing to explore, appraise and develop your assets. We provide start-up capital and there are no artificial limits on growth capital.

"We are also a very experienced investor; we understand that there are cycles in energy. We won't tremble if oil prices drop or crack-spreads drop. They eventually come back. We understand that."

Doubles and Triples

Distressed-situation-based M&A is on its way, says Shawn Reynolds, New York-based co-portfolio manager of mutual- and insurance-fund provider Van Eck Global's hard-assets strategies. "I've been disappointed in how willing the investment community is to keep funding many of these E&Ps, frankly. The whole investment community needs to use much more scrutiny."

Van Eck, which has $25 billion of assets under management, currently has energy holdings primarily in E&P and some oilfield-services names, and coal; downstream, it's neutral, and it has a small position in alternative energy. "We hired an analyst three years ago to focus exclusively on alternatives. To his credit, he couldn't find a lot of value there. Some of the wind guys have been taking it on the chin. We haven't been there."

As for the U.S. E&P onshore, Reynolds likes Denver-based Cimarex Energy Co. "(Chairman, chief executive and president) Mick Merelli and (chief financial officer) Paul Korus are two of the stalwart guys in the industry. They're not flashy; they get the job done."

Reynolds is keen on Cimarex's work in applying the technology that has unlocked unconventional resources—horizontal drilling and multistage fracing—to the Granite Wash oil- and gas-liquids play, the Cana gas play, and the Bone Spring oil play in the Permian. He also appreciates its use of the unconventional measures in conventional gas formations on the Gulf Coast in the Yegua and Cook Mountain.

"People aren't giving them a lot of credit for drilling 40-million-cubic-foot-a-day-initial-production discoveries on the Gulf Coast because they're conventional."

broad, Reynolds seeks exploration-risk stories that are over-discounted and likes West Africa, particularly Nigeria. "People think Nigeria stinks. Yeah, well, Van Eck has done well investing in companies active in Nigeria." He's looking at doing it again: Afren Plc that has an international exploration strategy similar to that of Addax Petroleum, in which Reynolds led Van Eck's investment in the past and that was sold to China's Sinopec last year for $7.2 billion.

Colombia is a hot topic in the E&P investment community today, but Reynolds says it's oh-so-2009. "That's almost done now. Where you want to be is Peru, Chile. It's time to go back to parts of Argentina. I think, eventually, Ecuador and Bolivia are places you want to get to and maybe not purely in the upstream but on the service side."

Onshore Brazil may hold great possibilities too for small independents, he adds.

Van Eck also has portfolio holdings onshore China, in northern Europe, and, while it is not invested offshore Indonesia, it has been impressed by Niko Resources' success there. "Exploration exposure is out there. It's real, and it's fantastic; you just have to work it really hard."

As for U.S. natural gas, Reynolds doesn't see contrarian investment opportunity today. "It has been a contrarian opportunity the whole year, and if you've done it, you've kind of had your head handed to you. We've very near the bottom, so is it contrarian from here?"

The gassy names Van Eck does have in its portfolio, it will hang onto. "We're going to be very patient with these investments. We know there's value there at today's prices. But we're looking for (returns in the) doubles and triples, and we think we'll get it."

Within oilfield services, Van Eck invested in three Norwegian start-up, speculative drilling-rig builders, including Seadrill Ltd., starting in 2005. "The U.S. rig contractors ridiculed these guys, laughed at them, to no end." That piqued Reynold's curiosity. "We went over there and saw probably 12 or 15 of these entrepreneurs and invested in three of them. One was Seadrill."

After a couple of private-funding rounds, Seadrill went public and is now listed on the NYSE. "It's now paying out an 8% dividend. We stuck with it going on five years now."

Reynolds is certain some energy names can outperform, regardless of commodity price. "These people who tell you they can predict oil prices, they can't. The two biggest drivers of oil prices are wars and weather. I certainly don't have an edge on that.

"How do I overcome that intrinsic risk that I can't research away? It's in finding those companies that have an ability to deliver some sort of value—the assets, the capital structure, the management. They're going to take that disconnect in the market and get it realized in value."

In the next round of M&A, Reynolds expects to see supermajors and large-cap names that haven't been active buyers in the past few years in the ring.

Much money remains in the energy-investment market right now that shouldn't be, he adds. "A lot of people who have been financing this round, they made a lot of money in 2003-08, and they thought they knew what they were doing and that they were smart energy investors, but they were just riding a commodity-price curve."

Another curve resurfaced in 2009 as oil prices began to improve, growing to $80 a barrel. "So now they're thinking, 'Now I know how to invest. I'm smart enough. I know how to do it. I'm giving this guy money and this guy money.'"

But oil prices have stabilized; natural gas prices, in particular, have fallen. "Gas prices have now gotten to the point that it's ridiculous. There are a handful of companies that are profitable at this price, but there are a lot that aren't. Some guys are having a hard time figuring that out. Twelve months from now, they'll say, 'Gee. Maybe I shouldn't be ponying up all this money.'"

And the money will dry up, flushing out weak E&Ps into the portfolios of the strong.

Within the Van Eck portfolio, the effect of emerging markets is the most compelling investment driver right now, he concludes. "It's blasé, but I'm a huge believer in emerging-market demand. It's unbelievably strong and it's not going to go away.

"If you're in a depleting-asset industry, in which E&P is, it's getting harder and harder to keep up, but demand is not going away. It sounds like an old story, but it's just so powerful you can't ignore it."

More Easts

Within a matter of weeks this fall, private-equity firm Kohlberg Kravis Roberts & Co. announced investments in both conventional and unconventional resources onshore the U.S. "There is great reason to invest in unconventional resources, but we also believe conventional resources are very attractive," says Marc Lipschultz, New York-based global head of KKR's energy and infrastructure business.

"It's not as exciting. It has nothing like the same economic profile as the unconventionals, but it represents the preponderance of oil and gas production in North America today."

In the conventional-resource space, the firm's KKR Natural Resources, a partnership with ex-Vintage Petroleum Inc. managers' Premier Natural Resources LLC, bought gas-producing, Wilcox-formation assets in south­eastern Texas for $40 million.

"This is to focus on cost management and production optimization. It's not a play on applying unconventional technology to the formation—horizontal drilling, multistage fracs—but the way to optimize long-term production may be with deployment of new technology."

Within unconventional oil and gas, KKR has partnered with newly formed, privately held RPM Energy LLC, launched by former Jefferies & Co. executives Claire Farley and David Rockecharlie, to invest in small and midsize unconventional-resource operators.

In June, KKR signed on to commit up to $400 million in privately held, Houston-based Hilcorp Resources LLC's roughly 100,000 net acres in the Eagle Ford gas-liquids and oil windows.

All of these investments come on the heels of one of the quickest-realized, private-equity transactions in U.S. energy: Marcellus-focused East Resources Inc., in which KKR invested in 2009 and which was sold to Royal Dutch Shell this June for $4.7 billion. With the KKR funding, East derisked the northeastern Pennsylvania portion of its more than 650,000 net acres that cover Marcellus and Utica shales.

"It's a safe statement that we would like more Easts. We were very fortunate. It represents the results of marrying the right capital and support with a spectacular land position and an outstanding team of operators.

"We would love to have many Easts, and we try every day."

The firm estimates some $1 trillion will be needed to develop the "Big Six" existing unconventional plays. Lipschultz, with Houston-based partner John Bookout III, expects midstream-infrastructure development will be essential in this.

"Oil and gas aren't worth anything if you can't deliver it to someone who's going to use it. So infrastructure, from the Eagle Ford, Marcellus, Bakken and the other shales, is critical to the ultimate success and economics of any of these plays."

mong the shales, some are rising to the top. "The shales have been painted with a very broad brush. It's probably true that the shales are the future, but not all shales are created equal, and not all parts of a shale are the same. We're starting to see those variances emerge."

The firm is oil and gas agnostic. "It gets down to value. Natural gas is very out of favor today. Oil has a global market. It's easier to develop a picture of intermediate demand for oil, easier to get conviction about it in terms of medium-term price. We are much more interested in the right fields and the right value more than whether it has to be oil or gas."

And, its wait time is long. "Today, the public market clearly prefers liquids to gas. It is very focused on reserve replacement and production growth. We're not. We're clearly focused on the ability to generate an economic return on capital. Our success comes from the ability to focus on long-term economics and not preferences of the market at any given moment."

KKR is bullish on opportunities within the energy sector, period, both abroad and in the U.S., and particularly in E&P and midstream. "When economies grow, it's a mathematical certainty that they will need more energy. China, India and Brazil will grow, and I certainly hope the U.S. and Europe will grow. There are challenges in the industry right now as we go through this weak economic environment coupled with strong supply.

"We want to be the bridge for industry from the challenges of short-term weakness to a fairly bright long-term opportunity."

Most important in creating value is management, he concludes. "If you buy high-quality assets with highly capable operators, that will be a successful model. There will be ups and downs, but if you have quality assets and managers, you will do well.

"There really are a lot of opportunities that might not be visible at inception, but a good management team will identify them over time. That was part of the success of East.