June 10, 2014
Interviewed by: David Snow
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A Peek Into Energy Investment Styles

Panelists from ArcLight Capital Partners, Trilantic North America, and Pine Brook Partners tell Privcap about notable energy investments their firms have made.

Panelists from ArcLight Capital Partners, Trilantic North America, and Pine Brook Partners tell Privcap about notable energy investments their firms have made.

A Peek Into Energy Investment Styles

Opportunities and Risks for Private Equity in the Energy Sector

David Snow, Privcap:

We’re joined today by Glenn Jacobson of Trilantic Capital Partners, Andre Burba of Pine Brook, and Dan Revers of ArcLight Capital Partners. Gentlemen, welcome to Privcap. Thanks for being here.

All of you are energy investment experts. I’m very pleased to have you join Privcap today. The best way to learn about what’s happening on the ground in the energy investment opportunity in North America is to hear some stories from the three of you in the form of some recent investments you’ve made that exemplify your style of investing and what the considerations are for risk and reward. Let’s start with you, Andre. Can you think of an investment you’ve done that really would be illustrative of the way you invest?

Andre Burba, Pine Brook:

Sure. I can think of several. To capture our investment style in a sentence or two: first and foremost, we look for very talented management teams. That’s a common theme amongst all three of our firms. We try to marry a very talented management team with some aspect of our macro thinking. We spend a lot of time thinking about where the industry’s going and the implications of what we’re seeing in the business. So, when we find a management team that articulates the same philosophical view on where some aspect of the industry is going, that’s the bull’s eye for us.

Thinking about investments that quintessentially fit that investment philosophy, a couple come to mind. We had one company in Fund One that was an oilfield service company called Global Oilfield Services or GOS for short. In that business, we try to figure out what product in the oilfield-service sector will be increasingly in demand when this unconventional revolution takes off. We discovered through our E&P companies that companies were using a certain type of electrical submersible pump more and more often in these types of plays. So, through GOS, we decided to start a company focused solely on that product. Sure enough, it turns out the product was, and continues to be, in very high demand. We built a very successful business in three years and ultimately sold the company to Halliburton.

We very recently completed an investment in Canada that falls into the same format where we start thinking about the implications of the changes in the U.S. transportation landscape on Canadian heavy-oil business. What will Keystone XL, for example, do to Canadian heavy-oil prices? We concluded that, in the long term, those bottlenecks will be solved. So, we started looking for opportunities in that area where our kind of capital could make a difference. We found a management team that saw the macro opportunity the same way and had a very interesting micro opportunity to capture small-scale thermo projects in Saskatchewan. So, we put them in business with a $250-million line of equity.

Glenn Jacobson, Trilantic:

I’m curious on GOS, because we had a very similar strategy around an artificial lift in the unconventional-oil space and we spent some time focusing on what existing investment opportunities would be out there to buy an artificial lift company and grow it. We discovered it was a fairly concentrated space and most of the players were multibillion-dollar players, where a firm of our size investing out of a roughly $2-billion pot of capital was not going to be able to play in that space. It sounds like you guys managed to find a way to build something more from scratch. I’m curious. Was it designing a new product out of the box or did you buy a small asset and grow it? How did you manage to be successful there, because it’s a great thesis?

Burba: That’s a really interesting question and you just hit on what was the biggest question mark in that business plan: “Can we find an acquisition target?” We quickly discovered that there are two or three very small companies that could be candidates for a platform expansion. One of those companies was sitting inside an E&P company and it was effectively an artificial lift company that was dedicated to the E&P company. Our management team went out to try to extract that business, bought this orphan business out of an E&P company, and paid a relatively good price for it, but we saw the growth prospects being so explosive that we didn’t mind paying a full multiple for it.

Snow: Dan, what’s a recent deal your firm, ArcLight, has done that is a good example of how you invest?

Dan Revers, ArcLight:

One advantage we have of investing across the whole value chain is that you can get ahead of trends. We did that back in the early part of the last decade in renewable power with wind farms and geothermal power plants. We did our first shale-related deal in 2006 near Acoma Basin. And recently, we did the first-of-its-kind, privately owned floating production system deep in the Gulf of Mexico. We had gotten into the Gulf of Mexico by buying an orphan asset—the SONAT transportation system. A lot of people were moving their gas production onshore and nobody really cared about those assets. We were able to buy them dirt cheap. We saw an opportunity where you can get comparable assets in terms of their profitability for a fraction of the cost of what assets were going for onshore.

As we moved into SONAT, we connected with a lot of producers, the lead one being LLOG Exploration and Production, a prominent offshore production company, and 10 of their drilling partners in a play called Delta House, deep in the Mississippi Canyon. These folks are drilling a lot of very expensive wells down there and were looking for someone to provide the infrastructure to gather, process, and transport those hydrocarbons onshore to the processing facilities. This had never been done before.

So, our approach is very granular. We created from whole cloth a structure where we’re the majority owner of this independent piece of infrastructure.

Snow: Maybe you can share a story from your firm that’s a good example of how you invest.

Jacobson: Sure. I’ll share the story of TLP Energy because it’s the most recent roundtrip—an investment, a build-out, and a sell of one of our E&P firms. Generally, we’ll take an approach as we back management teams where we’ll back a team without assets (although that’s less of what we do). We like to back teams that have some base of assets to grow on. Maybe that’s something they’ve identified as initial acquisition or something they already own and have in hand, whether it’s a family owned E&P business—which we’re in discussions with one now—or an entrepreneurial team that TLP was. They had assembled a position in the Anadarko Basin. It was about 10,000 net acres of undeveloped leasehold and it had about 500 barrels per day of production. They had gotten as far as they could developing and growing that asset on their own and they needed additional institutional capital to take it to the next phase.

On top of just being able to provide that capital and give them the growth expansion opportunity, the way we structured the deal is emblematic of what we try to do at Trilantic, which is to create structural protection where we often have equity that is subordinated to us going in.

Immediately upon the start of the transaction, we had $50 million invested and we had effectively one-to-one equity protection with the subordination below us. We committed $250 million, funding a good portion of it. At the end, once we had funded $250 million, the $50 million of subordination was not that much protection, but we had significantly de-risked the business plan.

Throughout that, again, we set up a structure where we would have downside protection. Along the way, we brought in another private equity firm, which is something we do quite frequently. We brought in First Reserve to be partners with us to expand the equity facility. And, together with the management team and First Reserve, we grew this business over 15 months and wound up selling it to a strategic buyer.

Revers: How much resistance do you get to those kinds of structural improvements from the management teams you work with? Do they all have different viewpoints in terms of what they want and what the risk reward profile looks like?

Jacobson: If we were going to provide it as all cash up front or all common equity, I don’t think it would align incentives as well as we’d like. So, it just may not be a deal we want to do. Also, we’d be talking about a different price range from maybe $90 million. It enabled us to pay what I would call a full market price for these assets, whereas otherwise we look to buy things at a bit more of a discount. On the upside, that worked really well for the management team; on the downside, we got protection.  

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