February 22, 2018
Interviewed by: Privcap
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PE Opportunity in the International Markets

Leonard Tao of Kerogen Capital discusses the firm’s investment strategy within the international markets.

Leonard Tao of Kerogen Capital discusses the firm’s investment strategy within the international markets.

PE Opportunity in the International Markets

Privcap: Why are the international markets attractive for a PE investor?

Leonard Tao, Kerogen Capital:

Overall, there’s two broad areas or categories, in terms of attractions. Firstly, it’s really the abundance of white space. There’s really a very large market, but still very underserved in terms of supply of capital.

Then, the second one is we like the low-cost conventional way to asset portfolios which are available. In terms of the abundance of white space, as you know, over 90% of the world’s proven reserves—80+% of production—resides in the national segment. Yet, since 2010, if you look at PE capital rates for energy, less than 10% is for that international segment.

Overall, I do think the story is very true. In terms of having a lot more demand for capital than there is supply. Firstly, public equity is clearly a source, but in the international segment, it’s just been very, very weak.

The second source, obviously, is private equity. So, what we see from a private equity standpoint is sort of an open field. And from that perspective it’s not so much debt leverage distress that you see in other markets, but actually the stress is more about companies that hold assets and are unable to fund their activities. They simply stop. They can’t fund value-adding activities to what may be very interesting asset bases. So, that’s really the opportunity for private equity to come in and unlock that lack of capital and help these companies develop their assets and add value.

What is Kerogen’s history in the space?

Tao: If you look at Kerogen’s history, we raised the Kerogen fund one in 2010 and ‘11, and I think we were one of the few players who are dedicated solely to the international segment. But, certainly, as we move forward in time, we’ve seen more players enter the market, including larger funds as well as smaller funds. And now, we have a small peer group assigned to develop or effectively emphasizing similar advantages of the international space. So, we certainly now have a small peer group that is focused internationally and I think that speaks to the attractiveness of the opportunities that more and more parties are looking to enter it.

How have the international markets evolved since Kerogen entered it?

We’re one of the very few handful of funds that dedicated solely to the international space. Now, certainly some of the bigger funds have invested internationally, but usually in context of a much bigger portfolio. Overall, that speaks to the attractiveness of the international segment and also provides good validation to the thesis in which we started, when we were effectively one of the first movers in the sector.

We like to see the sector succeed—we want to see the sector provide capital for growth companies and encourage more growth story successes. So, even though there are more players in the space today, from a competitive standpoint, it’s still far from being oversaturated or competitive.

Is it easier to raise capital or are LP’s coming around and proactively inquiring about international opportunities?

Tao: On the whole, yes. We’ve got two platforms, which raise co-invest on day one. One for the UK North Sea and one for Norwegian North Sea. There’s been very good dialogue with those LP’s who now are quite experienced and have looked at many different deals.

Are there opportunities like your investment in Hurricane that may not be obvious, direct or traditional?

Tao: Absolutely, even though North Sea is a mature basin in general, there are still many different opportunities and Hurricane is a very good example. Overall, there isn’t a secret source in terms of finding the new plays, but it comes down to two things: certainly that network and knowing all the right people are obviously key. The second point, which may be even more important, is having a technical understanding of the plays and the assets and having a historical perspective of which companies and which people did what to which asset. Sometimes it’s through that that you can piece a puzzle together and identify neglected areas, which, maybe with new expertise, with a new lens, you can have a newer play. And Hurricane is, in some ways, a good example of that.

Focusing on Hurricane, maybe a bit more in terms of how we source or transaction, clearly it’s by background a company that’s focused on fractured basin reservoirs. It’s a type of geology that’s been successfully developed in many different basins around the world, yet Hurricane is the first people to try to commercialize that in the UK North Sea context.

So, in terms of how we got to know them and how we identified this opportunity, the head of Kerogen’s technical team, Roy Kelly, had known the founder CEO of Hurricane for almost a decade. Roy himself also used to work at BP, so having that knowledge around that BP asset and the geology there was a useful context for what upside there may be in Hurricane’s play.

Then, thirdly, we knew some of non-exec directors on the Hurricane board, in particular Dr. David Jenkins, who used to be the Chief Geologist of BP and also Chief of Technology. So, he also, with a lot of background and experience around Clair, the BP operator asset, identified that these type of basement fractured [00:11:30] reservoirs could really hold potential of upside.

It’s really this sort of confluence of factors and personal connections that got us to the investment.

Can you speak about newer markets like your investment in Israel?

Tao: Kerogen partnered with a company called Energy in Oil & Gas and we effectively partnered to acquire and, going forth, to develop these offshore gas fields called Karish and Tanin. These are offshore Israel gas fields with a goal to supply gas to the domestic Israeli market. There’s been a number of huge, world-class discoveries that have been made and that’s really transformed the Israeli energy market. Israel is a newer market, from the oil and gas industry development standpoint. But, because of these major gas discoveries that have been made, it’s really transformed the market into Israel finally having an indigenous source of energy and also allowing them to move from coal to gas.

Can PE break easily break into international energy deals?

Tao: In terms of attraction for PE and the international sector, would be the low break-even cost of conventional biased asset portfolios available in today’s market. As you know, there are many low-cost production basins that reside in the international segment, so these are assets with full-cycle, break-even cost in the 20’s per barrel and low 30’s. So, we see good availability of these type of assets in the international space.

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