June 10, 2014
Interviewed by: David Snow
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PE Fights MLPs in Midstream Opportunity

There is a large opportunity for capital in the midstream energy sector, pitting private equity against listed master limited partnerships. Riverstone founders Pierre Lapeyre and David Leuschen tell Privcap about why PE is more able to take advantage of the funding and infrastructure needs than the MLPs, and how much the capital needs have changed.

There is a large opportunity for capital in the midstream energy sector, pitting private equity against listed master limited partnerships. Riverstone founders Pierre Lapeyre and David Leuschen tell Privcap about why PE is more able to take advantage of the funding and infrastructure needs than the MLPs, and how much the capital needs have changed.

PE Fights MLPs in Midstream Opportunity
With Riverstone Holdings Co-­‐founders Pierre Lapeyre and David Leuschen

David Snow, Privcap: You also invest in the midstream sector.Canyouwalkusthrough themoreexcitingopportunitiesthere?Thesearecompaniesand platformsthatservetypicallytheoilortheenergymovingfrom upstreamdowntotheultimateconsumer.

Pierre Lapeyre, Riverstone Holdings: You can think of it as everything between the actual wellhead and the gas station, for a lack of a better analogy. We have a four-­‐sector approach, so to speak, within Riverstone. Upstream E&P, as David mentioned, the midstream oil field service and power. 80% of what we do is in those first two; upstream and midstream are the two large opportunities that we identified back when we started Riverstone and that still exist today.

In a nutshell,  what’s going on in that sector of the business is dramatic shift from what it used to be five, six or seven years ago. You can’t talk about the midstream sector of our business without talking about a capital market vehicle called the MLP (the master limited partnership), a structure for holding midstream assets that is essentially a yield with growth vehicle that has tremendous capital market appeal. When we started Riverstone, it was a $40-­‐ billion market cap. Today, it’s bigger than the rate market, so it’s pushing$600or$700billion.

Hundreds of billions of dollars of capital is needed to build out that midstream infrastructure to get all the upstream resource that David mentioned to a place where we can all consume it. The issue is competition and that’s a very competitive part of the business today because of this cheap public capital that’s available. The business has moved from one of developing old brownfield opportunities to now, building new incremental capacity. That’s what the vast majority of our time is spent on.

Snow: You are in competition with MLP money.

Lapeyre: Absolutely. If you think of our published returns, we’d like to get 25% to 30% pretax rates of return on our capital. Looking

aggressively, the MLP has a 3% or 4% cost of capital to a high single-­‐digit cost of capital. They’re doing greenfield development as well as the old buy an old, tired, unfilled pipeline and retrofit it for a new service. They do both and they have a ravenous appetite for new projects. They compete very aggressively and they have big balance sheets because the typical MLP today can be a $10 to

$20 billion enterprise value plus entity, whereas five to seven years ago, that would be $7 billion.

Snow: How can private equity compete against MLP?

Lapeyre: One thing David always harps on, rightfully so, is relationship-­‐ driven access to proprietary opportunities. The other is having the management teams that can get things done quickly on budget, on cost, and very efficiently.

It’s very logical but as the MLPs or other larger industrial entities get bigger, the projects they need to move the needle on get much larger. They want $1-­‐, $2-­‐, $3-­‐billion opportunities. They’re not willing to focus their time and attention on a $250 to $500-­‐million opportunity and not everything comes in multibillion-­‐dollar sizes. We will tend to be more active and be more successful getting our returns focusing where others don’t or in sectors that the broader industry hasn’t paid attention to yet.

David Leuschen, Riverstone Holdings: Today, it’s a much more organic business where we are typically building pipe from a source of supply to a demand center and building pipe that we’ll ultimately sell to an MLP; we may well compete with an MLP to build that in some cases, but as Pierre said, as a child of the ‘60s, I always analogize this to the building of the interstate-­‐highway system. If you look at how the system was built to population centers in the ‘60s and ‘70s, today in our business, it’s as if everybody in San Francisco and L.A. moved to Nevada. We’ve got to build all new highways.

It’s exciting and it’s very organic because a lot of that Kinder Morgan, Magellan, Buckeye opportunity from yester-­‐year is really the province of the MLPs today.

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