MOGA/IPAA Capital Markets Update Private Equity Overview May 18, 2006
Jan 15, 2016
MOGA/IPAACapital Markets UpdatePrivate Equity Overview
May 18, 2006
2 EnCap Investments L.P.
University of Texas – 2006 NCAA Champs
3 EnCap Investments L.P.
EnCap Investments L.P.
Privately negotiated equity capital utilized as an alternative to traditional financing sources
Primarily focused on corporate issuers (typically private)
Frequently structured as preferred or common stock or some combination thereof
Seeks an annual rate of return of 25% or greater Function of the relative risk profile of the Issuer
Three to five year investment cycle
Illiquid
Private Equity Overview
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EnCap Investments L.P.Risk Spectrum
Private Equity
6% - 8% Target IRR 25%+ 50%+
BankLoan
WildcatFunding
Engineering Risk Geological & Geophysical RiskPDPReserves
ProvedReserves
Exploration
Mezzanine
Bank Debt
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EnCap Investments L.P.
Acquisitions Used to facilitate growth in connection with a pending property or
corporate acquisition or a development opportunity
Recapitalizations Strategic “reloading” of the balance sheet to create dry powder for
future growth
Start-Ups Early stage companies seeking capital, advice, and contacts
When is Private Equity Used
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EnCap Investments L.P.
Private Equity is a form of risk capital that is consistently available to support the growth of independents regardless of market conditions
Diverse sources of private equity provide opportunities to find a capital partner with a similar strategy and risk profile
Flexibility in structuring an investment vs. inflexibility and fickleness of public equity and debt capital markets
Private equity providers remain hungry for deal flow
Private Equity Benefits
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EnCap Investments L.P.
Dramatic increase in institutional appetite in oil and gas
Pool of private equity for oil and gas has expanded significantly – more players, larger funds
However, traditional players have been cautious; pace of investment relatively slow
Most of the deals being done today are start-ups; therefore, substantially about people
Current Private Equity Trends and Observations
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EnCap Investments L.P.
First Reserve * (Houston; $1.5MM)
Quantum (Houston; $345MM)
Energy Trust Partners (Dallas; $300MM)
Yorktown * (NYC; $585MM)
Warburg Pincus * (NYC; $500MM)
GreenHill Capital * (NYC; $350MM)
EnCap Investments (Houston; $1.5B)
Avista Capital * (Houston; $750MM)
Natural Gas Partners (Dallas; $1.3B)
Kayne Anderson (Houston; $550MM)
Lime Rock Partners * (Houston; $525MM)
Riverstone Holdings * (NYC; $1.3B)
Active Private Equity Providers to the E&P Industry
* * Denotes large energy focused fund; amount listed is estimated portion designated for E&P
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Lots of “re-cycles” with existing management teams (on the heels of successful exits)
Trend toward larger up-front commitments, particularly with “re-cycles” and proven money-makers
All seeking opportunities to back established money-makers, but open-minded to “un-proven” teams with solid experience and good ideas
With abundance of capital and increased competition for investment opportunities, entry into business never been easier
Current Private Equity Trends and Observations
EnCap Investments L.P.
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EnCap Investments L.P.
Greater competition amongst private equity providers resulted in more favorable deal terms
Shift to more common rather than preferred
Still structured with APO promote
Somewhat lower return hurdles to trigger back-in
Bigger slice of the pie to management team if “hit a homerun”
Current Private Equity Trends and Observations
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EnCap Investments L.P.
Historically, preponderance of private equity invested in companies with acquire and exploit growth and value creation strategies
Shift to more drilling-oriented investments due to over-heated state of M&A market and ferocious competition from public E&P companies
Public E&P companies continue to be rewarded for growth
Can’t drill fast enough to replace, much less grow, reserves and production
Plus, rising F&D costs make acquisition economics more compelling
Large public E&P companies driving M&A market; virtually nothing below their radar screen
Current Private Equity Trends and Observations
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EnCap Investments L.P.
Private Equity14%
Public 81%
Private 5%
Acquirers of Private Equity Backed Companies
Public companies acquired 81% of the private equity-backed companies in the A&D market over the last two years, while private companies and private equity purchased the balance.
Buyer Number of Total
Category Transactions Volume ($MM)
Public 51 $16,019
Private Equity 9 1,545
Private Co. 3 160
Total 63 $17,724
Source: Richardson Barr & Co.
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EnCap Investments L.P.
New twist for private equity – opportunity for portfolio companies to go public
Valuations compelling versus cash sale
Seed capital currently able to sweep chips via sale of secondary shares
Plus, company has access to more aggressive form of capital
Continue to take advantage as long as window stays open
Arbitrage partially achieved historically through strategic sale to public company buyers
Current Private Equity Trends and Observations
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EnCap Investments L.P.Summary
Expanding pool of private equity capital
Shift from acquire and exploit strategy to resource play strategy
Multiple exit opportunities Most often through the sale to public E&P companies Shorter cycles
Significant returns for management and private equity providers
Opportunity for repeat management teams
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EnCap Investments L.P.
A leading provider of capital to the independent sector of the U.S. oil and gas industry since 1988
Focus on the upstream and midstream sectors of the oil and gas industry
Manage aggregate capital commitments of approximately $2.5 billion
Provide growth capital to companies with acquire and exploit and/or lower-risk drilling strategies. Avoid pure exploration risk.
Oil and gas industry is cyclical. Cyclicality creates opportunity. EnCap has invested across four or five distinct cycles.
EnCap Overview
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EnCap Investments L.P.
Partner with seasoned management teams with solid value creation strategies Acquire and exploit Lower-risk drilling Midstream
Invest $20 million to $100 million of equity alongside management
Work with management to build the company into a larger independent’s “strategic acquisition”
Exit when the opportunity presents itself
What We Do
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EnCap Investments L.P.
Backed 115 different companies/management teams helping them create value for themselves and our institutional investors
Generally have 20-30 portfolio companies at various stages of strategy execution
Geographically dispersed in traditional oil and gas provinces
Predominantly all North America, generally all US with the ability to invest up to 15% internationally
Who do we do business with?
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EnCap Investments L.P.
Demonstrate a proven ability to create value
Articulate their strategy in a way which makes you feel comfortable about their ability to manage risk
Technically proficient team that gives confidence in their ability to execute their strategy
Sufficient focus in their strategy to improve chances for success
Experienced in the key technologies utilized to successfully execute their strategy
Have an interest in developing a working relationship with their financial partner and in aligning all of our interests
What attributes in a management team do we look for?
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EnCap Investments L.P.
Terms can be negotiated but generally management can back into 20-25% interest in the Company out of the Private Equity partners’ profits in excess of performance hurdle
Lower performance hurdles equates to lower equity earn-in percentages
Higher performance hurdles equates to higher equity earn-in percentages
Example ($’s in millions)
How do you make money?
Management Investment $5Private Equity Capitalization $50Debt Outstanding at time of sale $50
Sales Proceeds to Management Proceeds to Private EquityProceeds Management ROI Private Equity ROI
$200 $30 6.0 x $120 2.4 x
$300 $62 12.4 x $188 3.8 x
$400 $95 19.0 x $255 5.1 x
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EnCap Investments L.P.
We end up with about 80% of our management teams signing up to establish a new company with us after a sale
40% of our current management teams are teams we have done business with successfully in the past
We continue to add teams at the rate of 6-8 per year
Our management teams averaged making $35MM per team on the 10 companies sold last year
Are we a good partner?
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EnCap Investments L.P.
Plantation Petroleum I Assisted the Company in the acquisition of a publicly held company EnCap invested $30 million in common and preferred stock The Company increased production, reduced costs, and later sold to Forest Oil
Company EnCap has since made two additional investments with the Plantation management
team
Laredo Energy I EnCap committed $20 million to this start-up entity with a focus on the Lobo Trend Initial strategy of acquire and exploit but struggled to make acquisitions in the
competitive environment Management and EnCap shifted Laredo to more of a drilling oriented company After the successful sale to Chesapeake, EnCap and Management have partnered an
additional three times in continuance of the drilling strategy
Portfolio Company Examples
EnCap Investments L.P.
Houston Office1100 Louisiana
Suite 3150Houston, Texas 77002
(713) 659-6100
Dallas Office3811 Turtle Creek Blvd
Suite 1080Dallas, Texas 75219
(214) 599-0800