The Society of Petroleum Engineers Private Equity Overview. E. Murphy Markham IV Managing Partner EnCap Investments L.P.

Transcription

1 The Society of Petroleum Engineers Private Equity Overview E. Murphy Markham IV Managing Partner EnCap Investments L.P. April 22, 2015

2 Table of Contents I. Overview of EnCap Investments, L.P. II. III. Private Equity Overview Building an O&G Company with Private Equity 2

3 Overview of EnCap Investments L.P.

4 EnCap Investments History Founded in 1988, EnCap is a leading provider of growth capital to the independent sector of the U.S. oil & gas industry Raised and managed aggregate capital commitments of over $27.5 billion across 19 funds from an investor base that consists of more than 300 institutional investors from over 15 countries Investment strategy revolves around providing growth capital to early stage companies led by management teams with proven track records of value creation Capital provider to 220 oil & gas companies over the last 26 years 164 investments monetized/substantially realized with average returns of 48.0% IRR and 2.4x ROI which significantly exceeded our target returns of 25% IRR and 2.0x ROI across multiple hydrocarbon price cycles 54 current upstream and midstream portfolio companies operating in the most economically advantaged basins across the U.S. 4

5 EnCap Investments Organizational Overview EnCap Investments - Upstream Oklahoma City EnCap Flatrock - Midstream Core funds started in nd business line started in 2008 Two offices Houston, Texas 19 Investment Staff 21 Administrative Staff 3 Investor Relations Staff Dallas, Texas 10 Investment Staff 3 Administrative Staff San Antonio Dallas Houston San Antonio, Texas 6 Investment Staff 3 Technical Staff 3 Administrative Staff Oklahoma City, Oklahoma 2 Investment Staff 1 Administrative Staff Houston, Texas 2 Investment Staff 5

6 EnCap Investments Strategic Focus Two dedicated reserves-based investment platforms: EnCap Energy Capital Funds 16 funds totaling over $21.5 billion in LP capital commitments that focus primarily on the upstream side of the oil & gas business EnCap Flatrock Midstream Funds 3 funds totaling approximately $6 billion in LP capital commitments specifically targeting opportunities in the midstream space Upstream Midstream Downstream Geological Initial Drilling Development Gathering Treating Intrastate Transportation Storage Intrastate Transportation Storage Leasing Activity Completion Optimization Compression Processing Intrastate Sales Refining Intrastate/ Interstate Sales LDC's EnCap Energy Capital / EnCap Flatrock Midstream Focus EnCap Upstream / EnCap Flatrock Midstream Focus 6

7 EnCap Investments Portfolio Companies EnCap currently has 54 portfolio companies operating in the most economically advantaged basins across the U.S. Williston International Rockies O I L & G A S, L. L. C. Mid Continent Appalachia West Texas P A R T N E R S III N. LA/E. Texas OAK VALLEY RESOURCES South Texas Gulf Coast/GOM OAK VALLEY RESOURCES 7

8 EnCap Investments LP Investors Pension Funds Trusts / Foundations University Endowments CalSTRS Howard Hughes Medical Inst. University of Texas (UTIMCO) Texas Teachers MacArthur Stanford New Mexico PERA Parkland Hospital Dartmouth Michigan State Texas Children s Hospital NYU Canadian Pension Plan MIT Insurance Companies Corporate Pensions Notre Dame Liberty Mutual 3M University of Virginia Lincoln National Life Abbott Labs University of Michigan Travelers NFL Pension Fund Sovereign Wealth Funds Nationwide Raymond James Northwestern Mutual Raytheon Family Offices 8

9 EnCap Investments Time-Tested Model EnCap Capital Strategic guidance Risk management Management Team Experience / Track record Assets / Opportunities Capital NEWCO Provide growth capital to proven oil & gas management teams Typically commit $200-$500 million; ability to upsize Alignment of interest with management teams EnCap is lead investor and maintains board control Growth Stage Build oil & gas companies, focusing on lower-risk projects predominantly in the U.S. Heavy EnCap influence on risk management, capital allocation, capital structure and hedging policies Capital funded as opportunities arise and hard value is created Build production base and upside opportunity set Mature Stage / Exit Position as strategic acquisition target Monetize during up-cycle and continue to build in down-cycle Exit proceeds split between EnCap and management based on value creation parameters Target over 2.0x ROI / 25% IRR Re-back management team Portfolio Company Life Cycle (3-5 Year Average Life) 9

10 Historical Oil Price Movements & EnCap Fund History EnCap has navigated through multiple O&G cycles since inception in 1988 WTI Non-Inflation Weighted ($/BbL) $150 $135 $120 $105 $90 $75 $60 $45 $30 $15 Mezz Reserve Fund I Fund I $59 $- $21 Jun-88 Dec-88 Jun-89 Legend EnCap Fund Inception Oil Price Decreases Greater Than 30% Iran & Iraq Increase Production with End of War 33% Decline Dec-89 Jun-90 Reserve Mezz Fund II Fund II & III Reserve Fund III $50 $16 $52 $29 Dec-90 Iraq Invades Kuwait; Kuwait Demands Increase in production ceiling; produces well above quota 56% Decline Jun-91 Dec-91 Jun-92 Dec-92 Jun-93 Dec-93 Jun-94 Dec-94 Fund II Fund I $115 $104 Fund III $480 Jun-95 Dec-95 Jun-96 Asian Financial Crisis 49% Decline Dec-96 Jun-97 Dec-97 Jun-98 Fund IV $528 Asian Demand Recovers After 1997 Crisis; OPEC 10% Quota Increase Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Demand Growth in Asian, Weaker Dollar, Production Stagnates and Saudi Spare Capacity Declines Hurricane Katrina & Rita Strategic Petroleum Reserve 9.8MMBbl Release 33% Decline 9/11, PDVSA Strike, Iraq War & Series of OPEC Cuts ~4.2MM Bbl Production Falls due to Four OPEC Quota Increases in % Decline Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Fund V $825 Dec-04 Jun-05 Fund VI $1,525 Dec-05 Jun-06 Dec-06 Global Financial Crisis 78% Decline Fund VII $2,551 Jun-07 Dec-07 EFM I $792 Jun-08 Dec-08 Fund VIII $3,608 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Fund IX $5,155 Strong Shale Non-OPEC Production, Short Term Demand Concerns, OPEC Pushes to Maintain Market Share TBD Decline Arab Spring; Civil War Disrupts Libyan Ouput EFM III $3,061 EFM II $1,786 Dec-12 Jun-13 Dec-13 Jun-14 Source: Goldman Sachs & Wall Street Research 10

11 Adaptability is Key to Success Throughout its history, EnCap and its portfolio companies have adapted to changing market dynamics by shifting strategies and allocating capital to the most economically attractive opportunities Adaptability to dynamic market environment over time creates value Fund IV (2001 Vintage) Fund V (2004 Vintage) Fund VI (2006 Vintage) Fund VII (2007 Vintage) Fund VIII (2010 Vintage) Fund IX (2013 Vintage) 34% 36% 38% 37% 23% 36% Oil/Liquids Gas 66% 64% 62% 63% 77% 64% Hz Drilling & Advanced Completion Techniques Conventional Drilling 82% 18% 36% 64% 27% 73% 16% 84% 10% 90% 11% 89% 22% 16% 18% 17% Acquire & Exploit Low-Risk Drilling 54% 46% 57% 43% 78% 84% 82% 83% Note: Charts are based on invested capital for realized and unrealized portfolio. Oil/Gas mix is based on proved reserve volumes and targeted acreage plays at a 20:1 MCF/BO ratio. Classification of individual deals within each fund as Horizontal/Vertical Drilling or Acquire & Exploit/Low Risk Drilling is based on where the majority of capital has been spent. Charts exclude midstream & royalty focused investments 11

12 EnCap Investments Focus on Economics EnCap plans to continue investing in the most economically advantaged basins across the U.S. WTI Breakeven Prices (1) Lower 48 Shale Plays STACK (1-mile lateral): Utica (Wet Gas): Marcellus (SW Liq. Rich): Eagle Ford (Liquids Rich): Wolfcamp (N. Midland): Eagle Ford (Oil): Cana (SCOOP Cond.): Utica (Cond.) Wolfcamp (S. Midland): $33.54 $36.01 $39.30 $51.64 $53.71 $53.84 $56.27 $63.04 $65.92 Current EnCap Focus Area (1) WTI Breakeven Prices to develop (10% IRR) ($/Bbl) at $3.60 gas; Source: Wall Street research, EnCap Investments and Jefferies 12

13 EnCap Investment Strategy/Philosophy Equal emphasis on capital preservation and value creation (more detail on next slide) Back management teams that have proven track records and possess like-minded approach to risk management Board control in large majority of investments Capital generally advanced in tranches as attractive opportunities are presented and portfolio company performs consistent with plan Proved reserve value substantially underpins invested capital Dual objective: Strive for returns commensurate with strategy and appetite for risk (2.0x ROI and 25% IRR target returns) Build long-term relationships with proven management teams 13

14 EnCap Investment Strategy/Philosophy (cont.) Capital preservation Board control in vast majority of situations; control our capital in all situations Limited use of leverage Incremental advancement of capital over time as portfolio companies demonstrate success and establish hard value underpinning our invested capital Prudent hedging of producing properties, especially in acquisition situations Value creation Back seasoned management teams that fit a well-established profile Strong technical and operational skills; demonstrable track record of value creation; well-defined business plan; aligned interests; common understanding of risk management Recognize viable acquisition/drilling opportunities and optimize allocation of capital to create value Create asset base with ultimate buyer in mind and recognize favorable timing for exit 14

15 Private Equity Overview

16 Private Equity Overview Privately negotiated equity capital utilized as an alternative to traditional financing sources Takes many different forms and is typically used in conjunction with: 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 Frequently structured as preferred or common stock or some combination thereof Seeks an annual return of 25% or greater Three to seven year investment cycle (illiquid) Control consistent with ownership 16

17 Risk Spectrum 5% - 8% Target IRR 25%+ 50%+ Bank Loan Bank Debt Wildcat Funding Mezzanine Private Equity PDP Reserves Engineering Risk Geological & Geophysical Risk Exploration 17

18 Sources of Private Capital Private Capital Pyramid $ Individual Commitments Institutional Aggregators $ Aggregate Capital Available Institutional Investors (Pensions, Endowments, Insurance Cos.) Individual Aggregators (Mutual Funds, Hedge Funds, Family Offices) Individual Investors (High Net Worth Angels ) Source: COSCO Capital Management LLC 18

19 Private Equity Benefits Investment structure provides flexibility and insulation from the fickleness of public equity and debt capital markets 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 Private equity providers remain hungry for deal flow Strong institutional demand for oil and gas private exposure 19

20 Unprecedented Private Equity Capital Focused on U.S. E&P Source: RBC Richardson Barr database. Note: Certain figures above may represent RBC estimates.

21 Acquisitions & Divestitures Play Major Role in Private Equity Source: RBC Richardson Barr proprietary database. Note: Certain figures above may represent RBC estimates. (1) Represents gross values (including debt and co-investors).

22 Private Equity Industry 2014 Rankings EnCap ranks #11 on list of total funds raised over the last five years among all private equity providers and recently closed Fund X at $6.5 billion which would move us up in the rankings Private Equity Capital Raised Over Last Five Years ($ in Billions) Rank Firm Headquarters Capital Raised 1 The Carlyle Group Washington DC $ Kohlberg Kravis Roberts New York $ The Blackstone Group New York $ Apollo Global Management New York $ TPG Fort Worth $ CVC Capital Partners London $ General Atlantic Greenwich $ Ares Management Los Angeles $ Clayton Dublier & Rice New York $ Advent International Boston $ EnCap Investments Houston $ Lone Star Funds Dallas $ Energy Capital Partners Short Hills $6.5 22

23 Current Market Trends Significant commodity price decline Oil down >50% in last six months Gas down ~35% in last six months Declining prices challenging drilling economics and causing rig count decline across U.S. Total U.S. rig count down ~1,000 in last six months Service costs beginning to come down in response to lower prices but will take time Operators renegotiating terms with shorter time spans and lower costs (up to ~30%) Public markets have sold off significantly Expect soft M&A market for 2015 currently wide bid/ask spread for assets After a record setting first nine months of 2014, equity and debt markets are now much tighter 23

24 Go Forward Opportunity Set Current market provides uncertainty but opportunity will exist through the cycle We will remain focused on backing the best management teams in the most economic areas Go-forward strategies must offer best value creation opportunities: Low risk drilling Well-positioned acquisitions and JVs Distressed assets Over the long term, technology and cost efficiencies will continue driving the opportunity set Could be opportunities to access quality leadership in the form of new teams Industry consolidation and/or financial handcuffs effectively removed Talent, adaptability of management teams will ultimately drive value 24

25 Economics Will Drive Investment Decisions Economics are more challenged today in many areas However, economics are influenced by more than just commodity price Service costs coming down (20 30%) varies by area but will reset the economics in each play Potential opportunity to pick up good leases Quality reserves with sound economics that will improve with lower costs Ability to negotiate improved lease terms due to less competition May not drill economic opportunities at $50/oil if not under any time pressure Top quartile areas are the least impacted by price reduction and first areas to regain activity (ie will continue to be the areas of interest in normalized environment) Will not bet on an increase in prices to make decisions AREA TYPE CURVE ECONOMICS IRRs IRRs IRRs $50/$3.00) - $50/$3.00) - $70/$4.00) - Primary Focus Area(s) 100% Capex 75% Capex 85% Capex Utica 10% 27% 55% Marcellus 10% 19% 52% Ft. Worth Basin 17% 38% 76% STACK 14% 37% 73% Midland Basin 8% 18% 34% CBP 8% 20% 43% Note: Type curves based on individual EnCap portfolio companies. Not representative of entire areas. 25

26 Building an O&G Company with Private Equity

27 How do you Make Money in this Business? About more than buying low and selling high Quality Assets Drilling success Reserve category shifting Premium for size Public/private market arbitrage Stars align Being someone s strategic acquisition Running room Captured sufficient land & drilling opportunities Repeatability of proven concept 27

28 What makes a Quality Asset? Hard to generalize, but Operated control your destiny High value/production per wellbore Long life Abundance of upside opportunities Multiple pay horizons, infill drilling, field extensions High margin Low transportation costs/differentials (infrastructure) High btu gas/sweet crude High net revenue interest (NRI) Bottom line: is someone else going to want to buy it from you? 28

29 Managing Risk is Key to Money Making Proposition Limit downside risk through: Prudent hedging of producing assets Prudent use of bank leverage Having excess capital available for company to access Asset and project diversification Monitor performance results Drilling look-backs Budget vs. actual Advance capital incrementally as proof of concept materializes and/or attractive opportunities present themselves 29

30 Managing Risk (cont.) Disciplined approach to hydrocarbon pricing Engineerable reserve value underpinning invested capital Structure/governance Substantial influence via governance, covenants In the event of underperformance, have the ability to step in and right the ship Sweep chips when the timing is right Don t ruin a good PUD by drilling it 30

31 Managing for an Exit As you approach timing for an exit Increasing production Maximizing offset locations/category shifting Identify as much upside as possible Some smaller bolt on acquisitions & asset rationalization Pay attention to capital markets; unique exit opportunities may present themselves However, typically sell to larger independents (serial acquirers) 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 31

32 When to Sell Monitor A&D market in the play for attractive exit opportunity: Exiting is more of an art form than science as timing is everything 32

33 E&P Food Chain Well Owners Private Operators Small Caps Mid Caps Large Independents Majors 33

34 What does PE look for in a Management Team? Honesty, integrity and forthrightness Strong technical and operational backgrounds Track record of value creation i.e. Proven Moneymakers Well-defined business plan with viable, creative value creation strategies consistent with experience Adaptability Shared view of risk management Receptive to partnership relationship Entrepreneurial mindset 34

35 What do Teams look for in a PE Provider? Economic Considerations: Terms Capital available (size of provider) Required management contribution (skin in the game) Relationship Considerations: Cultural fit Track record / reputation Understanding of the industry (seen both up and down cycles) How did they respond over the last 18 months? Source of deal flow 35

36 How do Management Teams Make Money? EnCap generally contributes 95%+ of equity capital Multi-tiered back-in arrangement positions management to earn a blended ~20%+ of total equity proceeds Capital structure incorporates senior bank debt in addition to private equity Since 2008, EnCap has sold 42 companies resulting in over $4.0 billion of distributed wealth to our management teams 36

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38 E. Murphy Markham IV Managing Partner EnCap Investments L.P Turtle Creek Blvd., Suite 1000 Dallas, Texas (214)