Transactional activity in U.S. shale plays has seen renewed and increasing activity over the past couple of years as the economy has started to recover and the price of oil has hovered around $100 per barrel. While the major and multinational E&P companies continue to pour capital into acquisitions and joint ventures, recent transactions by KKR, Blackstone, and other private equity investors demonstrate that opportunities exist for private equity to participate in shale plays outside the midstream investments on which they have largely focused in the past.
The Need for Capital
The improvement and successful implementation of shale gas technology in a growing number of basins in the U.S. over the past five years, along with the discoveries of significant natural gas reserves, led to a “land grab” that is largely complete, at least in the core areas of the most important basins. Early success in the Barnett and Fayetteville shale basins led to a land acquisition frenzy in other significant shale basins, including most notably Marcellus.
However, those land acquisitions left many early movers capital constrained. Faced with the need to begin drilling and satisfy other lease obligations to retain the reserves acquired, those companies have eagerly sought outside capital, often from strategic partners. Those companies unable to attract sufficient capital seek exits from their investments.
Joint Ventures and Acquisitions
Strategic joint ventures have been an active source of much needed capital over the past three years, with over 40 such transactions being completed during that time. International investors from China, Korea, Europe, and elsewhere, eager to gain access to the shale technology and production methods have partnered with companies such as Chesapeake Energy, Atlas Energy (prior to its acquisition by Chevron), and others to gain stakes in the Barnett, Eagle Ford, Marcellus, and other major shale basins. With a long-term investment horizon, and an ability to offer strategic benefits in addition to cash, strategic joint ventures offer an attractive alternative for U.S. E&P companies looking for capital.
For those early participants seeking exits, the acquisition market has also been active. Some of the larger recent transactions involving oil and gas producers have included ExxonMobil's $41 billion purchase of XTO Energy in 2009, as well as Royal Dutch Shell's $5.9 billion acquisition of Duvernay Oil in 2008 and $4.7 billion purchase of Eastern Resources in May 2010.
How Private Equity Can Participate
Private equity investors have focused most of their shale-related activities on midstream assets related to the unconventional gas shale plays. With current and projected production of shale gas far exceeding the gathering, processing, and transmission infrastructure, and the predictable cash flows provided by midstream assets, private equity is an ideal source of capital for midstream developers. As the major oil companies move into natural gas and seek positions or participation in oil and other liquid-rich shale fields, their substantial balance sheets and long-term investment horizon can make it difficult for private equity to compete.
However, the shale gas business is in transition and to achieve the scale that many major oil companies will find attractive additional development is needed. To fill that void, private equity investors have stepped in. For example, KKR's investments in Eastern Resources and Hilcorp Resources helped finance developments in the Marcellus and Eagle Ford shales. The Royal Dutch Shell/Eastern Resources transaction and Marathon Oil's recent $3.5 billion purchase of the assets of the KKR-backed Hilcorp Resources Holdings LP demonstrated that private equity investments in shale assets can be extremely lucrative. Just last year, KKR committed up to $400 million for a 40% stake in the Hilcorp partnership, and the Marathon purchase valued KKR's interest at $1.13 billion. In 2009, KKR invested $325 million for a one-third stake in the Eastern Resources partnership, which was worth approximately $1.5 billion in last year's sale to Royal Dutch Shell.
In addition, private equity investors can find opportunities to “roll-up” some of the lesser capitalized developers. Blackstone's recent formation of a partnership with Alta Resources LLC will invest up to $1 billion to partner with developers or provide them with exits from for their shale oil and gas assets.
In addition to KKR and Blackstone, other private equity investors such as The Carlyle Group, Riverstone Holdings and First Reserve have joined the shale play. With names like these, look for others to follow as the shale business develops.
The views expressed in this article are those of the writer.