The Investment Lab Learn. Apply. Brainstorm.
High-Powered, The Energy Revolution Uncorrelated, LLC
Downloaded from www.hvst.com by IP address 192.168.160.10 on 09/23/2021 “For decision makers trying to reconcile economic, energy security and environmental objectives, it is essential to be aware of the dynamics at the heart of today’s energy market. We have the tools to deal with such profound market change. Those that anticipate global energy developments successfully can derive an advantage, while those that do not risk taking poor policy and investment decisions.”
Maria van der Hoeven, Executive Director, IEA World Energy Outlook 2013
2 Downloaded from www.hvst.comAll Rights Reserved, Uncorrelated, by IP address LLC 2014, 192.168.160.10 The Investment Lab on 09/23/2021 All Rights Reserved, Uncorrelated, LLC 2014, The Investment Lab A ragtag team of wildcatters, dreamers, and the just plain desperate changed the course of the nation during the dark days of the financial crisis. In the backyards of Pennsylvania homes, under the headquarters of Exxon, and in the plains of North Dakota, these men found a way to extract energy from the deepest, most densely packed parts of the earth. Almost overnight, this country transitioned from a crotchety chorus of Peak Oil pessimists into flag-waving energy optimists. For investors, this signaled a rare opportunity. On June 19, 2014, a select group of pension, family office, and endowment and foundation investment officers gathered in New York City along with asset managers and Fund Evaluation Group consultants to wrestle with the investment implications of our energy independence, both in the short and long run. The Investment LAB: High- Powered, The Energy Revolution, a collaborative workshop, created a unique setting for engagement. Combining specialist lectures with small group discussion sessions, this LAB explored the technical and entrepreneurial developments inspired by the promise of U.S. energy independence. Experts and practitioners across the energy value chain described trends, issues, threats and opportunities to foster discussion and long-term thinking among investors. This LAB Report documents the initiative’s lessons and results and, in a special feature article, answers a key question: How should you invest in the Energy Revolution now? Learn. Apply. Brainstorm. The Investment LAB created a rare day of nuanced conversation on an investment once relegated to the ho-hum, inflation-protecting, cyclical bin. An energy revolution? Investment LAB founder Cathleen Rittereiser explained: “It’s a high-powered topic. Energy accounts for 8% of GDP and 10% of the S&P 500.” It’s not just oil and coal but fracking and wind. Solar and Hurricane Sandy. It’s a story about unexpected technology advances and indomitable entrepreneurs. In this report, we share the highlights of the day – the theses, observations, and conclusions – about the Energy Revolution’s long-term impact on portfolios, while supplementing with follow-on conversations, information and ideas for investing in the Energy Revolution today. The LAB Report is the second initiative of Uncorrelated LLC, an “Act Tank” that connects institutional investors and asset managers to collaborate on solving investment problems and brainstorming futuristic investment ideas. Uncorrelated aims to produce outcomes: practical and actionable information and insights for investors. For more information, please visit www.theuncorrelated. wordpress.com.
Downloaded fromAll Rights www.hvst.com Reserved, Uncorrelated, by IP LLC address 2014, The 192.168.160.10 Investment Lab on 09/23/2021 3 The LAB Report Observations and Conclusions: Old World Sector, New World Opportunities
The speakers were diverse – an investor in private equity; founders and CEOs of energy companies; big picture experts. Each had a different angle to profiting from the revolution in energy. Yet there were commonalities. Amid the revolution, they agreed on the three eternals of energy: The sector is cyclical, quality people are always in demand, and the business operates like a family barbecue – tightly knit circles referring businesses, buying and selling to one another. But there was also no doubt that the ground is shifting; the Energy Revolution is creating opportunities barely imaginable even five years ago.
• A woeful shortage of talent at all levels and in LEARN: Key points the experts all areas. From the c-suite to the welder to the investment managers on Wall Street – there aren’t shared with the LAB participants enough individuals with energy expertise. • Energy as a growth stock. The technological breakthroughs are turning energy companies into • Renewables are here to stay and grabbing growth engines, not sleepy dividend payers solely important market share. Don’t count on oil prices dependent on rising commodity prices. falling and launching a new cycle. Solar has a sunny outlook, even without subsidies. • Everyone loves innovation, but don’t forget about • U.S. will dominate natural conventional oil & gas. Small, gas and become an exporter agile companies are snapping Formula for within the next five years. China up properties the majors can’t may have huge resources, but it be bothered with. The new “success: Rise doesn’t have a steady body of law wave of wildcatters is reviving early, work hard, that supports development. fields once deemed “don’t.” High tech innovations have turned strike oil. • Huge investment is needed the unattainable into the in infrastructure. From the - J. Paul Getty attainable. ” power grid – which will need $17 billion in capital alone – to clean • Transparency improving technologies and investment in profitability. An entire mini- exploration. industry of data collectors and analysis is prying information never before available, thanks in part • Coal will become the No. 1 fossil fuel as India and to environmentalists demanding that companies other developing countries expand. Oil will fall to document their activities. second place but maintain its special status as an efficient “miracle liquid” for many consumer and • Technical efficiencies mean more profits. Sensors industrial uses. and monitoring technology make the grid smarter, cheaper, and better.
4 Downloaded from www.hvst.comAll Rights Reserved, Uncorrelated, by IP address LLC 2014, 192.168.160.10 The Investment Lab on 09/23/2021 All Rights Reserved, Uncorrelated, LLC 2014, The Investment Lab properties like poker chips. Today, the majors APPLY and BRAINSTORM: are shedding small properties that New Wave Wildcatters are rejuvenating, thanks to the high Investment ideas generated by the tech revolution. Unsexy, unloved – these are often LAB participants under-rated properties making their way through the disaggregation/aggregation cycle that is energy. The LAB participants spent the afternoon wrestling with how to take the information they had learned in • Consider derivative beneficiaries of shale. the morning to use in their portfolios – now and over The most obvious – services like infrastructure, the next 15, 20, even 30 years. How do you invest and transportation and companies that make pipes. assess your total exposure to energy? What are the best Real estate is another – hotels, residential, sectors within energy? There was a buzz in every corner shopping centers. The population of Williston, as the discussions unfolded. There was also a consensus N.D., has doubled since 2010, and rents are now that when considering the new, take heed of the classic the highest in the nation – all thanks to the shale oil market bromides: Don’t overlook the unloved sectors, boom. value investing remains a cornerstone principle. And even with all the new technology that was turning • Also consider tertiary beneficiaries. Fracking America from an energy beggar into an energy tycoon, needs guar as a thickening agent. Energy companies the sector remains cyclical. Political, environmental, are fanatical about drug testing and are embarking and social risks are also part of the mix, but given the on a hiring spree. Look for ways to invest in these demand for energy and the unique position the U.S. less obvious winners. commands, the risks are well worth taking. In fact, the biggest risk may be sitting out the revolution. • The Internet of Energy. It took Silicon Valley time to make its way to the world of fossil fuels and The conversation bounced between themes and renewables, but now it is an indispensable part practical concerns: What are the best ways to take of the energy story. Software is enabling greater advantage of the energy boom both domestically and efficiencies in finding and identifying drilling around the world? Themes are hard to implement, locations, sensors tracking energy usage are noted one investor, who emphasized, as did many, reducing costs, and greater availability of data the need for quality managers with vision and skill. is creating a boomlet among those who collect, Depending on the mandate of the fund and the size and analyze, and advise on how to use the information. taste for risk, the investors latched on to the following More innovations are likely. key ideas for further discussion: • Frontier markets are likely to reap huge benefits • Only the beginning. Some investors came to the from abundant, cheaper energy. Cheap energy can workshop with one concern: Had they already transform societies. Under-developed countries missed their chance to take advantage of the shale trying to bootstrap their economies will get a huge revolution? So much money had already flooded lift from the Energy Revolution. the market. The answer: No. The demand for capital is so vast that entry points abound. Some numbers: • Invest across the capital structure in both public One federal agency expects demand for electricity and private vehicles. The investors debated to grow by 40 terawatt-hours in the next 20 years. vigorously whether private or public venues were And that’s just in the United States. Meanwhile, best, with the consensus leaning toward private exploration of shale deposits in the U.S. is still in its structures, believing that approach would help infancy. weather the volatility of commodity prices over the long-term. Several discussed private lending; • The energy revolution has hit the re-set button for mezzanine loans could offer attractive returns, conventional gas and oil plays. Churn has always especially with interest rates still so low. Some were been a fundamental part of energy. Oilmen flipped concerned that there were limited ways to short or
Downloaded fromAll Rights www.hvst.com Reserved, Uncorrelated, by IP LLC address 2014, The 192.168.160.10 Investment Lab on 09/23/2021 5 hedge their energy positions. Others made the case Next: Expert Speakers and for investing in traditional equities. The LAB Spotlight: Investing • Energy permeates portfolios – in real assets, in the Energy Revolution commodities, equities, and through companies vulnerable to commodity price spikes. This fact makes it tricky to measure risk exposure to energy. In the following section of this LAB There was general hesitance about changing the Report, we take you behind the curtain percentage of assets dedicated to energy or real – sharing the best thinking of eight assets, yet there was also a sense that the energy top energy experts who spoke at the business can easily absorb more capital. LAB – so you, too, can brainstorm with • Rethink renewables. For many investors, it’s your team, advisors, or committee. How surprisingly hard to find appropriate venues to will the trends and opportunities they invest in solar and wind, which they learned were describe apply to your portfolio? What not nearly as dependent on subsidies as they had long-term investment ideas occur to you? assumed. Part of the problem: Most renewable opportunities were too small relative to investors’ What aspect of the Energy Revolution needs. Over time expect that to change. inspires you to take action? Find their idea-packed synopses on pages 7-11. • Energy storage. The company that creates storage for electricity will be handsomely rewarded. Following the expert speaker section, Battery technology is a very important area to you’ll then find The Lab Spotlight: explore, and could benefit from seed capital. Investing in the Energy Revolution, a • Efficiency as a theme – and not just for feature on implementing an energy exploration. The power generation industry is aging allocation and expanding on the ideas and needs upgrading. Investors saw opportunities generated at the LAB. For this special in finding ways to invest in the companies that will article, Uncorrelated LLC spends assist in this endeavor. time with top energy specialists from • Disrupters to the disruption. Energy seems Fund Evaluation Group, Lucas Capital particularly vulnerable to political and social Management, and GRT Capital. Together, upheaval – for better or worse. The U.S. no they consider long-term trends, lessons, longer needs to kowtow to dictatorships with oil and ideas and answer the key questions in their backyards, but as an exporter, war and other political mayhem could hurt. Individuals of the day: How do you invest in the and businesses sitting on top of valuable shale Energy Revolution? Where does energy formations now have the incentives to sell their fit in your portfolio? What are the mineral rights; any change in the laws could change opportunities? What are the risks? You’ll that dynamic for the worse. Another concern: find answers in the article starting on Environmentalists could try to force rule changes page 12. that would dent profits through carbon taxes, for example, or an anti-fossil attitude among policymakers.
• Go for risk. Don’t be too cautious. This is a time to push boundaries – it’s rare to find a turning point like this when investors can try and capture the benefits of radical change.
6 Downloaded from www.hvst.comAll Rights Reserved, Uncorrelated, by IP address LLC 2014, 192.168.160.10 The Investment Lab on 09/23/2021 All Rights Reserved, Uncorrelated, LLC 2014, The Investment Lab Energy Expert Speakers JAMES IVEY - FOUNDER, PINTAIL OIL AND GAS
Jim Ivey is a late-career entrepreneur marshaling his experience as an engineer, financier and soldier into his new venture, Pintail Oil and Gas, a conventional Gulf Coast exploration and production company. The retired colonel says he’s gone from securing energy assets in Iraq in both Gulf Wars, to making policy, to his latest endeavor – drilling for new resources.
THESIS: Invest in conventional gas and oil as majors and large are relatively agnostic to oil and gas. It’s a conventional Gulf Coast independents disaggregate; improve output with the new strategy. There is absolutely nothing sexy about conventional gas and technology and sell during the next aggregation cycle. oil exploration and production. Which is precisely why I like it.” With the new 3D seismic technology he can re-visit fields, and figure out how OBSERVATIONS: Our impending energy independence caught to improve production. By his estimates, Ivey says he can acquire $100 everyone flat-footed. million to $150 million in assets and double their value within a few The U.S. has gone from importing 65% of its oil to 35% and is on the cusp years. The possibilities are endless. Recently he picked up a field that was of becoming a net exporter. “Five years ago, I would not have thought discovered in 1940 that hadn’t undergone a seismic study. “I bought 1-1.5 that possible,” says Jim Ivey. This reversal in fortune has caught the million barrels of known reserves, and I will get out three million.” So far industry completely off guard. For example: The refiners are set up to Ivey says he has improved productions by 20% on fields he has already crack heavy crudes from the Middle East, not the light, sweet oil coming purchased and expects that to improve to 50%-60%. from newly fracked regions at home. This is where U.S. policymakers His one caveat: Energy is and always will be a cyclical industry. “It’s very need to re-write rules so we can export our production. But Washington easy to be too optimistic or too pessimistic at any point in time,” Ivey says. isn’t big on pivoting: During the early stages of the Russian-Ukraine “The key is to manage your business to be ready for the next opportunity. conflict, the White House missed an opportunity to empower natural As I tell my younger guys: Until you get your butt kicked once or twice, gas firms to ship overseas, which could have helped break the Russian you won’t have what it takes to make money.” But Ivey can’t tamp down stranglehold on natural gas exports in Europe. his personal enthusiasm: Technology will enable us to make progress in CONCLUSION: Take advantage of the churn areas we never imagined – like drilling 30,000 feet in the Gulf of Mexico. “It’s the closest thing to a moon shot on earth in terms of technology.” Ivey is picking up the orphan production and reserves that larger players are spurning. Efficiency, technology and leverage are his weapons. “We
HUNTER CARPENTER - PRIVATE EQUITY INVESTOR, FORMER MANAGING DIRECTOR, THE STEPHENS GROUP, LLC
Hunter Carpenter is a private equity investor who previously was a managing director at The Stephens Group, a family office investment firm. While there, Carpenter was responsible for sourcing and executing new investments as well as monitoring and advising portfolio companies, largely in the energy and industrial space. Named one of the “Top 20 Under 40” by Oil & Gas Investor, Carpenter has served on several energy company boards and currently chairs the University of Mississippi Foundation investment committee.
THESIS: Invest in the consolidation of the oilfield supply chain, information across the value chain. In addition, he sees opportunities the midstream and infrastructure side of the industry, and in the consolidation of the oilfield supply chain and midstream services companies that enable efficient production and completion. – from infrastructure, traditional gathering and processing, to the nascent business of water reclamation. He looks for sub-sectors where OBSERVATIONS: Relationships, capability and scalability make inefficiencies abound, and others are missing an opportunity to scale. the difference over multiple cycles. CONCLUSION: Talent is the best hedge against misjudging the ”The energy business is relationally intensive, and it is a very small world,” market says Hunter Carpenter. “The more you are around energy, the more you see the concentric relationship circles. Being a successful investor Carpenter focuses on two key aspects of energy investing: prices and in energy requires strong long-term relationships and capital that can talent. Only great people can offset the inevitable vagaries of commodity sustain the cycles of volatility. If you focus too much on internal rates of prices, says Carpenter. Investors generally assume, rather simplistically, return over short periods of time, you can get burned. However, if you that you make money when energy prices are high and lose when they can be a long-term investor, you can make multiples on multiples of your are low. Sometimes that is right, Carpenter says. But high prices are often money.” a tipping point: The surge in oil prices in 2006-2007 wrecked demand. “That worries me equally as much as commodity prices falling right now.” Carpenter believes you must look beyond the mainstream for investing opportunities. He focuses on conventional oil and gas assets – which are To make money in energy, Carpenter says you need both a long-term largely being ignored by the market currently – and data management, view and great managers. Consider Pinnergy, an oil and gas services where there’s a tremendous need to both assemble and interpret business The Stephens Group invested in back in 2011. Natural gas was
Downloaded fromAll Rights www.hvst.com Reserved, Uncorrelated, by IP LLC address 2014, The 192.168.160.10 Investment Lab on 09/23/2021 7 trading at $4.50/MM btu. Then prices fell to $3. “That did not feel so ask a CEO what his biggest problem is he would say, ‘People, people, hot,” Carpenter recalls. “That business derived over 90% of its revenue people. We don’t have enough talented people. ’” From the c-suite to the from dry gas basins. Very quickly, the management team was able to craftsman, the shortage is both cyclical and systemic. Nonetheless, the tactically shift assets and has grown revenue over 50% since the date of U.S. maintains a global competitive edge in intellectual capital. “This and the original investment.” the structural advantages we have in the U.S., make it the best place for The greatest challenge facing the industry is a talent shortage. “If you capital, especially in the energy and industrial sector.”
RANDY ALLEN - MANAGING PARTNER , LUCAS ENERGY VENTURES
Randy Allen is a child of the oil patch, growing up in Enid, Oklahoma, across the street from three oil wells. A co-founder of Lucas Energy Ventures and managing partner of Lucas Capital Management, Allen has experience as a roustabout, drilling and completion engineer, lawyer, oil & gas executive, and asset manager. A graduate of the Colorado School of Mines, he has testified before federal and state bodies on energy policy and environmental issues.
THESIS: U.S. has a clear edge versus overseas up-and-comers in information. And you are steering within a three-foot window. This is energy. Space Age technology.” OBSERVATIONS: Production outstripping demand for energy In five years’ time, Allen sees natural gas exports expanding by more than in the U.S. a game changer 12 bcf, with 4 billion heading as exports to Mexico. “The U.S. energy pie is growing and getting bigger.” The U.S. production of oil and petroleum liquids surged 30% between 2008 and 2012, turning the page to an entirely new chapter in domestic CONCLUSION: The pump is primed in the U.S. energy. Yet the jump of 2.5 million barrels/day was just a drop in the The U.S. boasts serious advantages in energy exploration: A stable global demand bucket of 86 million. At first blush, the change appears to body of law; a system of private mineral rights; and service providers to be marginal: “Why do we see all these headlines about how the world is support the core energy business – from rig suppliers to parts suppliers changing?” Allen asks. Answer: Because that’s not the only metric in flux. and data managers. “There aren’t many places where you can’t hook During that same period consumption here dropped by 10% -- another up and drill,” says Allen. Demand may be dropping in the U.S., but it’s 2 million barrels/day. Suddenly, U.S. imports are dropping by 4.5 million. ramping up in the developing world. EIA projects that global demand “At $100/barrel, that’s $450 million a day that we’re not sending to will grow by 50%-60% by 2040. LNG facilities in the U.S built to import places that don’t like us very much,” says Allen. The policy implications natural gas are now being converted to export it. are enormous – dictatorships with oil in their backyards are losing In the coming decade, the investing opportunities are huge. The leverage and fast. investment bank Jefferies predicts that within the U.S. alone, energy Allen, like his peers, is still amazed by the new technologies. Thanks companies will need more than $2 trillion to develop the nine big to horizontal drilling and fracking, drillers can tap oil and gas reserves resource plays – and that does not include the Permian Basin, perhaps four miles away from a rig – 10,000 feet deep and then 10,000 feet the most promising. “You’ve got the resources, and you’ve got the horizontally. “You know exactly where you are. You’re getting real-time infrastructure, and you’ve got capital needs. It’s a nice setup for investing in the U.S.”
WILLIAM J. (JOHN) BERGER - CEO, SUNNOVA ENERGY
As the only solar guy in Houston, John Berger is a bit like the Maytag repairman, a lonely voice for renewable energy in the oil patch. A civil engineer with a Harvard MBA, John has launched a number of energy companies as well as a venture capital firm focused on renewables. Sunnova is a residential solar power company set up as a YieldCo, a synthetic MLP for renewable firms.
THESIS: If you own the power source, and you own the That critique should sound familiar to investors: “Unconventional gas customer, you can scale and make money –without any plays were too small five years ago. Who would have thought they subsidies. would become so huge?” asks Berger. Indeed, this summer, Berger raised over $250 million to expand Sunnova. Interest in the area is OBSERVATIONS: Investors have bought into a trio of myths growing. about solar • Myth #2: Solar wouldn’t be profitable without subsidies. “Less than John Berger is a bit of a myth-buster when it comes to 10% of our customers get cash subsidies. I think it’s in the low single renewables. He sees a triumvirate of misinformation that needs digits,” says Berger. He’d also like to see the tax benefits, or the Federal correction: investment tax credit, disappear. “They cause tax fraud, and it causes • Myth #1: Solar and alternative energy are too small to care about. people like you (institutional investors) to avoid putting money in something that is subsidized.” So investors should applaud rather than
8 Downloaded from www.hvst.comAll Rights Reserved, Uncorrelated, by IP address LLC 2014, 192.168.160.10 The Investment Lab on 09/23/2021 All Rights Reserved, Uncorrelated, LLC 2014, The Investment Lab fear the retirement of the investment tax credits in 2016. Investors know of SolarCity, a vertically integrated company that • Myth #3: Solar is a technology business. No, it’s a commodity business, makes and installs solar panels. But Berger says owning the power and says Berger. Investors should think of solar along the lines of oil or the customer is the quickest route to profits. The other aspects of the liquefied natural gas. As it scales, it will become increasingly global. business are not scalable and are more suitable for mom and pop style “Panels are moving around the world looking for the biggest bid to hit.” businesses. Berger’s strategy: Lock in 25-year agreements, maintaining ownership longer than other solar power providers. “We are an CONCLUSION: Solar can beat fossil fuels on price without a additional supplier, replacing about 75% of the power in the 23 states subsidy and territories we operate.” Berger constantly asks: “Are we the low cost producer? If not, then we Berger cautions investors to think twice before following Warren Buffett won’t be successful.” Therefore, Sunnova is all about cost cutting. Berger into power-grid dependent utilities. The deal Buffett signed has great says overhead has dropped from 20% to 6% and should fall to 2% as he rates locked in – and that’s the exception. Those highly-regulated utilities scales up. are full-fledged members of “cost plus, socialism.” For Berger, distributed energy and capitalism is the way to go.
JOHN C. MOORE - CEO, ACORN ENERGY
John Moore came to the energy industry through distressed investing, where he learned about the “transfer of wealth from the impatient to the patient.” Previously, he was president and co-founder of Edson Moore Healthcare Ventures and Optimer, a specialty materials company sold to an LBO fund. In 2006, he joined Acorn Energy, a NASDAQ-listed conglomerate investing in entrepreneurs who focus on energy efficiency. He is the co-author of “The Hidden Cleantech Revolution” (http://amzn.to/1sPuS6u).
THESIS: The future of energy is digital. Technology makes Dangerfield of specialties, says Moore. Alfred Nobel, an engineer, didn’t conventional plays newly profitable while it also creates even bother to create a prize for his field. This has practical implications. entirely new industries. Young, idealistic policymakers don’t understand changes taking place behind the scenes. The people with expertise are working in the fields. OBSERVATIONS: Power is information CONCLUSION: Eliminate pain points by investing in efficiency- For John Moore, the odyssey in energy began with a money-losing pink creating and monitoring technology sheet company. Its business: turning off the air conditioners in about 5 million homes when it gets hot. “Wow, that’s really strange,” Moore said. Moore says he likes to look for pain points. China, for example, has an But a light bulb flashed. This was the start of the “demand-response” existential problem. Its air is almost unbreathable. So Acorn invested in industry. Moore’s reconfigured company began to aggregate demand and a clean coal company that converted smog – NOx – into nitrogen and shape it to supply. Within 12 months, Moore took the division public for steam. Eventually, Moore sold the business to people who could scale it $250 million – even though it was losing money. Six months later, Moore for about five times revenue, twice the valuation he paid. sold his 15% stake in a secondary to Goldman Sachs at a $600 million Acorn is currently invested in four other businesses, including DSIT, an valuation – 16 times revenue. Israeli company that monitors threats to energy in subsea terminals; The moral of this story, says Moore: “The future of energy is about a business that monitors aging distribution transformers; standby information. There will be a vast system of sensors and control systems generators, and his favorite—U.S. Seismic Systems—fiber optic sensors connected invisibly and automatically and responding to our needs.” That designed to identify micro-seismic changes in the subsurface. This gives the Google generation an edge in this sector. technology has dramatically improved the failure/success ratio of holes drilled from 7:1 back in 1980 to 1:1 today. The only problem, the work is hidden: “Joe Biden can’t go to a car factory with a bunch of UAW members – like he did in Wilmington, Delaware Yet the field is still rife with inefficiencies: Schlumberger estimates -- and give $200 million in loan guarantees and say: ‘We’re going to get that 70% of fracking is wasted, says Moore. That leaves room for Fisker into the electric vehicle business.’” improvement and interesting prospects for both entrepreneurs and investors. This is a long-standing PR problem: Engineering is the Rodney
DANIEL J. RICE, DAN NEUMANN - PORTFOLIO MANAGERS, GRT CAPITAL PARTNERS
Prior to joining GRT, Dan Rice was a managing director of BlackRock Inc. where he managed the BlackRock Energy and Resources Portfolio. For the decade ending in 2010, Rice beat 99.9% of all U.S. stock-fund managers, according to data compiled by Bloomberg. He is on the board of Rice Energy, an independent natural gas company engaged in the acquisition, exploration, and development of natural gas and oil properties in the Appalachian Basin. Dan Neumann has worked with Rice since 2004 and runs the GRT Energy and Income Strategy, a top decile performer.
Downloaded fromAll Rights www.hvst.com Reserved, Uncorrelated, by IP LLC address 2014, The 192.168.160.10 Investment Lab on 09/23/2021 9 THESIS: The market doesn’t understand that the innovations in makes it much easier and quicker to maximize profitability. The majors energy exploration have transformed the sector into a growth are now responding to this new world. Chevron has set up a competitive opportunity. analysis position, something it never had before. Recently, Exxon pitted groups of engineering students against one another to locate the best OBSERVATIONS: Cash no longer flowing into the ground drilling spots, receiving identical responses in two days – and all based Once, energy companies needed to put 90%-95% of cash flow back into on public data. Two years ago, it took Exxon nearly eight man-years to do the ground, leaving them with only 5%-10% to invest in growth, says the same exercise internally. Dan Rice. The practical effects of that limitation: Annual growth trended CONCLUSION: Take advantage of market undervaluation and at a miserly one to two percent. The stock market accorded the sector hedge commodity price risk modest market values – about six times EBITDA. These companies were dependent on a commodity “price tailwind” of 10%-15% to supercharge The stock market has not adjusted to the new facts on the ground. “Some growth, says Rice. of the best shale companies are trading inside 8x EBITDA – even though the companies are growing 25%-30% in terms of units. No other growth Fracking has fundamentally changed the economics. Even though he stock trades at that much of a discount,” Rice says. The technology believes commodity prices will be flat over the next five to ten years, Rice advances have set up the kinds of disruptive changes that portfolio says companies engaged in shale plays will see phenomenal growth rates. managers dream about – yet only a handful have recognized the full “Fracking companies need only 50% of free cash flow to keep production potential. flat.” That changes everything. Suddenly the natural growth of these companies is spurting from 2%-3% annually to 30%-35%. Places like Dan Neumann is positioning the Energy and Income Fund to take Marcellus or Utica in Pennsylvania and Ohio have become beacons of advantage of this disruption by focusing on small to mid-sized shale growth. exploration companies. Neumann and Rice have been taking a top-down global approach – selecting energy companies that they believe will Transparency is also changing the profit outlook for energy companies. profit from their macro views. Neumann sells options on 30% of the Thank the environmentalists for forcing explorers to report how and portfolio, reaping yields of 6%-7% without leverage. “It helps minimize what they are extracting. More information than ever is available on the casino aspect of energy volatility.” the drilling and fracking methods used on shale. Rice says the data flow
GREGOR MACDONALD - FOUNDER, TERRAJOULE.US
Gregor Macdonald is an oil markets expert, journalist, data analyst, and publisher of TerraJoule, (http://www.terrajoule.us) a monthly newsletter, in which he shares his view on macro trends in the energy sector. Macdonald contributes to a number of publications, including the Economist Intelligence Unit and The Harvard Business Review, and is a regular commentator on business news TV programs.
THESIS: We are at the midpoint of a 20-year transition from and cheap -- just $15 to $20/barrel for much of the 20th century. At the dependence on oil to multiple energy sources – a costly shift turn of this century, when Macdonald was living in London, the dollar was that could lay the groundwork to very strong in oil; no one anticipated a change prosperity once concluded. Figure 1: Fossil Fuels are not going away in that relationship. In fact, The Economist declared the world was drowning in oil. Prices OBSERVATIONS: Previous energy were heading to five dollars. From that point transitions unleashed booms 35% in 1999, oil prices marched steadily higher, Wood to coal marks the first energy hitting $150/barrel in 2008 only to crash shortly transition in modern history; it powered 30% thereafter, and finally stabilizing at $100/barrel the industrial revolution and changed in 2011. As prices climbed during the entire the wage structure in Great Britain. “The 25% period, the share of oil in the global energy mix workers weren’t being paid just for their fell from 38.4% in 2000 to 32.9% in 2013. work but for the work that coal was 20% Now we are midway through a third energy doing,” says Gregor Macdonald. In his transition. And it is quite different. A mix of writings, Karl Marx missed the import 15% energy sources will share the global stage, not of switching to an energy source three just one, Macdonald says. The overexposure times more powerful than wood. Another 10% of Western economies to oil caused them to important lesson, says Macdonald: Coal weaken when prices surged. As a result, we was much cheaper than wood, but the 5% are paying for the current transition with slow economy needed time to develop the growth and stagnating wages. infrastructure to fully deploy it. “That’s a 0% useful thing to think about.” CONCLUSION: Invest in infrastructure, and the The shift from oil to coal marks a economy will reap the rewards in 10 years seamless changeover. “Oil was so powerful, it essentially paid for the cost Over the next 20-30 years, the International Energy Agency estimates of this transition.” Not only was oil 50% more potent, but it was plentiful,
10 Downloaded from www.hvst.comAll Rights Reserved, Uncorrelated, by IP address LLC 2014, 192.168.160.10 The Investment Lab on 09/23/2021 All Rights Reserved, Uncorrelated, LLC 2014, The Investment Lab that the world will need to invest 40 Trillion $USD in the global energy liquid.” Similarly, Macdonald says renewables will command greater sector: 23T for fossil fuels, and 17T for power grid and renewables. respect. Low interest rates have dramatically altered their prospects, “We need a power grid that doesn’t exist yet in the U.S,” Macdonald especially for solar. says, adding he believes the demand will be greater for power grid As seen in Figure 1 on page 10, by 2025, Macdonald predicts coal will be and renewables. Either way, he recommends investing in those areas. the No. 1 source of energy as demand from developing countries swells, Macdonald calls this the “capex” phase of the transition. Power plants will with oil shifting down to the No. 2 spot. While the greatest growth rates focus on efficiency, like reducing the amount of power lost – currently will be seen in renewables, especially wind and solar, fossil fuels are not 50% -- on the trip to customer homes. Oil demand will diminish but going away. not its status. “Oil’s utility value remains unchallenged. It is the miracle
GREGORY ZUCKERMAN - AUTHOR OF THE “THE FRACKERS: THE OUTRAGEOUS INSIDE STORY OF THE NEW BILLIONAIRE WILDCATTERS.”
A prize-winning reporter, special writer at the Wall Street Journal Gregory Zuckerman is also the author of the bestseller, “The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History.”
THESIS: Outsiders are more • George Mitchell, the son of a Greek immigrant, who struggled for likely to sense the tectonic plates years to find natural gas in the Barnett Shale play until one day his shifting under our feet than the engineers made a mistake, using too much water in their fracking so-called experts. solution. In 2002, about four years after that lucky break, Mitchell sold the company for a few billion dollars. OBSERVATIONS: The frackers • Harold Hamm, the son of dirt poor sharecroppers in Oklahoma, who acted on informed hunches to plowed ahead with an IPO in 2007 – despite the cratering economy upend an industry and little proof that his combo of fracking and horizontal drilling would Gregory Zuckerman asks an important produce a commercial success. Today, the stock trades at 10x the IPO question: Why are the experts so price, and his soon-to-be ex-wife will be richer than Oprah Winfrey. clueless when it comes to change on • Charif Souki, raised mostly in Lebanon and an energy neophyte, who their home turf? The Feds and bankers convinced investors to spend billions to import natural gas. When missed the looming financial crisis. natural gas suddenly became both plentiful and cheap, he persuaded Exxon paid no attention to the rich them to ante up even more money to export liquid natural gas. Today shale deposits sitting right under its Souki is worth $350 million. own headquarters, hunting instead with all the other energy behemoths for big strikes outside America. Genius investors like Warren Buffett CONCLUSION: Fracking is a great option for energy, and the completely misjudged the natural gas market, betting on a massive environmental concerns are manageable shortage. The record-setting $45 billion leveraged buyout of natural The shale revolution is making the U.S. less dependent on foreign oil, gas producer TXU marked a high in prices and then the demise of the and emboldening this country to boycott political foes like Iran. It’s even company. helping the environment. The levels of carbon dioxide in the atmosphere In his book “The Frackers” (http://amzn.to/1mDwglt), Zuckerman says are the lowest in ten years. But the industry requires regulation: he learned that it was a crazy band of outsiders who had the guts to Toxic wastewater is a concern. One in ten wells leak. Nonetheless borrow, cadge, and cajole investors to back what were basically informed environmentalists overstate their case against fracking, Zuckerman says, hunches. Chevron almost cracked the shale rock code, but gave up too just as frackers have sometimes been too lax in matters of safety. Since soon. The pricey effort became a company goat. fracking is here to stay and offers many benefits, we must learn how to regulate it properly. So who did recognize the potential in fracking?
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Implementing and Expanding Key Ideas from The Investment LAB: High-Powered, The Energy Revolution
Energy is undergoing a revolution. But revolutions don’t organize themselves into neat, investable buckets. In this LAB Spotlight, Uncorrelated LLC explores the challenges and opportunities in energy investing with experts who participated in The Investment LAB. You’ll gain access to the best thinking from The Fund Evaluation Group, Lucas Capital Management, and GRT Capital as they expound on the Energy Revolution and how investors can engage in this sector and profit from the changes reshaping markets.
estate, natural resources, and infrastructure. Energy Managing Portfolios: Understanding is typically slotted in with natural resources, alongside metals and mining. But oil and natural gas pipelines are a shape-shifter like energy also a part of infrastructure. And hotels in boomtowns For an investor, energy is a bit of a shape-shifter. are part of real estate. Some investors prefer to start It’s a commodity, a physical asset, a sector of sectors, a with direct commodity investments or public equities – corporate stock, a niche, a force that drives industries but there, too, energy seeps into multiple sectors. The and entire economies. It dazzles as it confounds: shape-shifter defies boundaries. Investors wonder what is the best approach? Where to start? Fortunately, there’s more than one “right” answer. The very multitude of opportunities drew FEG For institutional investors, portfolio objectives usually more than 10 years ago to the Energy Revolution. determine their approach, says Nolan Bean, managing “There are at least a million oil and gas wells throughout principal at the Fund Evaluation Group (FEG). That the United States. It became apparent that there are in turn affects the way they define energy investing. big inefficiencies,” says Christian Busken, senior vice “Whatever the approach – thematic or asset allocation president and director of real assets at FEG. “And that – energy investments share common goals: inflation there are a lot of levers to pull.” That means you need protection, total return, and diversification.” managers with geological and petroleum engineering expertise, experience, and vision. Investors must start somewhere, and usually that’s in real assets, which FEG divides into three buckets: real Randy Allen, managing director, Lucas Energy
12 Downloaded from www.hvst.comAll Rights Reserved, Uncorrelated, by IP address LLC 2014, 192.168.160.10 The Investment Lab on 09/23/2021 All Rights Reserved, Uncorrelated, LLC 2014, The Investment Lab Ventures, couldn’t agree more. “Our key team members and macro themes. It sets GRT Energy apart from have engineering backgrounds,” Allen says. He is competitors who employ bottom up analyses, are short- currently launching Lucas Energy Ventures IV, which has term oriented, and siloed. “Seventy percent of alpha plans to raise $500 million to invest in 10-12 properties. comes from macro events. Get those right and you will be a winner; if not you will be a loser,” Rice says. Once At GRT Capital Partners, Dan Rice has honed they have established their outlook, Rice and Neumann a unique approach to energy investing based on a say finding the stocks to fit their views is not hard. They proprietary macroeconomic model. The results have don’t need an army of analysts. Neumann notes that Rice been outstanding. Together with Dan Neumann, Rice is steeped in the sector – CEOs come to him for advice. now runs a long-only energy fund, a hedge fund, and Rice adds that helping his sons to establish Rice Energy the GRT Energy and Income Fund, a top decile, growth- enhanced his insights immeasurably. For example, Rice oriented equity portfolio that seeks annual yield bought MarkWest, an MLP, after hearing from industry through a combination of dividends and covered calls. players that it was the No. 1 choice for pipelines, Rice also is on the board of Rice Energy, an exploration gathering, and processing production. The stock is up and development company working in the Appalachian eightfold from the lows of 2008. Basin. “Going into actual operations provided insights that I never got on my side of the table as an analyst.” TECHNICAL EDGE, LOCAL NETWORK. After years in the field, Lucas Energy Venture (LEV) commands both Those kind of 360-degree views are critical to a powerful understanding of the technical aspects of success. But FEG says investors need to take into energy and has sunk deep roots in the communities that account other factors. “We look for an alignment of host their endeavors, helping to create an atmosphere interests,” says FEG’s Bean. “Are the managers putting of cooperation. The trucks used on a site can be noisy up a significant portion of their own net worth alongside and kick up dust along a town. Lucas takes the initiative the limited partners? Is there a stable capital base? You to clean up any mess. Allen has a keen appreciation for don’t want to invest alongside hot money that will leave these details. He grew up across the street from oil wells at the first sign of trouble.” The good news, says Busken: in Enid, Oklahoma, working summers as a roustabout. “There are multiple drivers of returns in private energy. After graduating from a petroleum engineering The price of oil is not everything.” The real trick is to find program, Allen went on to earn a law degree and work standout thinkers with unique skills. on legal issues in oil and gas. He then drilled wells with RiverGas in Alabama and Utah before connecting with Lucas where he has assembled a team with singular energy know-how: Managing Director and investment Negotiating The Energy Revolution: committee member Martin Holt holds an MBA and a Think different, deep, and local degree in mineral engineering; Jennifer Queen-Miles, a petroleum engineer, has worked at both majors and For Dan Rice and Dan Neumann, think different independents from Mexico to the North Slope of Alaska is something of a mantra. Decades before the Energy and is a leader in reservoir assessment. Even the CFO Revolution, Rice had pioneered a highly successful Rob Vogel has an engineering degree. investing technique that relied on long-term forecasts of energy prices. “There was always a general assumption This surfeit of expertise enables Allen to act as that commodity prices are difficult if not impossible to advisor, partner, and mentor to the businesses they predict,” says Rice. “That’s certainly true for prices in the invest in. “We’ve been on a drilling rig,” says Allen. short-run, but not 2-5 years down the road.” “We’ve guided the fracking process. We’ve been in a field when bad things happen. We know what it’s like. MACRO EDGE, EAR TO THE GROUND. That When we are sitting in a boardroom type capacity that insight has enabled Rice to establish long-term positions. ‘been there, done that’ experience helps,” says Allen. “In a very, very volatile sector that is the only way to Plus the local knowledge they have acquired over the make money.” Neumann, an economist by training, years is a huge positive. enjoys the interplay between the micro world of energy
Downloaded fromAll Rights www.hvst.com Reserved, Uncorrelated, by IP LLC address 2014, The 192.168.160.10 Investment Lab on 09/23/2021 13 The LEV funds and their process are a natural increases, reserves decline. But in this revolution “we extension for Lucas Capital, founded in 1934. The are getting more oil out of more places. And it is not private equity unit sprang from the hedge fund necessarily just by expansion geographically. It is also by business at the request of a client who was looking for depth. It is three dimensions.” This has translated into oils ways to invest in upstream oil and gas properties and and liquid production growing 30% between 2008 and companies primarily through controlling equity, wells 2012; natural gas surged 46% between 2005 and 2013. and leases. LEV maintains the controlling interest, finding teams to manage the projects. In many ways, REMOVE ENERGY FROM INFLATION BUCKET, Allen says his role isn’t very different from when he was INSERT INTO GROWTH. GRT would retire the notion drilling wells for his first firm, RiverGas. It’s the same that energy is best used as an inflation hedge. “Some skills and responsibility, only now for an institutional people feel that without inflation you don’t have a investor base. sector. It’s a misconception.” Rice says energy is a growth engine. Institutions are underweight the sector because they aren’t changing gears quickly enough.
Acting different: Hitting the reset FORGET ABOUT THE MAJORS. Neumann says button on conventional thinking about 85% of the Energy and Income portfolio is in small to mid-sized cap companies in North American The experts agree: It’s time to act differently, upstream exploration and production companies. but markets have been slow to catch on. “We’ve had “These are the organizations that are on the cutting tectonic shift in growth edge of developing and visibility of growth, Energy is an undiscovered growth story new technology to but we have not seen create a hyper efficient anything close to that production mode of shift in the valuation of shale. They are not yet the stocks,” says Dan being credited for this Neumann. “Stocks in our revolution in growth portfolio trade about 6.5x and visibility of growth.” forward EBITDA.” That’s barely changed from “pre- THE U.S. revolution” days when OFFERS THE MOST energy companies threw ATTRACTIVE ENERGY off a fraction of the free PLAY. “We have a very cash flow they do today. capable service industry Dan Rice regrets that and supply industry,” investors are stuck in says Lucas’ Allen. If you an old way of thinking. look at a map of the They get hysterical if the commodity price swings 30 U.S. and look at a map of pipelines, they are everywhere, cents. Prices are no longer the determining factor in available to all operators. There’s a steady body of law.” profitability in the Energy Revolution. Volatility persists Allen ticks off other pluses: Favorable property laws that – and to offset that, the Energy and Income fund allow private ownership of mineral reserves; a stable overwrites 30% of the investments, creating a steady tax structure, and a huge market for acquisitions and income stream of about 6%-7%, without leverage. But divestitures. In fact, the A&D market has averaged $46 energy’s new song is a song of growth. Some key factors billion of transactions per year since 2010. “What we to consider: are seeing today is probably the most exciting part of my career. The opportunities are getting better; the pie is SURGING PRODUCTION. “U.S. oil and gas actually growing.” production AND reserves are both growing,” says Lucas’ Allen. That’s counterintuitive. Usually production
14 Downloaded from www.hvst.comAll Rights Reserved, Uncorrelated, by IP address LLC 2014, 192.168.160.10 The Investment Lab on 09/23/2021 All Rights Reserved, Uncorrelated, LLC 2014, The Investment Lab institutions to think through their overall exposures Mitigating Risks: A critical, and identify the correlations,” says Nolan Bean. An emerging market investment may turn out to be an manageable part of the process energy proxy if it is energy reliant. Another, subtle risk: The Energy Revolution comes with a unique set of Investors could miss out on opportunities if they haven’t risks as well as some classic energy snares. “The energy set up processes that enable them to act quickly on co- sector is prone to long boom and bust cycles. One investing opportunities. Institutions that can create pre- potential pitfall: overinvestment and/or too optimistic approved sleeves for these openings – which are hard to forecasts for oil and gas production in the U.S.,” says predict or schedule – gain an advantage. FEG’s Nolan Bean. Not so long ago, the experts were touting peak oil theories. “Exogenous shocks, such as declining demand from emerging markets or political instability in the Middle East and Russia could hurt as Looking to the future: Striking the well.” right balance in your portfolio
Energy is hot, which means Wall Street wants a At this juncture, FEG, for example, recommends piece of it. Even generalist private equity firms are to investors a mix of energy exposure: publicly-traded raising money to invest. FEG notes that the old hands in equities and private funds with exposure to upstream, energy are meanwhile raising significantly larger funds midstream, power generation/infrastructure, mineral in response to strong institutional investor demand. This royalties, and, potentially, energy services. They also is also changing the return profile of energy. “Twenty- recommend exposure to Canada, a key player in North five percent internal rates of return won’t be the norm America. And since energy also touches other parts any longer even though that might be the advertising,” of the real assets opportunity set, institutions should says Bean. All the more reason for institutions to seek be aware that some private real estate funds are managers with expertise and a different take. targeting assets tied to the energy sector, like hotels or apartments in areas with growing domestic production, Dan Rice says he’s keeping an eye on regulation, or real estate investments tied to growing demand for but isn’t overly concerned now. “Fracking regulations or energy infrastructure. MLPs have been enormously something that makes it difficult for these companies to successful vehicles to ride the infrastructure boom. The grow. To date we haven’t seen anything that we believe recently announced restructuring of Kinder Morgan, will pose a serious impediment to growth.” the granddaddy of MLPs, raised questions about the viability of the MLP structure but FEG’s Christian As a private equity investor, Martin Holt of Lucas Busken says that doesn’t mean the category is dead. Capital, focuses on process and developing an internal Caution is the byword. hedge to manage risk in the LEV portfolios. “There are different entry points ranging from very risky Renewables should also be on the investor radar. exploration on the front end and lease acquisition where For now, portfolios with social or environmental you are buying very old producing old assets. We want mandates have been focused on this sector, but as to be closer to the middle where you’re buying existing solar and wind expand, opportunities to invest will production, cash-generating assets so we can judge emerge. If there’s any lesson to be garnered from the quantitatively -- as opposed to just qualitatively -- the Energy Revolution is that change happens fast. But that opportunity to drill more.” Randy Allen adds that they shouldn’t paralyze investors. The biggest risk is to avoid also like to spread their investments among oil, gas, and energy, the shape-shifter. It eludes easy classification liquids. Once they all traded at parity, but after the 2008 but that means it affords more ways for institutions financial crisis, each began pricing separately. “So we to invest. One thing is clear: “The U.S. is the best place want exposure to all three as an internal hedge.” to be investing in oil and gas today,” says Lucas’ Allen. It’s a view that more and more investors are coming to As a shape-shifter, energy poses one more risk: it understand. can appear in unexpected spots in a portfolio. “We tell
Downloaded fromAll Rights www.hvst.com Reserved, Uncorrelated, by IP LLC address 2014, The 192.168.160.10 Investment Lab on 09/23/2021 15 The Investment LAB Report: Inspiring and Informing your Thinking about the Future
THE INVESTMENT LAB: HIGH-POWERED, THE ENERGY REVOLUTION dove into a major investment theme, allowing investors to absorb and process multiple viewpoints, apply the knowledge to their existing portfolios, and brainstorm the optimal methods to profit from the LAB work. This LAB Report documents the results of this day of education and inquiry to help you begin constructing an approach to investing in the Energy Revolution. But the LAB itself and this report were never meant to be the final word. We urge you to conduct additional research and develop your own opinions, and encourage you to start by reading the books and journals produced by our expert speakers, and by contacting the consultants and investment managers that contributed to the LAB.
IEA Executive Director Maria van der Hoeven said in 2013: “Those that anticipate global energy developments successfully can derive an advantage, while those that do not risk taking poor policy and investment decisions.” We agree. The Energy Revolution represents an inescapable economic juggernaut and an important investment opportunity. Investors need to prepare.
No matter your level of energy investing experience, we hope this LAB Report will inform and inspire your long-term thinking. And whatever your approach, we firmly believe this LAB Report – uniquely generated by your colleagues and peers in the industry – gives you insights and information to help you shoulder your responsibilities and act with confidence. We look forward to hearing your thoughts and continuing the conversation in future Uncorrelated, LLC LABs.
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GRT Capital Partners, LLC was founded in 2001 by Rudolph Kluiber, Greg Fraser and Tim Krochuk. The firm provides active equity management through the use of time-tested as well as new strategies for a diversified investor base. GRT Capital prides itself on its institutional approach to asset management, risk control and client service.
At GRT Capital, we believe that active management, by its very nature, is hard to do. The maintenance of an investing edge takes dedication and constant improvement in everything a firm does. For this reason, we combine the benefits of careful fundamental research, deep quantitative analysis and the latest technology. But there is no compass like experience.
Our managers have decades of experience, and many boast top long-term Lipper ratings in their investment histories. Our team members have worked at major institutional asset managers including Fidelity Investments, State Street Research, Wellington, Boston Partners and BlackRock Asset Management. They are seasoned professionals dedicated to being the best in active equity management.
GRT Capital Partners is a registered investment adviser, and meets the requirement of a “qualified professional assets manager” or QPAM for purposes of ERISA.
The father and son team of George and Russell Lucas formed Lucas Capital Management, LLC (“LCM”) in 1996, a SEC Registered Investment Advisor, with an initial focus on private wealth management. Since then LCM has transformed into a firm managing multiple institutional investment funds with over $450 million in total assets under management, while maintaining focus on the legacy private wealth management business. Lucas Capital Management institutional products include the Lucas Energy Total Return Funds (Hedge Strategy) and Lucas Energy Ventures (Private Equity).
LCM is coming to market in the near future with their 4th private equity fund – Lucas Energy Ventures (“LEV”) focused on North American upstream oil & gas assets. Initial investment will be directed to producing wells and leases with significant follow on capital dedicated to associated drilling opportunities. Lucas strategically built the investment model to work within the oil and gas marketplace by leveraging key relationships with strong operating companies, top geo-technical experts and trusted experts in the field.
The LEV team’s experience includes production operations, drilling and completing wells, overseeing construction projects relating to facilities, reservoir valuation, auditing and engineering, over $1 billion of transactional work, company management and managing oil and gas investments. This vast and collaborative experience is the key driver to success in the Lucas Energy Venture Funds.
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Golub Capital is a nationally recognized credit asset manager with an award-winning middle market lending business. Golub Capital manages over $10 billion in capital for institutional investors and family offices, offering tailored solutions for investors’ credit asset strategies. Today, the firm has over 175 employees with principal offices in Chicago and New York. Golub Capital has three business lines that are highly complementary to one another: Middle Market Lending, Broadly Syndicated Loans and Opportunistic Credit.
Morgan Creek Capital Management, LLC is a SEC-registered investment adviser providing global investment management services to institutions and wealthy families. We provide a customized investment solution to clients in need of a targeted investment program, as well as discretionary strategies to assist clients in building investment programs based on the University Endowment Model. We provide Asset Allocation, Manager Selection, and Portfolio Construction.
Morgan Creek was founded in July 2004 by Mark W. Yusko, former Chief Investment Officer of The University of North Carolina at Chapel Hill (“UNC”) Endowment. The core of the Morgan Creek investment team has worked together in a fiduciary capacity for many years managing one of the most complex endowment management programs in the country. Mr. Yusko and Managing Director Mike Hennessy were responsible for building the Investment Office and subsequent Management Company operations for the UNC Endowment, and they worked closely with the Investment Fund Board to develop investment policy, set goals and objectives, establish a strategic framework, select investment managers and manage portfolio risk.
At Principal Global Investors, designing and delivering the investment solutions that our clients need, when they need them, is our singular and constant focus — and the diverse group of specialized investment boutiques that comprise our asset management business are an important facilitator in this endeavor. We offer investment strategies that support the growing demand for income and yield, and leverage our quality-focused alpha and beta offerings in both developed and emerging markets.
Our strength as a solutions provider lies in the fact that, unlike many other investment managers, we focus on delivering successful outcomes, not simply returns. Our ability to achieve those successful outcomes relies first on the time we take and our ability to understand our clients’ complex investment needs, and then in our knowledge of how best to combine our investment capabilities, which span multiple asset classes and global markets, to help them achieve their current and future investment objectives. We believe it is this multi-asset know-how that is critical to successfully leveraging our global investment prowess and delivering the best total investment results and outcomes for our clients.
SailingStone Capital Partners is a 100% employee-owned investment advisory firm focused exclusively on providing investment solutions in the global natural resource space. Based in San Francisco, SailingStone manages concentrated, long-only separate accounts for institutional investors.
18 Downloaded from www.hvst.comAll Rights Reserved, Uncorrelated, by IP address LLC 2014, 192.168.160.10 The Investment Lab on 09/23/2021 All Rights Reserved, Uncorrelated, LLC 2014, The Investment Lab We are in business to serve our investment partners. Our singular objective is to generate attractive risk-adjusted returns in the global natural resource sector. Success is defined by investment results, not assets under management. We believe this focus to be a competitive advantage.
We purchase stakes in companies which we believe have the ability to compound economic value for their shareholders, independent of changes in commodity prices. We work with our management teams to ensure that they are focused on generating attractive returns by allocating capital to advantaged assets. By funding and participating in the value created by portfolio companies, we strive to generate attractive through-cycle returns across a broad array of commodities in a concentrated, liquid investment strategy.
The Sailingstone team consists of five investment professionals each with a minimum of 15 years of investment experience and an additional twelve members with significant experience across trading, investor relations, operations, compliance and finance.
Tortoise Capital Advisors is an investment manager specializing in listed energy investing. Tortoise is a pioneer in managing MLP funds and other accounts for individual and institutional investors, with a focus on energy infrastructure investing. Our products include energy funds, both publicly-traded closed-end funds and mutual funds, as well as separate accounts. As of August 31, 2014, the adviser had approximately $19.2 billion of assets under management in NYSE-listed closed-end funds, open-end funds and other accounts.
Exclusive Service Provider Sponsor
Established in 1994, Kaufman Rossin Fund Services (KRFS) is an independent full-service provider of administration services to the alternative investment community. Born out of one of the nation’s top CPA firms, KRFS maintains top-tier technical skills, quality control practices and technology. KRFS “Goes Beyond” its competition by delivering expertise in the complex areas of taxation, accounting standards and financial statement preparation. Clients worldwide rely on KRFS for startup, accounting and valuation, back-office outsourcing, investor services, tax services, customized reporting and corporate services. KRFS has offices in New York, Boston, San Francisco, Dallas, Cayman, and Miami.
Contributors
Annual Connect was established in August of 2010 with a vision of offering specialized conference consultation and program management services to Morgan Creek Capital Management and its investment managers, clients, and friends. Today Annual Connect has broadened its offering to work with myriad clients to provide strategic conference planning advice and event planning services. Annual Connect allows our clients to focus on their core business functions and delivers a personalized, professional event experience, so they can host, mingle and network with their clients, prospects and guests. As professionals with over 20 years of experience in conference production, we will manage your meeting from start to finish and make you look incredible to the outside world.
Downloaded fromAll Rights www.hvst.com Reserved, Uncorrelated, by IP LLC address 2014, The 192.168.160.10 Investment Lab on 09/23/2021 19 Annual Connect also hosts its own investment education forums, roundtables and summits. Our programs provide high-level content and bring senior investment professionals together to discuss and debate strategies and industry trends. Annual Connect hosts the NC Investment Institute’s (NCII) Annual Forum in October and the iCIO Investment Summit in North Carolina and New York City. For more information please contact andrea@ annualconnect.com.
Fund Evaluation Group, LLC (FEG) provides investment consulting, portfolio management and research services. Established in 1988, the independently-owned firm has approximately $50 billion in total client assets under advisement and approximately 100 employees (as of 6/30/2014).
FEG specializes in designing sophisticated, institutional-caliber portfolios. Clients include institutions, such as universities and corporate retirement plans, and financial advisors. FEG’s research analysts are uniquely tenured for the industry, with the average analyst possessing approximately 10 years of investment experience. Analysts have been featured by CNBC and the Wall Street Journal. FEG is headquartered in downtown Cincinnati, and has offices in Detroit and Indianapolis.
The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters (Penguin, Nov.2013) Gregory Zuckerman. (http://amzn.to/1mDwglt)
Everyone knew it was crazy to try to extract oil and natural gas buried in shale rock deep below the ground. Everyone, that is, except a few reckless wildcatters - who risked their careers to prove the world wrong. No one understands these men—their ambitions, personalities, methods, and foibles—better than the award-winning Wall Street Journal reporter Gregory Zuckerman. His exclusive access enabled him to get close to the frackers and chronicle the untold story of how they transformed the nation and the world. Their story is one of the most important of our time.
TerraJoule.us is monthly ebook/newsletter written and edited by Gregor Macdonald that covers the macro of global energy. Typical readers of TerraJoule.us are private investors, financial institutions, government agencies, hedge funds, and family offices, located globally from Canada to Australia, the UK, Japan, and Europe. Subscription information can be found at Terrajoule.us.
Nancy Miller is the founder of Googa Inc., an investigative journalism and research boutique focused on finance and innovation. She is the author of “The Facebook IPO Primer”; her work has appeared in a variety of publications, including Fast Company, Barron’s, Men’s Health, and Time.com. You can follow her on Twitter @nancefinance or connect on LinkedIn https://www.( linkedin.com/in/nancefinance).
20 Downloaded from www.hvst.comAll Rights Reserved, Uncorrelated, by IP address LLC 2014, 192.168.160.10 The Investment Lab on 09/23/2021 All Rights Reserved, Uncorrelated, LLC 2014, The Investment Lab The Investment LAB Participants
Investment Officers
Suzanne Brenner Robert Lee Sharon Roush Chief Investment Officer Portfolio Manager - Hedge Funds Director The Metropolitan Museum of Art Employee Retirement Systems of Brandywine Group Advisors Texas David Brief Reginald Sanders Chief Investment Officer Alisa Mall Director of Investments Jewish Federation of Metropolitan Director of Investments W.K. Kellogg Foundation Chicago Carnegie Corporation of New York Anne Shelton Tom Coleman John Marron Deputy Chief Investment Officer Sr. Investment Officer Investment Associate The American Red Cross Virginia Retirement System UVIMCO Irina Tanenbaum Todd Corbin Michael Nicks Senior Investment Analyst Chief Investment Officer Director of Investments The Juilliard School The New York Public Library Pepperdine University Catherine Ulozas Joshua Fenton Novisi Nirschl Chief Investment Officer Director of Public Markets Director, Private Investments Drexel University The Helmsley Charitable Trust Memorial Sloan-Kettering Cancer Center Mark Waite Adele Gorrilla Investment Manager Chief Investment Officer Michelle Pak University of Utah Denison University Managing Director The Rockefeller Foundation Burton Yuen Douglas Hanly Senior Director Investment Analyst Paul Platkin Kamehameha Schools Partners HealthCare Chief Investment Officer Gruss & Co. Michael Horst Investments Director Cleveland Clinic
Expert Speakers
William J. (John) Berger James Ivey John C. Moore Chief Executive Officer Co-Founder & CFO CEO Sunnova Pintail Oil & Gas Acorn Energy
Hunter Carpenter Gregor Macdonald Gregory Zuckerman Private Equity Investor Founder Author and Special Writer TerraJoule.us Wall Street Journal
Downloaded fromAll Rights www.hvst.com Reserved, Uncorrelated, by IP LLC address 2014, The 192.168.160.10 Investment Lab on 09/23/2021 21 Asset Management Professionals (Alphabetically by Company)
Expert Speakers
Daniel Neumann Nulsen Smith Mary Beth Glaccum Portfolio Manger, Managing Director Managing Director Director GRT Capital Partners, L.L.C GRT Capital Partners, L.L.C Lucas Capital Management, LLC
Daniel Rice Randy Allen Portfolio Manger, Managing Director Portfolio Manager GRT Capital Partners, L.L.C Lucas Capital Management, LLC
Discussion Group Participants
Alissa Grad Arild Holm Laura Garner Managing Director Portfolio Manager Partner, Investor Relations Golub Capital Principal Global Investors Sailingstone Capital Partners LLC
Dan Kingston Dale Kindregan Andrew Goldsmith Managing Director Director-Institutional Marketing Head of Institutional Sales & Morgan Creek Capital Management Principal Global Investors Consultant Relations Tortoise Capital Advisors
Exclusive Service Provider Sponsor
Christine Egan Jonathan Gwynn Director Manager Kaufman Rossin Fund Services Kaufman Rossin Fund Services
Contributors
Meeting Leaders Writers Associates
Nolan Bean Nancy Miller Melissa Santaniello Managing Principal Managing Editor Founder Fund Evaluation Group Googa Inc. AOI
Christian Busken Karan Sampson Elizabeth Cimini Director - Real Assets Research Consultant Finance Student Fund Evaluation Group Uncorrelated LLC Villanova University
Phillip Scherrer Event Logisitics Kimberly Blue Consultant Senior Advisor Fund Evaluation Group Uncorrelated, LLC Donna Holly Matt Veith Annual Connect, LLC Gita Kahan Senior Vice President Associate Fund Evaluation Group, LLC Leslie Jacob Uncorrelated, LLC Annual Connect, LLC
22 Downloaded from www.hvst.comAll Rights Reserved, Uncorrelated, by IP address LLC 2014, 192.168.160.10 The Investment Lab on 09/23/2021 All Rights Reserved, Uncorrelated, LLC 2014, The Investment Lab Acknowledgements
Launching the first INVESTMENT LAB workshop –HIGH-POWERED, THE ENERGY REVOLUTION – and producing this LAB report could not have happened without advice, support and effort from the individuals and organizations acknowledged here.
Thank you to the twenty-two investment officers – current and future leaders of endowments, foundations, pensions and family offices – that participated. I must also thank the investors that served as the initial focus group, and the investors and managers that joined the Portfolio Whiteboard Project. Our LAB asset management partners, particularly GRT Capital Partners and Lucas Capital Management, made the LAB workshop and report possible. Our exclusive service provider sponsor, Kaufman Rossin Fund Services, provided crucial support.
The Fund Evaluation Group contributed significantly as curriculum advisors, meeting facilitators and guest speaker sponsors. Andrea Szigethy from our logistics partner Annual Connect provided expert advice and service, while her colleagues Donna Holly and Leslie Jacob superbly handled pre-conference logistics and on site support. Nancy Miller, the managing editor and lead writer, waded through pages of notes and hours of recordings to present our results creatively, thoroughly, and excellently. My colleague Karan Sampson gave vital marketing and editorial assistance, while Melissa Santaniello and Kimberly Blue offered valuable advice, introductions, and support. And my dear uncle, Fred Rittereiser, enthusiastically embraced and researched the Energy Revolution theme, and offered ideas, information and insights throughout the process.
Our expert speakers are energy industry leaders, investors and observers. They donated their time and expertise to educate the investment community. I cannot thank them enough for their commitment and contribution.
Additional thanks to
Jim Bethea Kevin Gahwyler Panayiotis Lambropoulos Andrew Saunders University of Iowa Twin Capital Hedge Fund Investor Castle Hill Capital Partners, LLC Pete Blanchfield James Gruver Dan Lancellotti MAP Royalty Black River Asset Capital Dynamo David Stewart Management Global ARC Peter Crivelli Joan Larson Institutional Investment Sales Christopher Holt Sandalwood Securities, Inc. Emma Sugarman Global ARC Orchard Square Partners Jeff Dorman Rachel Minard Harvest Exchange Corp. Christine Kelleher Minard Capital Management Eddie Szigethy Avec Capital Zig Zag Multimedia Sam Enoka George Moss Greensparc Energy Advisors Stephen Killeen LSU Foundation Jennifer Tamis The Carbon Neutral Company Gallatin Capital Stuart Feldman Phil Pearlman Fidelity Prime Services Larry Kochard Yahoo Finance Jeanie Ulicny UVIMCO Ulicny, Inc. Dawn Ford Scott Pittman Capital Craft Simon Koziel Mount Sinai Medical Center Protrak International
Downloaded fromAll Rights www.hvst.com Reserved, Uncorrelated, by IP LLC address 2014, The 192.168.160.10 Investment Lab on 09/23/2021 23 The LAB explored the technical and entrepreneurial developments inspired by the promise of US energy independence. We considered how the Energy Revolution will impact investment portfolios over the course of the next 20 years and offered guidance for how to invest in the Energy Revolution now. We strived to think big and generate creative, actionable ideas, and we raised new questions too. We aim to explore those questions and ideas, and many more themes, in future Investment LABs. We look forward to hearing what you think about our results and hope you will join the conversation.
Cathleen M. Rittereiser Founder and CEO Uncorrelated, LLC Founder and Publisher, The Investment LAB
About the Investment LAB Uncorrelated, LLC created the Investment LAB to inspire institutional investors to develop long-term perspectives – and actionable investment ideas – by offering a collaborative format that explores futuristic investment themes in conversations with experts and investment managers. LAB means LEARN, APPLY, BRAINSTORM. It is the foundation for the collaborative projects at Uncorrelated LLC.
HIGH-POWERED, THE ENERGY REVOLUTION was the first theme in the series, and one we expect to explore again, but we plan to cover many other long-term investment themes in future LABs. Long-term investment themes cut across numerous asset classes, liquidity profiles, vehicles and levels of investment experience. Institutional investors with a long time horizon and an interest in preparing for the future will benefit from theINVESTMENT LAB. If you have an investment theme you would like to examine, or want to be informed of the next Investment LAB workshop, please contact [email protected].
About Uncorrelated, LLC Cathleen Rittereiser founded Uncorrelated, LLC to develop, mentor and inspire future institutional investment leaders. Uncorrelated is an “Act Tank” that connects institutional investors and asset managers to collaborate on solving investment problems and brainstorming futuristic investment ideas. The previous Uncorrelated initiative, the Portfolio Whiteboard Project, brought together this new generation of investors with asset managers to define and publish an investment model for the future. Uncorrelated initiatives are designed to stimulate long-term thinking and generate new ideas. The collaborative, discussion-based activities – with a focus on solving common problems – build collegial, productive, professional relationships and inspire ongoing industry discussions and learning.
Rittereiser is the co-author, with Lawrence E. Kochard, the CEO of the University of Virginia Investment Management Company, of the books Foundation and Endowment Investing (Wiley, 2008) and Top Hedge Fund Investors: Stories, Strategies, and Advice (Wiley, 2010).
For more information:
Web: theuncorrelated.wordpress.com LinkedIn: http://www.linkedin.com/in/cathleenrittereiser Twitter: @theuncorrelated E-Mail: [email protected]
24 Downloaded from www.hvst.comAll Rights Reserved, Uncorrelated, by IP address LLC 2014, 192.168.160.10 The Investment Lab on 09/23/2021 All Rights Reserved, Uncorrelated, LLC 2014, The Investment Lab