CAPITAL FORMATION 2019 Bold Moves In A Volatile Market A Supplement To MAY 2019 A SUPPLEMENT TO CAPITAL FORMATION 2019 1616 S. Voss, Suite 1000 Bold Moves Houston, Texas 77057-2627 713-260-6400 Fax: 713-840-8585 In A Volatile Market HartEnergy.com Editor-in-Chief STEVE TOON CAPITAL MARKETS NEWS ..........................................5 [email protected] A roundup of recent news regarding the state of private Executive Editor-at-Large LESLIE HAINES capital, drilling activity, balance sheets and more. [email protected] Associate Managing Editor PRIVATE EQUITY INVESTMENTS STALLING .. 11 BRANDY FIDLER The caution flag is out in what one provider calls a [email protected] “super challenging” environment. Senior Financial Analyst CHRIS SHEEHAN, CFA [email protected] RESCUE CAPITAL ........................................................... 17 Midstream Editor-at-Large With RBL lenders and public money fearing energy PAUL HART [email protected] investments, a new force of private capital avengers is swooping in to rescue oil and gas operators. Contributing Editors ELLEN CHANG GREGORY DL MORRIS NEW CAPITAL VOYAGES ........................................... 23 Creative Director If willing to leave the harbor, a variety of credit solutions ALEXA SANDERS for upstream and midstream players lies beyond the horizon. Senior Graphic Designer MAX GUILLORY BILLION DOLLAR BABIES: Senior Marketing Manager MIDSTREAM RATES BIG BUCKS ......................... 28 TAMARA MURPHY [email protected] A welter of large private-equity deals are going on in both Production Manager hydrocarbons and water. SHARON COCHRAN [email protected] MEET ME IN THE MIDDLE .......................................... 35 Ad Materials Coordinator CAROL NUNEZ These capital providers believe in investing equity or debt [email protected] in the lower middle market. For additional copies of this publication, contact customer service at 713-260-6442. CAPITAL MARKETS SHAKE-OUT ......................... 39 [email protected] The flight of capital out of public equities and debt reveals a Vice President, Sales rare polar shift in investor sentiment. But for how long? DARRIN WEST [email protected] Director, Business Development TOP DEALS CHARTS ................................................... 41 CHANTAL HAGEN Oil and Gas Investor presents a compendium of equity and [email protected] debt deals over the trailing 12 months. Publisher KEVIN C. HOLMES [email protected] PRIVATE EQUITY’S ADVANTAGE ......................... 49 In a confused capital market, one midstream veteran credits private-equity backing with his firm’s ongoing success. Vice President, Editorial Director PEGGY WILLIAMS ENERGY FINANCE SOURCEBOOK: Chief Financial Officer A DIRECTORY OF CAPITAL PROVIDERS ....... 53 CHRIS ARNDT An A-to-Z listing of energy capital financiers. Chief Executive Officer RICHARD A. EICHLER INDEXES ............................................................................... 73 Copyright 2019, Oil and Gas Investor Hart Energy Publishing LP, Houston, Texas. May 2019 | Capital Formation | HartEnergy.com 1 INTRODUCTION TAPPING CAPITAL, OR TAPPING THE BRAKES t’s a given that the quality of the acreage and the qual- based on its survey of some 40 of the most-active PE ity of the management team still dominates all else in firms in energy. IE&P deal-making, so pairing up with the appropri- In light of these changes, alternative debt providers have ate capital provider and choosing the stepped up to the plate in a bigger way right financing structure follow from to help E&P entrepreneurs advance that truism. their companies. This is good news for But accessing capital today is not as some E&Ps scrambling for capital. easy as it once was. In every corner Capital sources serving the lower of the energy market, from commer- middle market are alive and well, and cial banks to private equity to the IPO indeed, can offer smaller E&P compa- scene, people have tapped the brakes. nies and start-ups a source of dollars For one thing, energy capital mar- used to buy and build an asset. Some kets are in flux—some might even say of the providers of this type of capi- distress. Investors in public markets tal admit that although it takes a lot have pulled back and clamped down of work to vet and close a deal, the on their wallets, demanding returns as rewards can be great, often yielding well as growth. Equity and fixed in- above-average returns. If deploying come issuance was down significantly $20 million, for example, it is easier in 2018 and early 2019. to imagine closing a sale on those as- In the lower middle market arena, sets later on for $100 million, for a always the sector with the greatest good return, than it is to deploy $200 need (but often, the greatest reward), financing a deal million and imagine a large pay day later on. can be difficult to do and quite time-consuming. Private In every case, patience and flexibility is the order of the equity’s cheery tone has changed as hold periods have day, and will remain so until commodity prices break to become longer and exit strategies for portfolio companies a higher level, which could re-establish greater confidence are no longer a slam dunk. Even so, Parkman Whaling in capital sources and the E&P companies they serve. in Houston has estimated that at least $30 billion of pri- vate equity rests on the sidelines, raised yet not deployed, —Leslie Haines, Executive Editor-at-Large FURTHER INFORMATION Since our last Capital Formation supplement in June 2018, we have also published these articles, which can be found at Hartenergy.com: “Deal Flow Dilemma” Why private equity exits have become a challenge. Aug. 2018 “High Yield Holds Its Ground” Investment bankers discuss this form of capital. Aug. 2018 “Energy IPOs Continue Backlog” Equity investors have grown wary. Nov. 2018 “Could Mezzanine Be Re-Emerging?” Some mezzanine providers weigh in. Jan. 2019 “Small, Strategic Capital” Three firms are profiled that serve small, or undercapitalized, teams. Jan. 2019 “Volatile But Range Bound” Financiers comment on public capital deals and availability. March 2019 May 2019 | Capital Formation | HartEnergy.com 3 MARKET NEWS but may also look for some expo- CAPITAL sure to emerging markets.” MARKETS PRIVATE-EQUITY NEWS In March, Red Wolf Natural Resources LLC, a newly NEWS formed exploration and pro- duction company in Oklahoma In case you missed it City, said it has partnered with Pearl Energy Investments, PREQIN SURVEY Houston, a private oil and gas Unlisted global natural re- investment firm with $1.2 bil- source assets under manage- lion of assets under manage- ment have grown tremendously ment. Red Wolf will pursue from $175 billion at the end were looking to increase their allo- upstream development and ac- of 2009 to $668 billion as of cations in 2019. Even for the asset quisitions in the Midcontinent June 2018 (latest data avail- classes that have demonstrated sub- and select Rockies basins. Drew able), according to Preqin, the par performance—namely natural Deaton is CEO and Jeff Dahl- research and data firm. It cur- resources and hedge funds—inves- berg is COO. They were recently rently tracks over 1,100 fund tors are still planning to increase active in the Denver-Julesburg managers in the space and over their allocations in 2019.” and Anadarko basins, having 3,800 active investors. Preqin said developed markets previously worked together at Energy dominates the indus- such as the U.S. will continue to Ward Energy Partners LLC. try, accounting for $89 billion of dominate natural resources fund- Cavalcade Midstream LLC the $93 billion raised in 2018. raising over 2019: 39% of investors has been formed as a full-ser- This leaves room for other nat- plan to invest exclusively in devel- vice midstream company, ural resource assets (metals and oped markets and 20% will “pre- receiving a total equity com- mining, water, timberland, agri- dominantly employ this approach, mitment of $150 million from culture and farmland) to grow, Pearl Energy Investments, the firm said. Old Ironsides Energy and In November 2018, Preqin sur- What will be the biggest NGP. Based in San Antonio, veyed 400 investors as to their impact of commodity price Cavalcade will provide tailored thoughts on 2019 and various asset volatility at the end of 2018? midstream solutions through classes. Most agreedConsolidation that inequity the oil greenfield development and markets were at high levelsand gas andindustry due strategic M&A, initially in the for a correction, which did occur in Permian Basin. Its three found- the fourth quarter. They also said ing partners are Rich Reynolds, that since the outlook for the nat- 23% Hunter Thunell and Ross Dil- ural resources industry in 2019 is lon, who previouslynability worked to exit oil to and- gas largely positive, theyMore oil were and gas ready to gether at NuStarinvestments Energy LP. through divesti- bankruptcies % % place capital with fund managers 3 45 ture, merger or IPO % when attractive opportunitiesNo lasting arise. 8 In October 2018, Skip McGee’s Some 88% of surveyedimpact inves- Intrepid Financial Partners tors said they planned to increase % hired an acquisitions and dives- or maintain their allocation to this 21 titures team based in Houston, asset class, a larger proportion than led by Antonio (Tony) Fernan- at the end of 2018.Lack of access to dez, managing director. He was capital for producers “In private equity, high absolute 45% Inability to exit oil and gas investments previously a senior A&D banker and risk-adjusted returns are the through divestiture, merger or IPO at J.P. Morgan, where he led priorities for investors … and for 23% Consolidation in the oil and numerous A&D projects across hedge funds and natural resources, gas industry most major U.S. unconventional the primary motivations are diver- plays. Prior to that, he was at 21% Lack of access to capital for producers sification and low correlation with Jefferies. Robert Willis and Ste- other asset classes,” Preqin said. 8% No lasting impact venson Bunn also joined, both “Where an asset class had outper- 3% More oil and gas bankruptcies coming from Apache Corp.