Investment funds boost E&P
PRIVATE equity funds are playing an increasingly important role in the region’s energy sector. Propelled by investors who are less anxious about short-term results, the funds are welcomed by companies that are tired of being punished by temperamental public equity markets.
In the 18 months to mid-2002, nine energy-specific funds (in the US and Canada) raised $4.18bn and four general equity funds with significant energy interests raised another $12.5bn, says the New York-based investment bank, Cosco Capital Management.
Cosco, whose business includes trans-border financings between the US and Canada, estimates private Canadian investment funds have risen in size from $60m three years ago to about $0.5bn and says they could double to $1bn over the next two years.
Cameron Smith, managing director of Cosco, told a Calgary forum earlier this year that the energy-focused funds have consistently returned 20-45% to investors at a time when the public markets have been plummeting and the capital available for investment in alternatives to technology companies has been tightening.
Funds such as Natural Gas Partners, First Reserve, Yorktown Partners, Quantum Energy Partners, Lime Rock Partners and Kayne Anderson Capital Advisors, along with a number of general funds that are investing in energy have enjoyed a successful period of raising capital, he said. Smith claimed most funds have not only replaced their capital in the last couple of years, but have doubled or tripled it in size.
He said the momentum primarily comes from large pension funds and insurance companies that want to avoid unstable stock markets and are ready to take a direct investment role in sectors such as oil and gas.
Dallas-based Natural Gas Partners has investments in 42 private- sector companies operating in oil and gas basins across North America about 80% of its funds are invested in the US and 20% in Canada.
North America’s wave of mergers and acquisitions in recent years has depleted the available pool of medium-sized and large producers, but the public markets have shown little inclination to invest in junior and start-up firms. As a result, many smaller exploration and production (E&P) firms, which had often put themselves up for sale in an attempt to maximise shareholder value, are finding their way into the private capital club.
Typical of the underperformers are three Canadian juniors Upton Resources, Tappit Resources and Lexxor Energy which are reviewing strategic alternatives that could include outright sale or conversion to a royalty trust.
Scott Dutton, chief executive officer of Upton, a 14-year-old company with assets valued at about C$100m ($68.5m), said “there is more value to be unlocked than our stock price reflects” a growing view that is attracting support for the private capital funds.
More funds are prepared to venture into the E&P sector, such as Calgary-based Camcor Capital, which has invested in seven start- ups, each producing less than 1,000 barrels of oil equivalent a day.
Similarly, Peter Kagan, managing director of the energy division at New York-based Warburg Pincus, said the fund is “not afraid of exploration” and has $0.6bn available for E&P.
Copyright Euromoney Institutional Investor PLC May 2, 2003
