KKR Prospects for Natural Gas After Leveraged Buyouts Dry Up
Henry Kravis, co-founder of KKR & Co. LP, walks during a conference in Sun Valley. Photographer: Matthew Staver/Bloomberg
KKR & Co., which led the record takeover of electricity provider TXU Corp. in 2007, is making a new bet on rising energy prices, this time without the leverage.
The private-equity firm is teaming up with David Rockecharlie, previously co-head of the energy group at New York-basedJefferies Group Inc., and Claire Farley, a former adviser to the securities firm, to build an exploration business for unconventional energy, according a person briefed on the plan. The business would prospect for fuel such as gas trapped in shale and coal beds under parts of Appalachia and Texas, said the person, who asked not to be named because the plan has yet to be formalized.
KKR, which is sitting on $12.6 billion in unused capital commitments, joins Exxon Mobil Corp.and BP Plc, the biggest owners of shale-gas deposits in the U.S., in betting that energy prices will rise and make the costly method of extracting fuels profitable. KKR’s first investment in shale gas returned a fourfold profit in a year. Unlike the TXU deal, which struggled under a $38 billion debt load, the latest energy bet will use mostly equity to produce returns.
“The promise of shale and what it means to domestic oil and gas production is significant, but the cost to get there is very significant too,” Marc S. Lipschultz, a partner at New York-based KKR who oversees energy and infrastructure investments, said in an interview. “That is going to present opportunities for firms that have the right level of expertise and commitment.”
Fourfold Gain
The asset manager is seeking alternatives to leveraged buyouts after those deals came to a halt with the credit crisis. Private-equity firms announced $32 billion of transactions for the first half of this year, less than one-tenth the volume in the same period in 2007, according to data compiled by Bloomberg.
KKR, run by Henry Kravis and George Roberts, started investing in shale gas when it backed East Resources Inc. with about $350 million a year ago. The company agreed on May 28 to sell a majority stake to Royal Dutch Shell Plc, giving KKR a fourfold return on its investment, said two people briefed on the agreement who asked not to be named because the information is private.
Shell’s $4.7 billion agreement with East Resources was the biggest among 11 U.S. shale-gas transactions totaling $17.9 billion in the first half of this year, according to data compiled by Bloomberg.
Last month, KKR said it plans to invest as much as $400 million in a partnership with closely held Hilcorp Energy Corp. to develop a shale deposit in Texas. KKR will hold 40 percent of the partnership, with Hilcorp owning the rest and managing operations.
‘Demand for Capital’
“We’re going to see a lot more private equity flow into this space,” Ralph Eads, chairman of energy investment banking at Jefferies Group, said in an interview. “There’s huge demand for capital and that capital’s not all going to come from the public capital markets.”
Unconventional gas is an industry term for the fuel trapped in shale formations, coal beds and sandstone rock. Tapping those deposits helped lift U.S. gas output by 3.9 percent to 18.3 trillion cubic feet last year through October and make the country the largest producer before Russia. Shale-gas production will probably account for a third of the U.S. total by 2035, compared with 17 percent in 2008, the U.S. Energy Information Administration said in a May 11 report.
Shale gas “is a total sea changer to the domestic and global energy industry,” said Andy Safran, a senior energy and utilities banker at Citigroup Inc.
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