1800 avenue of the stars, second floor los angeles, california 90067 tel 800.231.7414 1100 louisiana...
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1800 Avenue of the Stars, Second Floor • Los Angeles, California 90067 • Tel 800.231.7414
1100 Louisiana Street, Suite 4550 • Houston, Texas 77002 • Tel 713.655.7351
www.kayneenergy.com
Kayne Anderson Energy Funds
January 2006
Independent Petroleum Association of America 2006 Private Capital Conference
2
Firm Background
With offices in Los Angeles and Houston, Kayne Anderson Capital Advisors employs over 40 people. Distinct teams of investment professionals are dedicated to the various investment strategies managed by the firm.
Approximately $4.4 billion (80%+) dedicated to the energy industry!
Kayne Anderson Capital Advisors, LP
Energy Group(Structured Energy
Investments)
$900 Million raised
45+ transactions with 25+ oil and gas
companies since 1992
8 investment professionals
(6 in Houston, 2 in Los Angeles)
Closed End Fund Group
(NYSE: KYN and KYE)
$2.5 Billion in Assets
Hedge Fund Group
(Marketable Securities)
$1.5 Billion in Assets
Private Equity Group
(Non-Control Investments)
$360 Million raised
ENERGY
Energy Investments
(Public Companies)
$1.0 Billion in Assets
NON-ENERGY
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Life Cycle of Small Oil & Gas Companies
A B C D
Life of a Company
Val
uat
ion
Risk Profile: High Medium Low
Risk Type: Engineering Drilling Operational Geologic Operational Commodity Price
Fund Type: Private Private Mezzanine Venture Tranche B
Kayne Anderson: A-B & B-C Risk
4
Private Equity Energy Capital Markets
Significant amount of new capital has been committed to seasoned and new funds
Approximately $8.5 billion has been raised in the last 2 years by energy private equity funds (a)
– Kayne Anderson Energy Fund III closed in November 2004 with total commitments of $550 million (to date, 50% committed to 7 portfolio companies)
Also, traditional energy private equity players have been raising complementary, non-equity funds
– Working interest funds, mezzanine funds, royalty funds, etc.
Larger funds necessitate larger transactions and/or more portfolio companies
During the last 2 years, private equity-backed companies have accounted for approximately 15% and 30% of E&P buyside and sellside transactions, respectively (b)
(a) Source: COSCO Capital Management LLC.
(b) Source: Richardson Barr & Co. Percentage by deal count for transactions between $25 million and $1 billion.
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Private Equity Energy Capital Markets
Source: Richardson Barr & Co.
$8 $8 $10 $10 $10 $10$14
$24
$0
$10
$20
$30
$40
$50
$60
1998 1999 2000 2001 2002 2003 2004 2005
($ B
illio
n)
Asset Corporate$156
$41
$58
$43
$5
$63
% Private Equity 5% 32%
% PDP 70% 40%
M&A Boom
70/30 Blended Spot Price
$13
Private equity-backed companies have become increasingly prevalent in the M&A marketplace and are one of the main reasons PDP percentages (as a % of total reserves in sellside transactions) have decreased dramatically
Have a “build to sell” mentality recognizing that public E&P companies need to acquire upside and will pay for it
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Hot Domestic Plays
Sought after properties are more “repeatability” oriented, but cost of entry is at an all-time high and services can be a problem
Tight sands
Shales
Coal bed methane
Horizontal drilling
Bakken Shale
Piceance Uinta
Cretaceous Sands
Barnett Shale
E. Texas / N. Louisiana
Arkoma Caney Shale
Appalachia CBM
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Use of Leverage
Commercial banks have been aggressive in the E&P space
Competitive atmosphere for commercial banks to keep their loan dollars “at work”
– Borrowing base calculations based on higher price decks with more value given to non-PDP reserves
Bank price decks still conservative compared to NYMEX strip or equity research price estimates
– Long-term price decks of approximately $35.00/bbl oil and $5.00/Mcf gas
– Hedging PDP production helps to “bridge the gap”
Tranche B loans being used more frequently as a source of capital
Private equity firms are maximizing usage of 6%-7% bank debt to achieve target equity returns
8
Use of Hedging
Private equity firms are maximizing usage of long-term hedges for PDP production
Increases bank borrowing base, thereby lowering overall cost of capital
“Lock in” current commodity prices
– If prices go higher, hedges are “underwater” but generally nice problem to have since unhedged reserve base is more valuable
Source: Petrie Parkman & Co.
9
Drilling Economics
Capital is being used to accelerate drilling and rates of production
Services may be a problem – rigs, fracs, etc.
E&P companies are committing to long term contracts with service companies
“Rule of thumb” metrics don’t make sense any more
Full cycle margins at all-time high, and market valuations reflect this
Adjusted EV/ Adjusted EV/TP Reserves Production
($/Mcfe) ($/Mcfed)
Large Caps 3.01 13,743Mid Caps 3.18 12,441Small Caps 4.69 17,659
Current Trading Comparables
Sticker Shock?
Source: Scotia Capital.
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E&P Full Cycle Margins
0.82
0.220.21
0.56
1.15
0.240.18
0.57
1.32
0.30
0.23
0.57
0.94
0.40
0.22
0.64
1.09
0.35
0.21
0.76
1.57
0.290.20
0.82
1.16
0.32
0.23
0.81
1.63
0.31
0.26
0.97
2.02
0.30
0.26
1.12
2.25
0.29
0.32
1.39
2.50
0.27
0.32
1.51
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00U
nit
Co
sts
($
/Mc
fe)
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005E 2006E
FD&A Int + Pfd G&A LOE + Taxes
Source: JPMorgan Chase Global Equity Research.
($/Mcfe)1996 1997 1998 1999 2000 2001 2002 2003 2004 2005E 2006E
Full Cycle Margins:
Actual Revenue (1) $3.03 $2.77 $2.18 $2.55 $4.53 $4.07 $3.65 $5.41 $6.21 $8.99 $10.02Full Cycle Cost 1.81 2.14 2.42 2.20 2.41 2.88 2.52 3.17 3.70 4.25 4.60Full Cycle Margin $1.22 $0.63 -$0.24 $0.35 $2.12 $1.19 $1.13 $2.24 $2.51 $4.74 $5.42
(1) Weighting: 70% gas, 30% oil. 2006E assumes 12 month NYMEX strip as of 1/9/06.
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Declining Production
Despite record investment levels and rig counts, North American gas production has been declining year-over-year (even adjusting for 2005 hurricane effects)
Average gas well decline rate has increased from 16% per year in 1992 to approximately 30% per year in 2005 (a)
Chart Source: JPMorgan Chase Global Equity Research.
(a) Source: EOG Resources.
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Market Trends in Private Equity Deals
Funds are bigger, able to write much larger checks and need to deploy capital
“Blank check” investing using control of capital budgets to allocate capital
Offering management teams better economics after return thresholds
Fewer “B-to-C” investment opportunities since many companies are being sold and management teams are starting over from scratch
More “A-to-B” investment opportunities
Less management equity in deals
Shorter hold periods since acquirors willing to pay for upside
Management teams doing second, third and fourth deals with equity funds
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Downside Protection
Most funds can sustain a substantial decline in prices without losing capital
Hedging PDP production
Use of bank debt to fund drilling and acquisitions
Remain conservative in commodity price assumptions
– Kayne Anderson uses a discount to NYMEX 5-Year strip for unhedged volumes
– Pressure to increase these price assumptions
Exit timing flexibility to ride out price cycles
Nonetheless, ROI/IRR could fall below target returns
14
Pros & Cons of Private Equity
Pros Cons Knowledgeable partner
Structuring flexibility
Allows all parties to find appropriate risk/reward trade-offs
Fills void of debt capital markets and public equity markets
Patient, growth-oriented capital
Consistently available
Alignment of interests
No cash flow sweep
Management gets promote on $ invested
Management has virtually unlimited checkbook for “equity return” projects
Control
Board control
Budget approval rights
Subsequent financings
Forced sale provision
Expensive capital
Dilutive to shareholders
Appendix: Kayne Anderson Energy Funds
16
2005 Kayne Anderson Update
Kayne Anderson closed Kayne Anderson Energy Fund III (“EF 3”) in November 2004 with total commitments of $550 million
During 2005, Kayne Anderson monetized interests in 7 companies
Panther Energy (EF 2) – private sale of Kayne Anderson’s interests (February 2005)
Blue Mountain Energy (EF 1) – private sale of Kayne Anderson’s interests (April 2005)
Profico Energy (EF 1) – private sale of Kayne Anderson’s interests (May – August 2005)
Medicine Bow (EF 2) – company sale to El Paso for $814 million (August 2005)
Lyco Energy (EF 2) – company sale to Enerplus for $421 million (August 2005)
The Exploration Company (EF 2) – partial asset sale to EnCana for $80 million (September 2005)
Crusader Energy (EF 2) – company sale to Encore for $108 million (October 2005)
During 2005, Kayne Anderson made commitments to 8 companies totaling $326 million
$48 million committed to Crusader Energy II (EF 2)
$278 million of EF 3 has been committed (see next page)
Currently in discussions with 3 other companies for total commitments of approximately $130 million
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EF 3 Portfolio Companies
CompanyKayne Anderson
CommitmentPrimary Area of
FocusPresident/CEO
Blacksand Energy $40 MM Los Angeles Basin Tim Collins
Caddo Resources $50 MMEast Texas / North
LouisianaRex Corey, Jr.
Cavallo Energy $38 MM Texas Panhandle George SanFilippo
CORE Energy $20 MM Michigan Bob Mannes
Crusader Energy III $50 MM Oklahoma Dave Le Norman
Matris Exploration $30 MMSan Joaquin &
Sacramento BasinsRich Langdon
Pedernales Production
$50 MM Gulf CoastJoe Bailey / George
Kane
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Current & Past Portfolio Companies
M TRISM TRIS
CADDO RESOURCES LP
CAVALLO ENERGY LP
PEDERNALES PRODUCTION LP
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Los Angeles Office
Richard "Ric" Kayne – CEO of Kayne Anderson Capital Advisors and Kayne Anderson Rudnick Investment Management
He began his career in the mid-1960s as an analyst with Loeb, Rhodes & Co. in New York. Prior to forming Kayne Anderson in 1984, Mr. Kayne was a principal of Cantor Fitzgerald & Co., Inc., where he managed private accounts, a hedge fund and a portion of firm capital. Mr. Kayne is a trustee of and the former Chairman of the Investment Committee of the University of California at Los Angeles (UCLA) Foundation and is a trustee and Co-Chairman of the Investment Committee of the Jewish Community Foundation of Los Angeles. He earned a BS in Statistics from Stanford University in 1966 and an MBA from UCLA in 1968.
Robert "Bob" Sinnott – President, Chief Investment Officer and Senior Managing Director of Energy Investments
Prior to joining Kayne Anderson in 1992, Mr. Sinnott was Vice President and senior securities officer of Citibank’s Investment Banking Division from 1986 to 1992, concentrating in high-yield corporate buyouts and restructuring opportunities. From 1981 to 1986, he served as Director of Corporate Finance for United Energy Resources. Mr. Sinnott began his career in the financial industry in 1976 as a Vice President and debt analyst for Bank of America. Mr. Sinnott graduated from the University of Virginia in 1971 with a BA in Economics. In 1976, he received his MBA in Finance from the Harvard Business School.
Houston Office
Daniel "Danny" Weingeist – Senior Managing Director of Energy Investments
Prior to joining Kayne Anderson in 1999, Mr. Weingeist was a Managing Director and principal of Torch Energy Advisors, a Houston-based company that provides capital and specialized outsourcing services to the industry. Prior to that, he served as Vice President with EnCap Investments and as a Reservoir Engineer at Exxon Company U.S.A. Mr. Weingeist is a 1985 graduate of the University of Texas with a BS in Petroleum Engineering and an MBA in 1989.
Charles "Chuck" Yates – Managing Director of Energy Investments
Prior to joining Kayne Anderson in 2001, Mr. Yates was Senior Vice President and head of the Power Technology Group at Stephens Inc., an integrated merchant and investment bank. A member of Phi Beta Kappa, Mr. Yates received his BA in 1991 and his MBA in 1994 from Rice University.
Michael "Mike" Heinz, Jr. – Managing Director of Energy Investments
Prior to joining Kayne Anderson in 2002, Mr. Heinz was a Senior Vice-President of Netherland, Sewell and Associates, Inc., a Texas-based oil and gas consulting firm that provides a complete range of professional reservoir engineering, geophysical and geological services to the worldwide petroleum industry. Mr. Heinz began his career in the oil and gas industry in 1984 as a reservoir and operations engineer for Exxon Company U.S.A. Mr. Heinz graduated from the University of Tulsa in 1984 with a BS in Petroleum Engineering.
Gifford “Giff" Wilkerson – Vice President of Energy Investments
Prior to joining Kayne Anderson in 2004, Mr. Wilkerson was a reservoir engineer with Netherland, Sewell and Associates, Inc., a Texas-based oil and gas consulting firm that provides a complete range of professional reservoir engineering, geophysical and geological services to the worldwide petroleum industry. Mr. Wilkerson began his career in the oil and gas industry in 1991 with Exxon Company, U.S.A. where he held various reservoir, operations, and supervisory assignments. Mr. Wilkerson received his BS degree in Civil Engineering, cum laude, from Louisiana State University in 1990 and his MBA from the University of New Orleans in 1997.
James Broach – Vice President of Energy Investments
Prior to joining Kayne Anderson in 2005, Mr. Broach was an Associate in the energy investment banking group of Credit Suisse First Boston where he worked on a broad array of capital markets and M&A transactions. Prior to attending graduate business school, he was an Analyst in the energy investment banking group of Stephens Inc., an integrated merchant and investment bank. Mr. Broach earned his BA in Economics from Trinity University in 1998 and his MBA from the University of Texas at Austin in 2003.
Investment Professionals
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What Sets Kayne Anderson Apart?
Technical expertise
We have 3 engineers with combined 50 years of industry and third party consulting experience in every onshore domestic basin
We can evaluate complicated situations quickly (without requiring outside engineering services or a reserve report)
We can help portfolio companies evaluate deals (just ask our CEOs!)
Will hold majority or minority stakes
Will invest in both private and public companies
Will invest in “A-to-B” and “B-to-C” risk companies
Increased access to capital markets and deal flow
We have been investing in energy since 1992
45+ transactions with 25+ oil and gas companies
Unique structuring capabilities to help all parties find appropriate risk/reward trade-offs