encap investments l.p. · mezzanine players in the industry. ten years later there were more than...

November 2013 | www.oilandgasinvestor.com | PRIVATE EQUITY 45

about that time natural gas prices, afterlanguishing for over a decade, wereapproaching $3.00 per MCF and alongcame something called the Barnett Shale.We did our first deal in the Barnett in2000 and then proceeded to march fromone economically-advantaged resourceplay to the next over the ensuing dozenor so years. Horizontal drilling andcontinued advances in completiontechnology led to further opportunityfor our teams in both unconventionaland conventional resource plays.

While many private equity firmswere slow to respond to these new op-portunities, EnCap embraced them.Since 2008, EnCap has sold close to 40companies that were involved in variousresource plays, resulting in gross salesproceeds of roughly $20 billion andsome $8.5 billion of distributions to ourinstitutional partners.

QWhat are the key drivers ofEnCap’s success?

Consistency is the hallmark of EnCap’strack record. Preqin’s Global PrivateEquity Survey 2012 ranks EnCap as oneof the most consistent private equitymanagers overall and the top managerin the oil and gas industry. In fact,EnCap is the only energy private equityfirm that has had six consecutive top-quartile funds. EnCap’s funds have alsosubstantially outperformed the S&PEnergy Index and energy commoditiesover the life of the funds.

In total, EnCap has raised 17 insti-tutional oil and gas investment fundsaggregating more than $18 billion. Overthe past 25 years, EnCap has investednearly $10 billion in just over 200 com-panies. One hundred and fifty of thoseinvestments have been realized, resultingin returns that have consistently exceededour targets of a 2.0x ROI and a 25% IRR.

Our ability to attract the highest qual-ity management teams in the industry iscentral to our success. Over EnCap’s longhistory, we have established a strongreputation as an innovative, value-addedsource of capital. This has allowed us to

attract seasoned management teams withdemonstrable track records of successand solid value creation strategies.

Certainly, one of our core strengthsis the experience and cohesiveness ofour investment staff. EnCap’s fourfounding partners have led EnCapsince its inception and have a workingrelationship that spans almost 35 years.We also have a very deep “bench” withthe six partners below the foundershaving an average of over 23 years of oiland gas industry experience and anaverage tenure with the firm of 14 years.

EnCap has consistently generatedsuperior returns across multiple hydro-carbon price cycles by applying a low-risk,disciplined philosophy that balances cap-ital preservation and value creation. Weensure that our management teams focuson the most economically advantagedareas and strategies, adapt to changingmarket conditions, and build asset basesand opportunity sets that are attractive tothe universe of buyers.

EnCap takes a rigorous approachto risk management. We monitor in-vestments and market conditions closelyand advance capital incrementally asmanagement teams identify compellingopportunities and create value through thesuccessful execution of their business plans.

QWhat do you look for in amanagement team and what

differentiates EnCap’s value-addedcontributions to the teams in yourportfolio? We look for teams with a history ofsuccessful value creation grounded instrong technical and operational back-grounds. EnCap backs teams with anentrepreneurial mindset and a riskmanagement philosophy that is consistentwith ours. We also place the highestvalue on integrity, honesty and opencommunication. Today, with a $5-billionupstream-focused fund and a $1.75-billion midstream fund via our partner-ship with Flatrock Energy Advisors,EnCap is strategically positioned toprovide some of the largest equity

commitments in the industry to attractand support the best management teams.

QWhat are the most attractiveupstream opportunity sets today?

From a big-picture perspective, boththe upstream and midstream sectors arehighly capital-intensive. The IEA esti-mates that approximately $750 billionper year will be required worldwideto offset production declines and generatenew reserves to meet increased long-termdemand. We believe that in and of itselfsuggests there will continue to besignificant investment opportunity. The industry has seen a dramaticshift from vertical to horizontal drillingand the implementation of advancedcompletion technologies. These tech-niques were initially tested in emergingshale plays like the Barnett, Haynesville,Eagle Ford and the Bakken. More recentapplications include conventional “tightrock” formations like the Granite Washand the Permian Basin’s Wolfcamp for-mation. Promising new plays like theUtica and the Cline Shale continue toemerge with current development activityfocused on oil and liquids-rich areaswith superior economics. Many areasconsist of multiple hydrocarbon typesand offer repeatable opportunities.Stacked pays offer substantial optionvalue and the potential to exploit moremature areas through the application ofmodern technologies. Our sense is the foremost opportu-nities continue to be centered in theeconomically-advantaged, lower-riskdrilling plays. Broadly speaking, theM&A market for oil and gas assets ap-pears to be intensely competitive, but wehave had portfolio companies selectivelyidentify and capture highly attractivereserve acquisitions in every fund and webelieve that will continue to be the case.

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ENCAP INVESTMENTS L.P.

PRIVATE EQUITY | www.oilandgasinvestor.com | November 201344

EnCap Investments L.P.QWhen EnCap Investments was

created 25 years ago, the firm’s fourmanaging partners saw opportunity invery uncertain economic times. Whatformed the basis of the decision tolaunch the firm? Both public and private capital wereextremely scarce after the collapse of oiland gas prices in the mid-1980s.However, we were aware of severalhands-full of institutional investors,principally life insurance companies, thatwere still willing to entertain an oil andgas opportunity. When we formedEnCap in 1988, our business plan was tobecome a conduit between those insti-tutional capital sources on one handand oil and gas investments emanating

from the extensive industry contacts wehad on the other. We began by forminga mezzanine fund to effectively provide“stretch” bank financing with a mid-teensreturn objective. We also formed a reserveacquisition fund to pursue attractive oiland gas acquisition opportunities targetingsimilar returns.

QWhat drove your evolution froma firm focused on mezzanine debt

and acquisition funds to private equity?In the late 1980s there were very fewmezzanine players in the industry. Tenyears later there were more than 30mezzanine providers, which had the ef-fect of driving returns down and creditrisk up. Similarly, the reserve acquisition

market was becoming increasinglycompetitive with new entrants signifi-cantly altering the risk-return equation.We believed that private equity wouldrepresent a superior value proposition,coupled with the fact that our interestswould be better aligned with manage-ment teams, so we started our first privateequity fund in 1994. In 2001, EnCapFund III was the first fund to focus onbacking start-up management teamsthat possessed deep experience andexpertise in the oil and gas industry.

We believed that partnering withthe premier teams in the industry anddeveloping a relationship-driven modelwould create substantial value for ourinvestors and management teams.Since inception, more than 95% of the$18 billion of capital we have managedhas been focused on backing start-upmanagement teams and then re-backingmany of those teams on the heels ofsuccessful exits.

QHow has the private-equity land-scape shifted over the last 25 years

and how has EnCap changed with it?EnCap has consistently sought in-vestment opportunities with the mostattractive risk-reward profiles, and that hasrequired that both we and our portfoliocompanies have the ability to adapt tochanging market dynamics. During mostof the 1990s, our portfolio companieslargely pursued acquire-and-exploitgrowth strategies, which involved “buy-ing right” from the majors and largeindependents, doing some lower riskdevelopment work on the acquiredproperties, and then selling to publicE&P companies. However, around theturn of the century, that strategy becameless attractive economically as the samepeople we were selling to, i.e., the smallto mid-cap public E&P companies,began to compete with our portfoliocompanies for M&A deals. Fortunately

Seated, L-R: Gary Petersen (managing partner), David Miller (managing partner), Marty Phillips (managing partner). Standing: Murphy Markham, Doug Swanson, Jason DeLorenzo,Jason McMahon. Bob Zorich (managing partner), Wynne Snoots, Sean Smith.