Encouraging rise in volume for OS majors today. We could be near a turn.
In this game you must get to the party just in time. Too early and you get burned. Too late and you also get burned.
This article should be of interest:
M2 Capital Keeps Faith Amid Oil Slump
Buyouts
Uncertainty about the oil and gas industry is undermining the
fund-raising activities of a new private equity group dedicated
to making acquisitions in that volatile sector.
Austin, Texas-based M2 Capital Partners, which began raising
its $100 million debut fund in December, is finding that many
potential limited partners are taking an increasingly cautious
approach toward investing in the oil and gas industries, said
Tim Dunn, a principal at M2.
"We are experiencing a lot of people who are saying, Wait and
see,'" Mr. Dunn said. "No one is saying Oh great, you're a
first-time fund in a difficult industry. Can we sign on?'"
M2's difficulties are part of a larger trend in the private equity world in which certain general
partners are anxious to acquire what they view as undervalued oil and gas companies, but limited
partners are hesitant to have their money committed to these deals- particularly in light of
declining oil prices and oil company valuations in the public markets.
M2 is not the first buyout-related enterprise to focus exclusively on opportunities in the rapidly
changing energy sector: Encore Acquisition Partners has raised more than $300 million to target
energy properties (BUYOUTS Sept. 28, 1998, p. 1). Houston-based Haddington Ventures is in
the process of raising an energy industry fund, having rounded up approximately $80 million to
date, while First Reserve Corp. is currently investing its $800 million eighth fund, also focusing
on the energy sector. In addition, larger buyout firms such as [ Chase Capital Partners ] and [ Hicks,
Muse, Tate & Furst Inc. ] are prospecting for deals in the energy sector.
Hicks Muse Ditches Coho
Despite the enthusiasm among these groups for the energy sector, some high-profile deal
meltdowns are calling into question the wisdom of investing in oil companies now. On Feb. 11,
Hicks Muse backed out of an agreement to buy a majority of [ Coho Energy ] , a Nasdaq-listed oil
company. The Texas-based buyout giant originally agreed to buy 62% of the company at $6 a
share (BUYOUTS Aug. 31, 1998, p. 8). Hicks Muse later tried to renegotiate that to 71% at $4 a
share before dropping the deal altogether.
A source at another buyout firm that invests in the energy sector said Hicks Muse's decision to
back out of Coho may have been related to its investment in [ Triton Energy Ltd. ] Following Hicks
Muse's agreement to purchase Triton at $17.50 per share, the stock valued dropped to around $8
per share. Partners at Hicks Muse did not return calls seeking comment.
Industry observers also point to the pending merger between [ Ocean Energy ] and [ Seagull Energy ] ,
two companies that lately have seen massive drops in their share prices, as another sour deal that
has investors spooked. Last Tuesday, the companies reported earnings well below analysts'
expectations.
All this bad news makes energy plays seem to investors like an increasingly elusive strategy. "A
number of private equity funds are trying to call a bottom," said Chris Jones, a managing director
at Haddington Ventures. "But things just keep getting worse."
Mr. Jones said his firm is experiencing much the same investor angst as M2 Capital. He said
Haddington expects oil and gas prices to drop even lower in the next two to three months and
become even more volatile thereafter. But it is precisely these conditions that make Haddington
want to get into the oil and gas market now.
In Times of Trouble, Invest
"I tell investors that, with alternative assets, they should be focused on a contrarian position," Mr.
Jones said. "We want to buy when everything is terrible and sell when everything is great. We're
pretty optimistic about what to do over the next few years."
In some cases, lower prices and increased volatility are not necessarily detrimental to a company
in the energy industry. Mr. Jones said Harrinton in October 1998 bought California-based
Western Hub Properties, a gas storage company, and has seen an increase in business as a result
of price discrepancies between regions; energy companies often will lease storage space from
Western Hub before transporting gas to areas where the gas can fetch a higher price.
Opportunities Among Pitfalls
Mr. Jones said that while the volatility may be a turn-off to investors, it inevitably will lead to
more buyout opportunities. [ Western Gas Resources ] , which recently announced that it will look to
divest some of its non-core businesses, is one such example, he said.
First Reserve, with an $800 million private equity fund dedicated to energy, is seeing an
unprecedented amount of business as a result of the attrition in the oil sector. "We think this is the
most prolific deal flow we've seen in the firm's 16-year history," said Kathleen Ellsworth, a
managing director at First Reserve.
Ms. Ellsworth said her firm recently has been focusing more on oil field services companies
rather than exploration and production companies like Coho and Trident, the fortunes of which
are more closely tied to the price of oil.
The partners at Hicks Muse, for their part, still appear to be bullish on Coho, even if they don't
wish to subject their investors to the same level of risk-partners at the firm reportedly continue to
have $12 million of their personal wealth invested in the company.
M2 Searches for Capital
The apparent gap between the proliferation of energy sector buyout opportunities and the money
dedicated to financing them is frustrating to M2's Mr. Dunn, who said investors are wary of the
oil companies because they don't understand how to value them. "{The energy sector} tends to
be a mystery to a lot of people," he said. "Some people think there is some black art associated
with it."
Like Ms. Ellsworth, Mr. Dunn said his firm will look for companies whose returns are not overly
dependent on an increase in the price of oil.
Hailing from an Operational Background
M2's four partners do not hail from private equity backgrounds: Mr. Dunn was a director at
Parker & Parsley Petroleum Co. (now merged with [ Pioneer Natural Resources ] ), Jay McEntire is a
former vice president for corporate development at the same company, Bob Wagner was
managing director at Alex. Brown & Sons' oil and gas practice and Steven Weatherl served as
vice president for U.S. exploration at Pioneer Natural Resources.
According to Mr. Dunn, his firm has met with investors who have expressed interest in
committing capital on a deal-by-deal basis, and M2 may begin investing in this fashion if the
private equity fund takes too long to raise. "In the meantime, opportunities are happening," he
said.
Mr. Dunn also said his team will consider heading oil platform companies for larger buyout
firms. "We're not professional private equity guys," he said. "We are an oil and gas management
team. We can look at an exploration and production company the way an LBO firm would look at
a widget manufacturing company."-D.S.
(Copyright 1999)
_____via IntellX_____
Publication Date: February 22, 1999
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