What does Marquette Exploration, Oasis Petroleum, Petrohawk Energy, Plains All American Pipeline, Marlin Resources, Halcon Resources, Peregrine Oil & Gas, Phillips Energy Partners and Venado Oil & Gas have in common? They are all funded by the same private equity company, EnCap Investments L.P. I think it’s important for land professionals to understand the financing side of the energy business, and EnCap’s investments have a more significant effect on our industry than many realize.
EnCap was formed in 1988, and over the years has raised over $18 billion dollars towards funding independent oil & gas companies in the United States. The company has been through a number turbulent times in various energy price markets, and has managed to be one of the most successful private equity companies in the energy space. EnCap’s management team is proof of their success, the 4 managing partners have been together since before the company was founded — and the partners have been with the company an average of 13 years (with an average of 22 years in the oil & gas industry).
EnCap holds it’s midstream projects under a different company, EnCap Flatrock Midstream, the management team of Flatrock also boast similar statistics in regards to industry experience.
You can tell quite a bit just from reviewing EnCap’s website, they have a list of all their current investments and completed investments in the Upstream Portfolio and Midstream Portfolio. One thing you quickly notice is that after companies are sold, you’ll see EnCap funding a new company with a similar name (like Common Resources, and Common Resources, III). What isn’t readily apparent is that management teams of many of the firms “Realized Investments” form the management teams of their current investments. They place a high value on people, and we all know that talented people make our business run.
For an interesting read you can check out this Reuters article: EnCap-Backed Cordillera Energy Explores Sale for More than $3B
You’ll see that EnCap backed Cordillera’s management team 3 times and Cordillera was sold 3 times — the first in 2003 for $250mm, the 2nd in 2008 for $1 billion and the third in 2011 for $2.85 billion. Not a bad performance history for the management team over 8 years.
You won’t find much in the press quoting EnCap management directly, and that’s likely because they don’t need any publicity. It doesn’t appear they’ve had any trouble raising $18 billion in 17 different investment funds over the years. The last fund that closed was in February 2013, and the $5 billion in funding available was “significantly oversubscribed”. In the linked article Rober Zorich, one of the managing partners is quoted:
“Our existing investors’ strong support of Fund IX resulted in a very quick and very successful fundraise. We’ve had the good fortune now of having our last three funds heavily oversubscribed, and we couldn’t have done it without the longstanding relationships we have with so many highly respected limited partners.”
Another interesting item you can glean from reviewing the companies that are funded and some general industry information is that EnCap backed companies run incredibly lean from a staffing perspective. Many of the companies expend as little capital as necessary on labor. One can assume this is a partial result of the heavy influence of EnCap on the board of these companies. It’s also known that you won’t make an eye-popping salary working for an EnCap backed company, and their stance on staffing should help you to understand why — the more money you spend on labor the lower the profits are.
That’s not to say that professionals who work for these companies (and the management teams) aren’t compensated well, employees know that they will be rewarded handsomely when the company sells. Notice I said ‘when’, not ‘if’. EnCap is in the business of building companies and selling them for a profit — and they are good at it.
Why Should You Care
Maybe you are thinking “I don’t work for these companies, so I don’t care how successful they are.” You would be wrong. The land business lives and dies on the heels of mergers & acquisitions activity. Even for pure-play conventional exploration companies, it’s vitally important to buy, sell and trade leases to build productive blocks. These lean, well financed EnCap backed companies purchase assets when they are created, create new assets while in development, and divest considerable assets when they are sold. The chances are very good that in any play you work in, you’ll find an EnCap company somewhere in the chain of title in a prospect area.
The chances are very good that in any play you work in, you’ll find an EnCap company somewhere in the chain of title in a prospect area.
While EnCap is working to deliver performance to the investors in their funds, they are generating a revolving M&A door that creates work all along the upstream workflow. There is due diligence on the acquisitions, title curative on those results, land administration work to manage the records, engineering work to evaluate reserve claims, additional finance work (and the due diligence that goes with that as well) to help the purchasers, and the list goes on and on and on and on and on and on and on and on and on….
The Bottom Line
Most people will never work directly with EnCap, most people will probably never interact with them at all. That doesn’t mean they don’t provide a service that helps you and creates significant value in the oil & gas space. Without the professionals at EnCap the business of funding yourself as a private exploration company would be significantly different.
Have you worked for an EnCap funded company? Are you involved with a private exploration company who decided not to take funding? Tell us about your experience in the comments below!