I’ve written a lot recently about the surge in private equity for natural resources. With PE firms in the energy space being particularly dominant — holding an estimated $156 billion in funds for global projects.
And this week, one major investment group cut a unique deal to deploy those funds. With the terms suggesting some interesting shifts underway in how these buyers pursue new assets.
The investor is Carlyle Group. And the target is not a buyout — but rather a joint venture, with major U.S. shale player EOG Resources.
Carlson Capital's Black Diamond Arbitrage Partners fund added 1.3% net fees in the first quarter of 2021, according to a copy of the firm's March 2021 investor update, which ValueWalk has been able to review. Q1 2021 hedge fund letters, conferences and more At the end of the quarter, merger arbitrage investments represented 89% of Read More
Carlyle announced Monday that the group will contribute $400 million to a JV with EOG. With these funds to be used to advanced drilling and development of specific acreage — in this case, EOG’s lands in the Marmaton oil play of Oklahoma.
The target in this case is interesting — with Marmaton being a relatively unknown play. But the most notable feature of the deal is Carlyle taking a direct interest in wells alongside EOG, as a participating partner.
That’s a departure for Carlyle and energy private equity groups in general. With such investors usually injecting funds into E&Ps at the corporate level — or in rarer cases, buying out acreage 100% and then launching new companies to develop it.
The new joint venture model for Carlyle appears to be coming with a few twists. With the investment group saying its working interests in the Oklahoma lands will “largely revert to EOG” after certain performance milestones are met.
The idea boils down to this: Carlyle kicks in funds, gets in as a partner, makes money during initial flush production of wells, then gets out by returning the working interests to EOG. With Carlyle stating that its expected timeline for the whole operation is four years.
Such a model could certainly work. But it entails different risks than energy PE normally takes on — such as the possibility that wells don’t perform as expected, and payback isn’t achieved in the target period.
That change in behaviour in turn suggests that private equity is “stepping out” in its search for new investments. Signalling that the market may be getting too crowded to find more-traditional buying opportunities.
If so, we could see cashed-up PE groups getting more aggressive and desperate over the coming months. Watch for further unusual deals — or perhaps investments in further-afield locations than we’ve seen in recent years.
Here’s to joining the party,
Article by Pierce Points