A lot of private equity capital has been raised to invest in the oil and gas sector – $70 billion last year, eight-fold over 2012 – but the challenge is finding where the value is.
That’s the takeaway from a presentation given Wednesday by Sam Oh, founder, president and chief investment officer of Houston-based Mountain Capital. And that’s why his two-year-old private equity firm is focusing on the smaller end of the market – deals worth $50 million to $150 million – that are often overlooked by bigger firms.
“People think we’re a distressed investor, but we’re not,” he said at a luncheon held by the Independent Petroleum Association of America in Houston. “But we do like complicated situations. We think there’s great value there where we can buy at a better price.”
Oh is a former senior partner and one of the original founding members of Apollo Management’s private equity natural resources group, where he was actively involved in investments in Parallel Petroleum, Athlon Energy and EP Energy.
The private equity executive left a few years ago to go out on his own, and in January announced he had raised $645.76 million for Mountain Capital – a large sum for a virgin fund – some of which came from Harvard University’s endowment.
“People think we’re a distressed investor, but we’re not. But we do like complicated situations.”
— Sam Oh, Mountain Capital
The firm’s primary law firm, Latham & Watkins, advised on the fund (including Houston partner Sean Wheeler).
Mountain Capital started out with a broad mandate: To invest in oil and gas opportunities in North America, whether they be in the upstream, the midstream or oilfield services. So far, the firm’s four investments have been in oil and gas exploration and production in Texas, Oklahoma and Louisiana. “We really like the southern U.S.,” Oh said.
The portfolio companies include Bedrock Energy Partners, which is focused on North Texas’ Barnett Shale but has developing assets in West Texas, the MidContinent and Ohio’s Utica Shale (Bedrock’s CFO previously held the same position at Yorktown-backed Mid-Con Energy Partners); and Compass Production Partners, which owns properties in North Louisiana and West Texas’ and New Mexico’s Permian Basin (it’s led by the onetime president and COO of SandRidge Energy).
The other two investments are Escondido Resources, which is focused on acquiring and developing conventional and unconventional reserves in South Texas (its predecessor, Escondido II, was backed by EnCap Investments); and Revolution Resources, which owns and operates oil and natural gas assets in Oklahoma (its CEO was previously drilling and completions manager at Chaparral Energy, where Mountain Capital founding member John Wehrle used to work as development and finance chief).
Mountain Capital previously announced it was backing the management team at Midland-based Talon Resources, which was led by the former CEO of Parallel Petroleum and focused on acquiring and developing conventional assets in the Permian’s Central Basin Platform. But the firm isn’t working with the team anymore.
Oh said he hopes to invest in one or two other opportunities out of the first fund, the next one by year-end.
Despite all the money available to invest and higher oil prices, private equity firms’ returns in the oil and gas industry have been challenged and debt remains too high in the industry, according to Oh. “We’re not out of the woods yet,” he said.
The firm is long on natural gas, which Oh predicts will be shipped in far greater quantities by pipeline to Mexico and elsewhere through liquefied natural gas, or LNG, facilities over the next few years. “The market dynamics will fundamentally change and you’re going to see some more volatility,” he said. “It will take a couple of years to play out.”