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Private E&Ps Finding Success Again and Again with PE Backing

Private equity (PE) continues to put a bead on funding U.S. exploration and production (E&P) companies, and there appears to be a lot more money available than ever before, unconventional operators said at the Colorado Oil & Gas Association's Rocky Mountain Energy Summit in Denver.

Several Denver-based executives who run some big, private E&Ps, took the stage last Wednesday and said to a man that being private allows management to pick and choose where to spend money and where to explore, without shareholders begging for dividends.

"There's a tremendous amount of opportunity in shale, and a tremendous amount of capital that's going to be invested for decades," George Solich of Energy IV LLC told the audience. Solich had run Cordillera Energy Partners III LLC until early 2012, when he helped sell it to Apache Corp. for $2.85 billion (see Shale DailyJan. 24, 2012).

"It's a great time to be an entrepreneur," he said. By one estimate, there's $100 million of PE "that's looking for a home."

Joe Jaggers, now CEO of Jagged Peake Energy LLC, has seen both the private and public side of exploration. He was Bill Barrett Corp.'s long-time COO until he helped to start Ute Energy LLC, which sold last November for more than $1 billion. For both Ute and Jagged Peak, PE's Quantum Energy Partners LP has been by his side.

Jaggers explained that one of the draws of running a private company is that he knows it will be sold within a few years for a hefty profit. That method also has allowed him to keep most of his management team by his side.

"Our rationale for re-upping with Quantum is that they know the business and they have a successful record. They've been there when we need them to access additional capital and as important, they're a good fit with our team."

The latest commitment was "probably larger than we anticipated," but Jagged Peak is going to "repeat" Ute's success. "It's early days. We have no assets yet, just a funding commitment and an organization."

Unlike the PE model of five or 10 years ago, "we have to grow to a meaningful position in reserves and production" to become a successful takeover target, Jaggers explained. "It's fun to have a blank sheet of paper, no legacy assets, no organizational staff constraints...no Securities and Exchange Commission, no analysts...After two times as president of a public company, it's refreshing to be out of that environment."

Glen Warren and Paul Rady helped form the first iteration of Antero Resources Corp. in 2002 backed by Warburg Pincus LLC. The first company sold about three years after it was formed for about $685 million to XTO Energy Corp. in the pre-ExxonMobil Corp. days. "Antero II," also helmed by the duo, also was formed with Warburg's help.

Today the Appalachian monster is in the midst of raising money through an initial public offering, which would allow public trading. It launched the IPO two months ago (seeShale Daily, June 17). Warren couldn't talk about "those three letters," but he said an initial Warburg backing of $260 million in 2003 has kept Antero growing for more than a decade. Following the sale to XTO, "we reloaded and kept going," buying into the Woodford and Fayetteville shales, which "served us well for several years."

Antero has operated in almost every major basin in the United States; today its bread and butter is the Appalachian Basin, where it's one of the big gassy operators. Warren still is convinced that natural gas will be a good fit going forward.

"It's really been an interesting ride," he told the audience. He linked North America's E&P "renaissance" to PE activity over the past few years.

"As long as you are creating value, PE is with you," said Warren. "There are a lot of success stories" by PE-backed explorers that have become public too. Now it's just sit-and-wait time for natural gas prices to strengthen. With more energy analysts calling for prices to average $4.00-4.50/Mcf in the next few years, E&Ps are in a good position to take advantage. There's plenty to do until then.

"It takes a lot of time to build a position...delineate wells...infrastructure...Everything is built from scratch, and we've seen that in the Marcellus and Utica" Antero today is prepared to become a public company and "the shale revolution offers a strategic opportunity."

For Antero and other privates, "there's a pretty good selection of an enormous resource," said Warren. "The majors have tended, in general, to miss the bull's eye" when it comes to the U.S. onshore, "and they don't really have a meaningful position in the core of the plays...And it's all about the core."

The Antero executive said it may be time for a "new era of the super independent," a title once reserved for once globally focused operators like Apache Corp. and Anadarko Petroleum Corp. Warren thinks that super independent title could become a moniker for U.S. onshore-only producers.

Tracker Resource Development was formed in 2004 to focus on unconventionals, and its third portfolio had a commitment of $400 million from PE's EnCap Investments and ZBI Ventures LLC.

CEO Jeff Vaughn, who now runs Tracker III, said PE investments allows him learn every day. It's a lesson he shared with the audience. "Hang out with people smarter than you; you might learn something..." Tracker executives have been working in the "PE world" for more than 12 years. In 2010 unit TRZ Energy LLC sold some Bakken Shale acreage to Hess Corp. for more than $1 billion.

Today Tracker and its entities operate in the Rockies, the Permian and Fort Worth basins (think Barnett), as well as in Appalachia. "One lesson I've learned is to respect your private equity investments," said Vaughn. "It's a small community that you may need again down the road."

 Tracker hasn't always been able to achieve the success that it modeled, and it was hit particularly hard in 2008 when the financial markets crashed. However, "we had good investors and long-term relationships...Being right is not enough; you have to survive long enough to be right at the right time."

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