Greg Armstrong still remembers the cold call he received one day in the late 1980s from EnCap Investments partner Gary Petersen.
Armstrong had just moved the company that would become Plains All American Pipeline from Oklahoma City to Houston. The firm was then worth about $30 million.
"He said, 'I hear you guys have good ideas on how to spend money, and we know how to raise it,' " Armstrong said.
In the ensuing years the pair did just that, EnCap raising millions of dollars for Plains to spend as it expanded, spun off its exploration and production business and became the $6 billion oil pipeline and storage giant it is today.
"If our management team had to start all over again, even with all the money we wanted on hand, we'd still want EnCap to be an investor," said Armstrong, the chairman and CEO of Plains All American.
EnCap, a Houston-based private equity firm, would probably have the funds to do it, too, particularly with the close of its latest and largest fund last week. EnCap has raised $2.5 billion that it will put to work in oil and gas exploration and production businesses.
Private equity investors gather funds from institutional investors, like pension funds and insurance companies, or from wealthy individuals, and invest the money in companies in exchange for a stake in those companies. Investors usually reap the rewards years later when the companies go public or are bought out by another firm.
Private equity-backed firms tend to grow more quickly than public companies, according to a study by Ernst & Young, because of the more selective nature of the private equity funds. Annual growth rates for private-equity-backed firms averaged 33 percent in the U.S. and 23 percent in Europe, according to the study, compared with public company equivalents of 11 percent and 15 percent.
Founded in 1988
It has always been focused on the energy exploration and production business but has had success in other energy sectors, too, including its continued interest in Plains.
Many of the investments are repeats. EnCap sometimes backs the same management teams many times as the teams buy assets, build them up and then sell them to larger players.
The approach has paid off for investors, said Ned Naumes, president and CEO of Legacy Trust Co., a Houston-based bank that manages money for trusts and estates. Legacy has invested repeatedly in EnCap funds.
"They don't do it through speculation but through the drill bit, and by using technology to exploit field potential," Naumes said.
Legacy Trust only makes investments that return 20 percent or more, Naumes said, and EnCap returns into the mid- and high-20s.
"The quality of their performance and the respect they get from investors around the country is still something of a secret within Houston," Naumes said.
Starting again
But a number of its past investments have since been liquidated and the management teams behind them wanted to start again with new ventures, Phillips said. Buyouts of companies like Burlington Resources and Kerr-McGee also have created a large pool of talented managers leaving those firms looking to start their own companies.
About $550 million of the new fund is already committed, partner Robert Zorich said.
EnCap isn't the only firm investing equity capital in energy exploration and production.
The larger First Reserve Corp., based in Greenwich, Conn., raised $7.8 billion in 2006 that it planned to spread throughout many parts of the energy business, including exploration and production.
And Houston-based Quantum Energy Partners closed on a $1.3 billion fund earlier this year, with plans to invest it much the same way EnCap does.
But EnCap has been focused on exploration and production longer than probably any other firm, said Tom Meneley, president of Houston-based Plantation Petroleum, another EnCap portfolio company. This gives the four partners a depth of knowledge that's particularly valuable.
'Diligent and disciplined'
High oil prices have helped fuel the demand for more investment dollars as exploration projects once deemed too expensive become economical.
Price volatility is another matter, Meneley said.
"With the price bouncing around, it's been really difficult to run any financial models to get a good picture of an acquisition's value," Meneley said.
That's why Plantation's latest project involves more drilling than in the past, so the firm can grow by discovering reserves instead of buying them.
"But we're always looking for opportunities to acquire reserves and know that we can count on EnCap when the right deals come along," he said.
Via: Herald Chronicle
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