Gulf Blowout Has Energy Private-Equity Leaders Questioning Forward E&P Valuation Metrics
June 22, 2010
OilandGasInvestor.com

Valuing U.S. E&P investments is challenged today by the eventual outcome of federal and state law and policy regarding future best practices in drilling in the Gulf of Mexico and elsewhere offshore the U.S. as well as onshore, such as the Marcellus shale, which has recently experienced well blowouts.

This is according to energy-industry executives and investors who were at Argyle Executive Forum’s recent energy program in New York in which Oil and Gas Investor presented.
Chris Ortega, a Connecticut-based director for energy private-equity investment firm First Reserve Corp., says, “It’s obviously something we’re following very closely. It’s premature to come to any conclusions (as data are changing), but energy demand is going to continue to increase, nevertheless…Regulation is something you have to think through no matter where you are.”

Changing Gulf and other drilling costs as a result of the ongoing leak emphasizes the importance of a diversified portfolio and of “portfolio construction,” he says.

First Reserve’s energy investments span the energy chain, from E&P, such as Gulf-focused Cobalt Energy International Inc. (NYSE: CEI), Deep Gulf Energy LP and Deep Gulf Energy LP II, and oilfield services, such as CHC Helicopter Corp., to solar and nuclear. And its investments span the globe.

The possibility of changing law and policy regimes is an important consideration when investing in a firm in any country, he notes. Australia’s natural resources tax is being debated, for example. “(Investors) have this sense that, because this is OECD, you don’t have to think about (game-changing) regulation.” But it is a possibility in any political regime, he says.

Christopher Manning, a partner with private-equity investor Trilantic Capital Partners, says issues in the Marcellus and the Gulf are of concern. “Our diligence on new opportunities will probably be different as a result of that.” Trilantic’s E&P investments include U.S. onshore-focused Antero Resources Corp. and Enduring Resources LLC and Europe-focused Mediterranean Resources LLC. Another portfolio company, Cross Holdings Inc., provides oilfield services in the Gulf of Mexico.

Marcellus drilling costs may grow as concerns about the use of hydraulic fracturing continue, he says.

As for the Gulf of Mexico, “right now, we would be very reluctant to invest until we have some transparency” as to what new rules and costs will be.

Craig Jarchow, a managing director for energy private-equity investor Pine Brook Road Partners LLC, says new rules as a result of the BP blowout will affect how industry participates in drilling wells in the future. “We’ll see more operators not interested in being operators.”

Pine Brook’s energy investments include Mike Harvey’s U.S. onshore-focused Stonegate Production Co. LLC, Andy Lydyard’s Comet Ridge Resources LLC and Roger Jarvis’ Common Resources LLC; Paul Favret’s Europe onshore-focused Source Energy Partners LLC; and Bill Flores’ Gulf-focused Phoenix Exploration Co. LP

He suggests that funding and insuring liabilities for oilfield incidents in the future may be handled as the nuclear industry insures catastrophic risk. In this, the first tranche is insured by the nuclear plant’s operator up to $300 million. “Above this exposure, the entire industry kicks in a retrospective premium and, since the whole industry is in, the insurance capacity is huge.”

He concludes, “Liability is going to be very interesting going forward.”

–Nissa Darbonne, Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, OilandGasInvestor.com Today, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.com, UGcenter.com