By Ryan Dezember
For years, private-equity firms gushed into oil investments.
Now, some of their profits are slipping away.
With oil prices down more than a third since June,
private-equity investors have seen at least $12.3 billion of value
erased from their holdings, based on share moves in nine
exploration and production companies representing many of buyout
firms' biggest publicly traded energy positions.
Among the investors hard hit: Warburg Pincus LLC, whose Antero
Resources Corp. and Laredo Petroleum Corp. investments are down
roughly 33% and 70%, respectively, since June, and Apollo Global
Management LLC, the largest shareholder in EP Energy Inc., which
has declined about 60% in the same period. SandRidge Energy Inc.
shares owned by Riverstone Holdings LLC and Carlyle Group LP are
off about 67% since June.
Private energy investments also are generating pain for buyout
firms, as those assets' values are often judged based on similar
publicly traded companies and assets. Falling oil prices crimp cash
flow, KKR & Co.-owned Samson Resources Corp. has said. The
Tulsa, Okla., energy producer has struggled with slumping
natural-gas prices since KKR led a $7.2 billion leveraged buyout in
2011. KKR has since marked down its investment by more than
half.
The downdraft in oil will likely take a bite out of coming
earnings of some publicly traded private-equity firms, such as KKR
and Apollo, as it did in the last quarter amid oil's decline.
Apollo owns about 23% of EP Energy's shares, making EP one of the
firm's largest stock positions. A less-severe decline in EP's
shares through the end of September was a major contributor to a 2%
decline in the value of Apollo's private-equity funds during the
third quarter. Apollo executives pointed to its stake, which has
lost about $775 million of value since June, when talking about
pressure on the firm's results.
To be sure, many of these firms recently raised large, new
energy funds, and their appetite for deals remains strong, said
executives, who express confidence prices will eventually rebound
to make investments worthwhile. Oil- and stock-price declines, they
said, create buying opportunities, with energy producers looking to
bridge cash shortfalls by selling assets and bank financing for
drilling more difficult to come by.
"There are more sellers than buyers in energy to begin with. Now
with the drop in oil prices, you're going to have companies that
are highly levered that will become, in essence, forced sellers,"
Apollo co-founder Josh Harris said. "Our perspective is that there
will be a long-run buying opportunity."
Apollo has been among the more aggressive buyers this year,
pumping billions of dollars into oil and gas ventures from
Mississippi to Alaska. Last month, Apollo committed more cash to a
company that buys stakes in oil and gas wells.
And many debt-laden private-equity investments in energy
included financial hedges to lock in prices and guarantee enough
cash to handle the debt.
The recent infusion of private cash into the oil patch follows a
page from the firms' playbooks. The last time oil prices were this
low, five years ago during the depths of the recession, financing
for drilling had all but dried up.
Private-equity firms were sitting on a mountain of money raised
during the precrisis boom years and put cash behind wildcatters who
were using new drilling technology to unlock troves of oil and gas
across the U.S. Some of the investments made during the nascent
shale-drilling boom turned out to be among firms' all-time
best.
KKR turned $312 million into $1.5 billion in about a year
helping East Resources Inc. unearth natural gas in Pennsylvania.
Warburg Pincus and two smaller firms invested about $1.5 billion in
Antero, and have at times been up as much as $12 billion on the
company they launched.
Before oil prices began their plunge this summer, energy-focused
private-equity funds had outperformed general private-equity funds
over the past decade, returning about 16.5% annually, after fees,
compared with 14% for the general funds, according to Cambridge
Associates LLC. The big returns prompted private-equity investors
to double down on drilling.
Nearly $100 billion has been pumped into energy funds since
2011, according to data provider Preqin.
For most of the year, private-equity firms ran into each other
in auctions bidding up prices for drilling properties that big oil
companies sold. Through mid-October, private-equity firms had been
the buyers of roughly a third of the $54 billion of U.S. onshore
oil and gas fields, according to RBC Richardson Barr, a Houston
unit of Royal Bank of Canada. As oil's slide steepened, the deal
market slowed, though.
Private-equity firms sized up California oil fields that
Freeport-McMoRan Inc. shopped recently, according to people
familiar with the matter. Some of the suitors gave up pursuit of
the properties valued at $5 billion because they were unable to
borrow enough of the purchase price to earn the profits they were
after, the people familiar with the matter said.
As for done deals, private-equity firms often have some
protection.
Even as they were downgrading Laredo's stock to "neutral" from
"overweight," Simmons & Co. International analysts last month
said the Tulsa, Okla., company "has a number of things working for
it," including the $88 dollars a barrel it will get for most of the
oil it pumps next year. Laredo has hedged about 85% of its expected
output in 2015, which is well above the 35% average for other
energy producers it studies, the investment bank said.
Warburg and its investors, which spent about $600 million
launching Laredo, have already pocketed about $1 billion from the
investment, so proceeds from any shares the firm still owns is
gravy.
EP Energy, which has also hedged much of its near-term output,
is basically a break-even deal for Apollo at the current share
price, down from about double the firm's money when it sold shares
in its January initial public offering. "We feel good about the
long-term prospects of that investment," said Mr. Harris, the
Apollo co-founder.
And despite Antero's recent slide, which has lopped about $4
billion since June off the shares still held by Warburg and
partners Trilantic Capital Partners and Yorktown Energy Partners,
the investment firms have already pocketed about $1 billion on
their roughly $1.5 billion investment in the Denver company.
Write to Ryan Dezember at ryan.dezember@wsj.com
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