The likes of Apollo, Carlyle and KKR have been stung by the sharp plunge in the price of crude. Creative structures like those used recently by Blackstone and EIG could help pave the way for better deals.
The last round of investments is proving troublesome. Shares of Carlyle-backed SandRidge Energy have tumbled as have those of Laredo Petroleum, a Warburg Pincus portfolio company. Samson Resources, a $7.2-billion KKR buyout in 2011, recently warned it might need to restructure in bankruptcy.
Freshly raised private equity funds are already hard at work. The main hurdle to overcome in the energy sector is sellers reluctant to cede at depressed prices. Some, including KKR and Warburg Pincus, have in recent weeks found straightforward ways to double down, by acquiring assets with an existing joint venture and putting money into a start-up exploration and production company, respectively.
Others are being more inventive. Privately held EIG Global Energy Partners, for example, agreed in late March to inject $1 billion into publicly listed shale producer Breitburn Energy Partners. The sum includes $650 million of new senior notes that rank ahead of other Breitburn bonds, a twist made possible by loopholes in existing credit arrangements. The remaining $350 million of preferred shares confer 18 per cent voting rights and a board seat. The cash will allow the California-based partnership to sidestep a looming financial squeeze and hunt acquisitions of its own with EIG's help.
In another clever turn, Blackstone's credit arm GSO agreed this year to front up to $500 million of drilling costs for Linn Energy. The deal, which echoes one struck in October between KKR and Anadarko Petroleum, gives Blackstone an initial 85 per cent stake in the new wells drilled. The holding shrinks once a targeted return on investment is reached.
In both cases, the target companies avoided selling big equity stakes while giving investors some preferred terms and a say in future transactions. The recent evidence suggests energy companies will have to be just as imaginative about extracting new capital as they have been oil.
