quantum energy partners sm january 14, 2009 ipaa private capital conference the impact of the...
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QUANTUM ENERGY PARTNERSSM
www.quantumep.com
January 14, 2009
IPAA PRIVATE CAPITAL CONFERENCE
The Impact of the “Credit Crunch” on Private Equity
Benjamin A. Stamets
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2QUANTUM ENERGY PARTNERS
Firm OverviewFirm Overview
► Quantum Energy Capital, LLC (“Quantum”) manages a family of energy-focused investment funds with a primary emphasis in the oil & gas, midstream, and oil field service & equipment sectors.
► Founded in 1998, Quantum currently has over $5.0 billion in assets under management (“AUM”) across two investment platforms.
Quantum Energy Partners (“QEP”)
Private equity fund with $4.0 billion in AUM.
Targets $50-$300 million equity or equity-linked investments.
Quantum Resources (“QR”)
Producing property acquisition fund with $1.2 billion in AUM.
Targets >$200 million long-lived oil & gas property acquisitions.
► Quantum’s investment team is uniquely qualified to support and be a value added partner to our portfolio companies.
In-house financial, technical, commercial, operational, legal and tax expertise.
Extensive experience as CEOs and division heads of private and public energy companies.
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3QUANTUM ENERGY PARTNERS
Where We Were – Pre-August 2008, and…Where We Were – Pre-August 2008, and…
► Ample liquidity in both the debt and public equity markets fueled investment and M&A activity. Credit terms eased as global liquidity
was at an all-time high. Commodity prices supported increased
borrowing bases. Many new entrants arrived to provide
capital to the space.
► Robust, liquid hedging markets.
► Super-charged corporate cash flows and increased CAPEX budgets.
► “Land grab” mentality emerged, as nearly every play appeared economic.
► “Buy and Flip” with hold periods of only 2-3 years was common.
Source: Bloomberg. As of 1/13/2009.
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4QUANTUM ENERGY PARTNERS
……Where We Are TodayWhere We Are Today
► Commodity prices experienced their most rapid declines in history (in $).
► Liquidity reversed course as the global credit markets entered crisis mode. Lending ground to a halt as banks worried
about their own balance sheets. IPO market is effectively closed. The cost-of-capital has increased
dramatically.
► Hedging markets impaired by heightened counterparty risk.
► Cash preservation mode = reduced CAPEX budgets.
► Most resource plays are marginally economic at best.
► Bid-ask spreads too wide to transact.
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Source: Bloomberg. As of 1/13/2009.
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5QUANTUM ENERGY PARTNERS
A Backdrop: The Global LBO Market Declined Materially in 2008A Backdrop: The Global LBO Market Declined Materially in 2008
► Global LBO volume hit an all-time high in 2006 with over $670 billion in transactions.
These transactions represented 19% of all M&A activity.
► Through 3Q 2008, total LBO volume had shrunk to less than $99 billion, representing only 4% of all M&A activity.
This precipitous fall represents an 80% decline from YTD 3Q 2007.
► Worse yet, 2008 saw 49 LBO-backed companies file for bankruptcy vs. only 2 in 2007.
Of these, only two were energy focused: SemGroup and CDX Gas.
Source: Goldman, Sachs & Co.
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6QUANTUM ENERGY PARTNERS
Industry Wide, PE Fund Raising Hit a Wall in 4Q 2008…Industry Wide, PE Fund Raising Hit a Wall in 4Q 2008…
► After four years of record growth, 2008 fund raising by private equity funds was down 18% below its 2007 level.
363 funds raised $266 billion in 2008 versus $326 billion in 2007.
Leveraged buyout funds faired worse than other sectors, as only $181 billion was raised in 2008 versus $245 billion in 2007 – a 26% decrease.
► In the fourth quarter of 2008 alone, capital raising was down 57% versus a year earlier.
In 4Q 2008 slightly more than $43 billion was raised versus $100 billion during 4Q 2007.
► Many industry observers anticipate this fourth quarter trend will continue, exacerbated by losses in existing funds and liquidity and allocation concerns among institutional investors.
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7QUANTUM ENERGY PARTNERS
……And Private Equity LPs Faced Their Own ChallengesAnd Private Equity LPs Faced Their Own Challenges
► Limited partners (“LPs”), the institutional investors behind private equity funds, were not immune to the economic crisis that impacted almost every corner of the financial industry.
► As the value of their public equity and fixed income investments decreased dramatically, LPs found themselves over-allocated to private equity on a portfolio basis.
California State Teachers (CalSTRS), one of the largest pension funds, saw its allocation to private equity jump from 9% in early 2008 to ~14% by year end.
► A robust secondary market for private equity commitments emerged.
Most public of these, Harvard University marketed its $1.5 billion PE portfolio.
► For certain LPs, liquidity for capital calls became a problem as free cash and attractive sale opportunities dried up.
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8QUANTUM ENERGY PARTNERS
The Good News: Energy PE “Re-Loaded” in 2008The Good News: Energy PE “Re-Loaded” in 2008
Source: Oil and Gas Investor estimates, Quantum estimates.
► Many of the major energy focused private equity players raised new pools of capital prior to the downturn and multiple new entrants emerged.
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Growth in Private Equity Fund Sizes
'01-'06 Vintage Fund '07-'08 Vintage Fund (closed or estimated)
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9QUANTUM ENERGY PARTNERS
Very Much Open for Business, But the Landscape Has ChangedVery Much Open for Business, But the Landscape Has Changed
► Private equity investors will be forced to “over-equitize” their investments.
Higher hurdle rates for investment (≥PV15 vs. ≤PV10?).
Less credit and more scrutiny given to non-PDP reserve classes.
► For debt that is available, senior secured lenders are tightening their underwriting criteria, characterized by:
More expensive, with LIBOR spreads widening by at least 100 bps.
Shorter tenures with required amortization.
More restrictive maintenance covenant packages.
► Project financings without near term cash flows and any construction or counter-party credit risk will be very challenging.
► Deal sizes will likely be smaller.
Companies operating within the bounds of their equity commitments.
Bank financings beyond the size of a “clubbed” deal will be difficult.
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10QUANTUM ENERGY PARTNERS
Expectations for the A&D Market in 2009Expectations for the A&D Market in 2009
► A&D market was effectively closed in the 4Q 2008 and today a backlog of delayed sales exists.
► However, at current prices and valuations, no one wants to sell control unless they have to.
► Divestiture market may remain slow until the second quarter:
Borrowing base redeterminations will force certain companies to pare assets in order to reduce bank borrowings.
Companies will high-grade their portfolio of projects in a cash flow and capital constrained environment.
Distress could lead to consolidation, generating additional asset sales down the road.
► Greater potential for farm-outs and joint venture opportunities as capital constrained companies face lease expirations.
► Much depends on the lending market as more credit is required to provide liquidity to the A&D market.
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11QUANTUM ENERGY PARTNERS
How Quantum is Approaching the Current MarketHow Quantum is Approaching the Current Market
► We are believers in the long-term fundamentals of the energy industry.
► Continue to seek out complete, proven management teams with sustainable competitive advantages. Challenging markets put a premium on talent.
► Remain creative and nimble with regard to investment structure. Equity line of credit with start-ups still possible. Growth equity in existing, operating businesses will be more common than in 2008.
► Expect longer hold periods of 5-7 years.
► Acquisition strategies are generally more attractive than resource plays or pure exploration.
► Must be prepared to fund development projects with 100% equity.
► Great example: Primary Natural Resources III Quantum backing Rich Talley, Mark Sheehan and Jack Fritts with $100 million commitment. Acquisition and exploitation strategy. Primarily focused in mature basins of Midcontinent, Panhandle and Permian.
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12QUANTUM ENERGY PARTNERS
In SummaryIn Summary
► Energy-focused private equity funds have ample available cash.
Quantum is open for business (as are many of our competitors).
► Credit, when available, will be more expensive.
► Over-equitization of transactions will increase hurdle rates.
► Bid-ask spreads remain too wide to transact.
► Creativity in deal structuring will be important.
► Forced selling in distressed situations likely by mid-2009.
But robustness of A&D market will depend on the credit and hedging markets.
► On the one hand…private equity likely to be patient, waiting for the “fat pitch.”
► But on the other…2009 could prove to be the best buyers’ market in a decade.
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13QUANTUM ENERGY PARTNERS
► For more information on Quantum, or to submit information on your company, please call or send your information to the following:
Quantum Contact InformationQuantum Contact Information
Alan SmithManaging Director – Oil & Gas
(713) [email protected]
Quantum Energy Partners777 Walker Street, Suite 2530
Houston, TX 77002Phone: (713) 225-4800
Fax: (713) 225-5700www.quantumep.com
David BoleManaging Director – Business Development
(713) [email protected]
Ben StametsPrincipal
(713) [email protected]