Monday, June 14, 2010

KKR Again Invests in Shale Gas

Private equity firm Kohlberg Kravis & Robers (KKR) has agreed to invest up to $400 million for a 40% ownership of a venture with Hilcorp Energy Co. to develop acreage in the Eagle Ford Shale in southern Texas.  KKR pretty much recycled their returned principal from an earlier investment in East Resources.  Less than a month ago, KKR-backed East Resources agreed to be acquired by Shell Oil for $4.7 billion.  Not bad for a one year investment.

This deal is good news for the shale gas industry.  The East Resources investment showed that investors can make big money backing producers.  Pipelines have been a popular investment because of their high capital costs and relative stability, which allows private equity firms to put lots of money to work and at the same time safely borrow lots of dough to fund the investment.  Investments in energy services companies have been receiving less press.  The service companies are either the Weatherfords, Smiths and Baker Hughes of the world or they are smaller regional companies that most of us have never heard of.  Some of the smaller companies are investment targets, but you don't hear much about that. 

In general, backing the independent gas E&P has been a very successful model in shale plays.  The big international players don't have the patience or expertise to develop these plays at the appropriate pace.  But they ultimately want in and can afford to buy in after the play has been proved.  When you have deep pockets, you don't have to be the "first mover"

If nothing else, the KKR investment brings positive energy, attention and investment cash to shale gas exploration.

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