“We’ve always been, to a
certain extent, contrarians.
We were buying in Ohio
when no one even thought
about the Appalachian basin,
and we were able to buy in
Karnes County when people
focused on the Permian
and wanted to move out [of
the Eagle Ford] to a certain
extent.”—John B. Walker,
chief executive officer,
EnerVest Ltd.
SPECIAL
REPORT
probably should be in this business, particularly with regard to drilling.”
Operator-investor in one
Serving as something of a private equity fund and operator
in one, Houston-based EnerVest Ltd., founded in 1992, specializes in buying onshore properties with proved reserves,
building up those assets, and then selling them. “There’s
only four of us that do that, and we’re by far largest,” said
EnerVest Chief Executive Officer John B. Walker, who himself has experience on both the financial and operational
sides of the industry. EnerVest as well as the separate, publicly traded EV Energy Partners LP, founded in 2006 and
where Walker also serves as executive chairman, say they’re
“extremely particular” in their acquisitions, and
would “rather lose a bid than buy foolishly,” according to their web sites.
The combined strategy includes finding assets
that are long-lived producing oil and gas properties with low decline rates, predictable production profiles, and low-risk development opportunities; leveraging their own operating and
technical knowledge to control operational costs
and increase asset value and cash flow stability;
maintaining conservative levels of indebtedness
to reduce risk and facilitate acquisition opportunities; and
reducing cash flow volatility and exposure to commodity
price and interest rate risk through derivatives.
Early in his career, Walker spent 11 years as an energy
analyst on Wall Street, where he was named “All American”
energy analyst 6 years in a row by Institutional Investor. “I
ator, with management being “told what to do” from essen-
tially an outside source, “and that isn’t terribly attractive.”
“Generally these operators have a good amount of drill-
ing inventory and require additional capital to develop their
assets,” Arnold said. “These operators are not in distress and
have the ability and willingness to invest capital alongside
He added that IOG’s partners have avoided “using
a large amount of leverage to retain control of their
business,” meaning they’ve avoided mezzanine
debt and corporate investment via private equity.
An example of these reversionary interest deals
includes IOG’s development agreement with Seneca Resources Corp., which was made in late 2015
and revised in summer 2016. Under the revised
agreement, Seneca and IOG agreed to jointly participate in a program developing up to 75 Marcellus wells
on 10,500 acres in the Clermont-Rich Valley area of Pennsylvania. IOG is expected to fund $325 million of the program while holding 80% working interest in the wells, with
Seneca holding the remaining 20%. When IOG reports a
15% internal rate of return, a predetermined reversion takes
effect and Seneca’s working interest increases to 85% and IOG’s interest drops to 15%, allowing Seneca to retain long-term economics.
Rowland describes IOG as “sort
of the antiprivate equity model.”
The firm doesn’t make decisions
for the operator—it’s “truly an
oil and gas partner” and “people
who’ve been in the business a
while like those kinds of relationships,” he said.
“We can function as a money
partner but [also] as an oil and gas
guy that will exit when it’s right for
them to exit.” Perhaps most importantly, Rowland reiterates that IOG
isn’t debt. “If it doesn’t work out,
the risk is on us. There’s no obligation at the end of the day, so it
doesn’t cloud [the operator’s] balance sheet otherwise, and a lot of
people are still risk averse as they
