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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
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.
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.
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.
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.
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.
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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'01-'06 Vintage Fund '07-'08 Vintage Fund (closed or estimated)
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.
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.
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.
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.
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]
