November 28, 2020

DealBook: K.K.R. Venture Sells Its Shale Assets for $3.5 Billion

Natural gas is flared at a well in the Eagle Ford shale area.Eddie Seal/Bloomberg NewsNatural gas is flared at a well in the Eagle Ford Shale area.

8:27 p.m. | Updated

Kohlberg Kravis Roberts Company has now struck gold in unconventional oil and gas exploration — twice.

Hilcorp Resources, a joint venture between K.K.R., the private equity firm, and Hilcorp Energy, announced on Wednesday that it would sell its assets in the Eagle Ford shale formation in south Texas to Marathon Oil for $3.5 billion.

The deal will reap a windfall for K.K.R., which paid about $400 million for its 40 percent stake in Hilcorp Resources less than a year ago. That stake now is valued at $1.13 billion, a staggering 2.7 times the firm’s original investment.

What Marathon is buying includes 141,000 net acres of shale, 36 producing wells and 10 drilled wells that await completion.

Investors and analysts regarded the price as rich, helping to push Marathon shares down 2.8 percent on Wednesday to $52.65.

The deal was announced one year after another K.K.R. shale partnership, East Resources, sold itself to Royal Dutch Shell for $4.7 billion. The buyout firm initially invested just $350 million for a 35 percent stake in East.

For K.K.R., both deals highlight the wisdom — and luck — of its push into shale investments, made when the market had cooled for the leveraged buyouts for which the industry is known. Not only did the firm generate handsome returns from Hilcorp Resources and East, but it left each investment in about a year.

“We had a lot of conviction that there’d be value here long term,” Marc S. Lipschultz, the global head of K.K.R.’s energy and infrastructure business, said. “But we didn’t expect to sell either one of these in a year.”

Energy investments have a long history at K.K.R. Its co-founders, Henry R. Kravis and George R. Roberts, have family roots in the oil industry, and the firm struck its first oil deal in 1985. It was part of the private equity consortium that took over the Texas utility TXU in 2007 in the largest leveraged buyout on record, though the company has since struggled with heavy debt loads and low natural gas prices.

East and Hilcorp Resources have proved highly profitable.

In its effort to find quality low-cost areas, K.K.R. turned first to the Marcellus shale formation, which stretches from West Virginia to New York. It formed a partnership with East Resources in 2009 because of the energy company’s knowledge of the area and operational expertise.

K.K.R. used those same principles in entering a partnership with Hilcorp Energy last year.

The firm provided capital to help expand the partnerships, when East and Hilcorp might have considered selling themselves at lower prices. K.K.R.’s investment in East allowed the company to expand from one drilled well to 75 in a year. Its infusion into Hilcorp Resources allowed the partnership to add more than 40,000 acres and increase to 600 employees from 75.

K.K.R. has one shale partnership, with RPM Energy, and it owns other shale assets.

Jefferies Company and the law firm Andrews Kurth advised Hilcorp Resources on the sale. Simpson Thacher Bartlett served as legal adviser to K.K.R.

Barclays Capital and the law firm Baker Botts advised Marathon.

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Shale Boom in Texas Could Increase U.S. Oil Output

Now the region is in the hottest new oil play in the country, with giant oil terminals and sprawling RV parks replacing fields of mesquite. More than a dozen companies plan to drill up to 3,000 wells around here in the next 12 months.

The Texas field, known as the Eagle Ford, is just one of about 20 new onshore oil fields that advocates say could collectively increase the nation’s oil output by 25 percent within a decade — without the dangers of drilling in the deep waters of the Gulf of Mexico or the delicate coastal areas off Alaska.

There is only one catch: the oil from the Eagle Ford and similar fields of tightly packed rock can be extracted only by using hydraulic fracturing, a method that uses a high-pressure mix of water, sand and hazardous chemicals to blast through the rocks to release the oil inside.

The technique, also called fracking, has been widely used in the last decade to unlock vast new fields of natural gas, but drillers only recently figured out how to release large quantities of oil, which flows less easily through rock than gas. As evidence mounts that fracking poses risks to water supplies, the federal government and regulators in various states are considering tighter regulations on it.

The oil industry says any environmental concerns are far outweighed by the economic benefits of pumping previously inaccessible oil from fields that could collectively hold two or three times as much oil as Prudhoe Bay, the Alaskan field that was the last great onshore discovery. The companies estimate that the boom will create more than two million new jobs, directly or indirectly, and bring tens of billions of dollars to the states where the fields are located, which include traditional oil sites like Texas and Oklahoma, industrial stalwarts like Ohio and Michigan and even farm states like Kansas.

“It’s the one thing we have seen in our adult lives that could take us away from imported oil,” said Aubrey McClendon, chief executive of Chesapeake Energy, one of the most aggressive drillers. “What if we have found three of the world’s biggest oil fields in the last three years right here in the U.S.? How transformative could that be for the U.S. economy?”

The oil rush is already transforming this impoverished area of Texas near the Mexican border, doubling real estate values in the last year and filling restaurants and hotels.

“That’s oil money,” said Bert Bell, a truck company manager, pointing to the new pickup truck he bought for his wife after making $525,000 leasing mineral rights around his family’s mobile home. “Oil money just makes life easier.”

Based on the industry’s plans, shale and other “tight rock” fields that now produce about half a million barrels of oil a day will produce up to three million barrels daily by 2020, according to IHS CERA, an energy research firm. Oil companies are investing an estimated $25 billion this year to drill 5,000 new oil wells in tight rock fields, according to Raoul LeBlanc, a senior director at PFC Energy, a consulting firm.

“This is very big and it’s coming on very fast,” said Daniel Yergin, the chairman of IHS CERA. “This is like adding another Venezuela or Kuwait by 2020, except these tight oil fields are in the United States.”

In the most developed shale field, the Bakken field in North Dakota, production has leaped to 400,000 barrels a day today from a trickle four years ago. Experts say it could produce as much as a million barrels a day by the end of the decade.

The Eagle Ford, where the first well was drilled only three years ago, is already producing more than 100,000 barrels a day and could reach 420,000 by 2015, almost as much as Ecuador, according to Bentek Energy, a consultancy.

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