Presentation on theme: "1800 Avenue of the Stars, Second Floor Los Angeles, California 90067 Tel 800.231.7414 1100 Louisiana Street, Suite 4550 Houston, Texas 77002 Tel 713.655.7351."— Presentation transcript:
1800 Avenue of the Stars, Second Floor Los Angeles, California 90067 Tel 800.231.7414 1100 Louisiana Street, Suite 4550 Houston, Texas 77002 Tel 713.655.7351 www.kayneenergy.com Kayne Anderson Energy Funds January 2006 Independent Petroleum Association of America 2006 Private Capital Conference
2 Firm Background With offices in Los Angeles and Houston, Kayne Anderson Capital Advisors employs over 40 people. Distinct teams of investment professionals are dedicated to the various investment strategies managed by the firm. Approximately $4.4 billion (80%+) dedicated to the energy industry! Kayne Anderson Capital Advisors, LP Energy Group (Structured Energy Investments) $900 Million raised 45+ transactions with 25+ oil and gas companies since 1992 8 investment professionals (6 in Houston, 2 in Los Angeles) Closed End Fund Group (NYSE: KYN and KYE) $2.5 Billion in Assets Hedge Fund Group (Marketable Securities) $1.5 Billion in Assets Private Equity Group (Non-Control Investments) $360 Million raised ENERGY Energy Investments (Public Companies) $1.0 Billion in Assets NON-ENERGY
3 Life Cycle of Small Oil & Gas Companies A B C D Life of a Company Valuation Risk Profile:HighMedium Low Risk Type:Engineering Drilling Operational GeologicOperational Commodity Price Fund Type:PrivatePrivate Mezzanine VentureTranche B Kayne Anderson: A-B & B-C Risk
4 Private Equity Energy Capital Markets Significant amount of new capital has been committed to seasoned and new funds Approximately $8.5 billion has been raised in the last 2 years by energy private equity funds (a) –Kayne Anderson Energy Fund III closed in November 2004 with total commitments of $550 million (to date, 50% committed to 7 portfolio companies) Also, traditional energy private equity players have been raising complementary, non- equity funds –Working interest funds, mezzanine funds, royalty funds, etc. Larger funds necessitate larger transactions and/or more portfolio companies During the last 2 years, private equity-backed companies have accounted for approximately 15% and 30% of E&P buyside and sellside transactions, respectively (b) (a) Source: COSCO Capital Management LLC. (b) Source: Richardson Barr & Co. Percentage by deal count for transactions between $25 million and $1 billion.
5 Private Equity Energy Capital Markets Source: Richardson Barr & Co. $156 $41 $58 $43 $5 $63 % Private Equity5%32% % PDP70% 40% M&A Boom 70/30 Blended Spot Price $13 Private equity-backed companies have become increasingly prevalent in the M&A marketplace and are one of the main reasons PDP percentages (as a % of total reserves in sellside transactions) have decreased dramatically Have a “build to sell” mentality recognizing that public E&P companies need to acquire upside and will pay for it
6 Hot Domestic Plays Sought after properties are more “repeatability” oriented, but cost of entry is at an all- time high and services can be a problem Tight sands Shales Coal bed methane Horizontal drilling Bakken Shale Piceance Uinta Cretaceous Sands Barnett Shale E. Texas / N. Louisiana Arkoma Caney Shale Appalachia CBM
7 Use of Leverage Commercial banks have been aggressive in the E&P space Competitive atmosphere for commercial banks to keep their loan dollars “at work” –Borrowing base calculations based on higher price decks with more value given to non-PDP reserves Bank price decks still conservative compared to NYMEX strip or equity research price estimates –Long-term price decks of approximately $35.00/bbl oil and $5.00/Mcf gas –Hedging PDP production helps to “bridge the gap” Tranche B loans being used more frequently as a source of capital Private equity firms are maximizing usage of 6%-7% bank debt to achieve target equity returns
8 Use of Hedging Private equity firms are maximizing usage of long-term hedges for PDP production Increases bank borrowing base, thereby lowering overall cost of capital “Lock in” current commodity prices –If prices go higher, hedges are “underwater” but generally nice problem to have since unhedged reserve base is more valuable Source: Petrie Parkman & Co.
9 Drilling Economics Capital is being used to accelerate drilling and rates of production Services may be a problem – rigs, fracs, etc. E&P companies are committing to long term contracts with service companies “Rule of thumb” metrics don’t make sense any more Full cycle margins at all-time high, and market valuations reflect this Sticker Shock? Source: Scotia Capital.
10 E&P Full Cycle Margins Source: JPMorgan Chase Global Equity Research.
11 Declining Production Despite record investment levels and rig counts, North American gas production has been declining year-over-year (even adjusting for 2005 hurricane effects) Average gas well decline rate has increased from 16% per year in 1992 to approximately 30% per year in 2005 (a) Chart Source: JPMorgan Chase Global Equity Research. (a)Source: EOG Resources.
12 Market Trends in Private Equity Deals Funds are bigger, able to write much larger checks and need to deploy capital “Blank check” investing using control of capital budgets to allocate capital Offering management teams better economics after return thresholds Fewer “B-to-C” investment opportunities since many companies are being sold and management teams are starting over from scratch More “A-to-B” investment opportunities Less management equity in deals Shorter hold periods since acquirors willing to pay for upside Management teams doing second, third and fourth deals with equity funds
13 Downside Protection Most funds can sustain a substantial decline in prices without losing capital Hedging PDP production Use of bank debt to fund drilling and acquisitions Remain conservative in commodity price assumptions –Kayne Anderson uses a discount to NYMEX 5-Year strip for unhedged volumes –Pressure to increase these price assumptions Exit timing flexibility to ride out price cycles Nonetheless, ROI/IRR could fall below target returns
14 Pros & Cons of Private Equity Pros Cons Knowledgeable partner Structuring flexibility Allows all parties to find appropriate risk/reward trade-offs Fills void of debt capital markets and public equity markets Patient, growth-oriented capital Consistently available Alignment of interests No cash flow sweep Management gets promote on $ invested Management has virtually unlimited checkbook for “equity return” projects Control Board control Budget approval rights Subsequent financings Forced sale provision Expensive capital Dilutive to shareholders
16 2005 Kayne Anderson Update Kayne Anderson closed Kayne Anderson Energy Fund III (“EF 3”) in November 2004 with total commitments of $550 million During 2005, Kayne Anderson monetized interests in 7 companies Panther Energy (EF 2) – private sale of Kayne Anderson’s interests (February 2005) Blue Mountain Energy (EF 1) – private sale of Kayne Anderson’s interests (April 2005) Profico Energy (EF 1) – private sale of Kayne Anderson’s interests (May – August 2005) Medicine Bow (EF 2) – company sale to El Paso for $814 million (August 2005) Lyco Energy (EF 2) – company sale to Enerplus for $421 million (August 2005) The Exploration Company (EF 2) – partial asset sale to EnCana for $80 million (September 2005) Crusader Energy (EF 2) – company sale to Encore for $108 million (October 2005) During 2005, Kayne Anderson made commitments to 8 companies totaling $326 million $48 million committed to Crusader Energy II (EF 2) $278 million of EF 3 has been committed (see next page) Currently in discussions with 3 other companies for total commitments of approximately $130 million
17 EF 3 Portfolio Companies Company Kayne Anderson Commitment Primary Area of Focus President/CEO Blacksand Energy$40 MMLos Angeles BasinTim Collins Caddo Resources$50 MM East Texas / North Louisiana Rex Corey, Jr. Cavallo Energy$38 MMTexas PanhandleGeorge SanFilippo CORE Energy$20 MMMichiganBob Mannes Crusader Energy III$50 MMOklahomaDave Le Norman Matris Exploration$30 MM San Joaquin & Sacramento Basins Rich Langdon Pedernales Production $50 MMGulf Coast Joe Bailey / George Kane
18 Current & Past Portfolio Companies CADDO RESOURCES LP CAVALLO ENERGY LP PEDERNALES PRODUCTION LP
19 Los Angeles Office Richard "Ric" Kayne – CEO of Kayne Anderson Capital Advisors and Kayne Anderson Rudnick Investment Management He began his career in the mid-1960s as an analyst with Loeb, Rhodes & Co. in New York. Prior to forming Kayne Anderson in 1984, Mr. Kayne was a principal of Cantor Fitzgerald & Co., Inc., where he managed private accounts, a hedge fund and a portion of firm capital. Mr. Kayne is a trustee of and the former Chairman of the Investment Committee of the University of California at Los Angeles (UCLA) Foundation and is a trustee and Co-Chairman of the Investment Committee of the Jewish Community Foundation of Los Angeles. He earned a BS in Statistics from Stanford University in 1966 and an MBA from UCLA in 1968. Robert "Bob" Sinnott – President, Chief Investment Officer and Senior Managing Director of Energy Investments Prior to joining Kayne Anderson in 1992, Mr. Sinnott was Vice President and senior securities officer of Citibank’s Investment Banking Division from 1986 to 1992, concentrating in high-yield corporate buyouts and restructuring opportunities. From 1981 to 1986, he served as Director of Corporate Finance for United Energy Resources. Mr. Sinnott began his career in the financial industry in 1976 as a Vice President and debt analyst for Bank of America. Mr. Sinnott graduated from the University of Virginia in 1971 with a BA in Economics. In 1976, he received his MBA in Finance from the Harvard Business School. Houston Office Daniel "Danny" Weingeist – Senior Managing Director of Energy Investments Prior to joining Kayne Anderson in 1999, Mr. Weingeist was a Managing Director and principal of Torch Energy Advisors, a Houston-based company that provides capital and specialized outsourcing services to the industry. Prior to that, he served as Vice President with EnCap Investments and as a Reservoir Engineer at Exxon Company U.S.A. Mr. Weingeist is a 1985 graduate of the University of Texas with a BS in Petroleum Engineering and an MBA in 1989. Charles "Chuck" Yates – Managing Director of Energy Investments Prior to joining Kayne Anderson in 2001, Mr. Yates was Senior Vice President and head of the Power Technology Group at Stephens Inc., an integrated merchant and investment bank. A member of Phi Beta Kappa, Mr. Yates received his BA in 1991 and his MBA in 1994 from Rice University. Michael "Mike" Heinz, Jr. – Managing Director of Energy Investments Prior to joining Kayne Anderson in 2002, Mr. Heinz was a Senior Vice-President of Netherland, Sewell and Associates, Inc., a Texas-based oil and gas consulting firm that provides a complete range of professional reservoir engineering, geophysical and geological services to the worldwide petroleum industry. Mr. Heinz began his career in the oil and gas industry in 1984 as a reservoir and operations engineer for Exxon Company U.S.A. Mr. Heinz graduated from the University of Tulsa in 1984 with a BS in Petroleum Engineering. Gifford “Giff" Wilkerson – Vice President of Energy Investments Prior to joining Kayne Anderson in 2004, Mr. Wilkerson was a reservoir engineer with Netherland, Sewell and Associates, Inc., a Texas-based oil and gas consulting firm that provides a complete range of professional reservoir engineering, geophysical and geological services to the worldwide petroleum industry. Mr. Wilkerson began his career in the oil and gas industry in 1991 with Exxon Company, U.S.A. where he held various reservoir, operations, and supervisory assignments. Mr. Wilkerson received his BS degree in Civil Engineering, cum laude, from Louisiana State University in 1990 and his MBA from the University of New Orleans in 1997. James Broach – Vice President of Energy Investments Prior to joining Kayne Anderson in 2005, Mr. Broach was an Associate in the energy investment banking group of Credit Suisse First Boston where he worked on a broad array of capital markets and M&A transactions. Prior to attending graduate business school, he was an Analyst in the energy investment banking group of Stephens Inc., an integrated merchant and investment bank. Mr. Broach earned his BA in Economics from Trinity University in 1998 and his MBA from the University of Texas at Austin in 2003. Investment Professionals
20 What Sets Kayne Anderson Apart? Technical expertise We have 3 engineers with combined 50 years of industry and third party consulting experience in every onshore domestic basin We can evaluate complicated situations quickly (without requiring outside engineering services or a reserve report) We can help portfolio companies evaluate deals (just ask our CEOs!) Will hold majority or minority stakes Will invest in both private and public companies Will invest in “A-to-B” and “B-to-C” risk companies Increased access to capital markets and deal flow We have been investing in energy since 1992 45+ transactions with 25+ oil and gas companies Unique structuring capabilities to help all parties find appropriate risk/reward trade-offs