Presentation on theme: "Presentation to the IPAA Private Capital Conference April 19, 2004 Kurt A. Talbot Head of E&P Capital Goldman, Sachs & Co."— Presentation transcript:
Presentation to the IPAA Private Capital Conference April 19, 2004 Kurt A. Talbot Head of E&P Capital Goldman, Sachs & Co.
Overview Who plays E&P? Capital providers have constraints Why is investing in E&P so difficult? Who is Goldman Sachs E&P Capital?
Harvard E&P Capital Providers MG TCW RIMCO ENCAP Torch Enron Cambrian Beacon KCS Stratum Koch Wells Fargo Tenneco Ventures Deutsche Bank Cargill Aquila Duke Shell Macquarie Black Rock Williams RBS Goldman Sachs PetroBridge GE John Hancock Prudential First Reserve NGP Quantum Lime Rock Kayne Anderson NYL Range/Domain Mirant Constellation Cerberus
Capital Providers Fall Into Two Basic Groups Regulated Entities Banks, Insurance Companies, ERISA Funds Non-Regulated Entities Corporations Merchant Energy Companies Commodity Trading Companies Investment & Merchant Banks Hedge Funds
Tenneco Ventures Prudential Lime Rock NYL Range/Domain Harvard E&P Capital Providers MG TCW RIMCO ENCAP Torch Enron Cambrian Beacon KCS Stratum Koch Wells Fargo Deutsche Bank Cargill Aquila Duke Shell Maquarie Black Rock Williams RBS Goldman Sachs PetroBridge GE John Hancock First Reserve NGP Quantum Kayne Anderson Mirant Constellation Cerberus
Capital Provider’s Have Constraints Regulated Entities Strong credit skills, usually strong industry experience Specific structures, less flexibility on underwriting criteria Less flexibility on pricing Limited transaction size Reserve requirements Mandated diversification May require a investment to be rated by S&P or Moody Follow up investments can cause conflicts External constraints
Capital Provider’s Have Constraints Non-Regulated Entities Credit skills and industry experience vary widely Flexibility in structure, pricing, and underwriting criteria Potentially larger investments Internal policy dictates diversification requirements Follow up investments desired Internal constraints
Prudential NYLHarvard RBS Why is Investing in E&P so Difficult? MG TCW RIMCO ENCAP Torch Enron Cambrian Beacon KCS Stratu m Koch Wells Fargo Tenneco Ventures Deutsche Bank Cargill Aquila Duke Shell Maquarie Black Rock Williams Goldman Sachs Petrobridge GE John Hancock First Reserve NGP Quantum Lime Rock Kayne Anderson Range/Domain Mirant Constellation Cerberus
Industry Types Think of Risk primarily as Technical, or Commodity Related Technical Reserves & Production Proven vs. Unproven Developed vs. Undeveloped Project Execution and Operations People Drilling wells, Installing Waterfloods, Recompleting, Stimulating CAPEX, OPEX, G&A
Industry Types Think of Risk primarily as Technical, or Commodity Related Commodity Prices are volatile if not hedged Hedging requires credit Hedging can introduce unintended risk Counterparty risk (Remember Enron?) Basis risk if physical sales and financial hedge are done at a different index What about nonproducing and undeveloped volumes?
General Investors worry about Credit and Structural Risk Fundamental Credit and Investment Structure Project or Corporate Guaranteed or Nonrecourse Capitalization Floating or Fixed Interest Rates Ranking and Security Covenants Public or Private, ability to exit Is the investment rated?
With so many variables to consider, can E&P risk be correctly priced? Risk Return These deals get done because they meet the return threshold, but they are under priced for the level of risk taken These deals are passed over because they don’t meet the return threshold, but they are attractive relative to the risk.
Do Capital Markets Correctly Price All of These Various Risks?
Basis of Competition among Capital Providers is Taking and Pricing These Risk Wide Disparity in the Perception of these various risks Private Deals are difficult to benchmark Terms generally not disclosed No publicly available performance data Not knowing specific terms or covenants, how can you ever be sure two deals are really comparable? Capital providers are forced to rely upon their past experience and inexact comparisons Basis of Competition is the willingness to price risk that are largely subjective
What’s Attracts Money to Direct E&P Investments? Financial Returns Superior spreads or security as compared to other opportunities Limited competition, relative to capital market transactions Ancillary Business Opportunities Agency or Advisory Opportunities Fee generating activities Commodity Trading
Goldman Sachs E&P Capital Principal investing effort for Goldman Sachs Not an investment fund Based in Houston Staffed with experienced E&P professionals Kurt Talbot 20 years in E&P, 13 years with TCW 34 transactions totaling over $900 million John Howie 22 years in E&P, Encap, Range, Tenneco Ventures, Amoco, Apache 30 transactions totaling over $300 million Extensive support from GS Commodities Group and other parts of the firm
Goldman Sachs E&P Capital Flexibility Not tied to a specific structure Not tied to a specific return target Principal Investor Arranger Syndication Participant
Goldman Sachs E&P Capital Preferred Investments Junior and/or Senior Debt Volumetric Production Payments Drilling Partnerships Preferred Transaction Size $10 - $50 million as a principal Several hundred million as an arranger
To Start a Dialog Contact One of Our E&P Experts Kurt Talbot Head of E&P Capital John Howie Vice President