NGP forms $1.3 billion fund, its 8th in 17 years, into technology sector as well

NGP team involved in a working group session at the company’s headquarters in Irving, Tex., study a map showing oil and gas infrastructure in the western United States.

Natural Gas Partners, with headquarters in Irving, Tex., in the Dallas-Fort Worth metroplex, has been a source of private equity funding for 17 years and has developed a reputation for being the premier sponsor of successful companies that otherwise might have had difficulty raising capital.

Founded in 1988, NGP has provided equity funding for more than 80 companies, primarily smaller upstream and midstream companies, and helped them grow and accrue significant value before making the decision to cash in and make a sizable profit for the management team and investors. Over the years, NGP has earned a favorable reputation in the industry for its strong support of its portfolio company management teams.

Natural Gas Partners is managed by its operating parent, NGP Energy Capital Management, which also oversees its other investment vehicles.

NGP VIII formed

In late November, NGP announced the formation of Natural Gas Partners VIII LP, which has $1.3 billion in available capital intended primarily for smaller upstream and midstream companies, and also raised a dedicated fund of $147 million for energy technology companies.

The new entity, NGP Energy Technology Partners, was created with its funds earmarked to provide capital for companies providing technology-related solutions for the oilfield service, power, and alternative energy industries.

Kenneth A. Hersh

“We’re excited about this new funding initiative,” said Kenneth A. Hersh, managing partner for NGP and head of the Irving office. “This is not [venture capital] funding, but growth capital intended to help existing companies grow and increase revenue.”

Philip J. Deutch, a former managing director of Perseus LLC, a private equity fund with offices in New York City and Washington, DC, heads up NGP Energy Technology Partners out of the firm’s Washington office. Deutch led Perseus’ energy technology investing since 1997. Prior to that, he worked at Williams & Connolly and in the mergers and acquisitions department at Morgan Stanley & Co.

“We are not gambling on untried and risky new technologies, but we will work with established companies that have developed exciting new technologies and need additional capital in order to realize their commercial potential,” added Hersh.

This sensible, low-risk approach to doing business has characterized NGP from its inception. The firm looks for seasoned management teams with the proven ability to enhance assets. They provide those teams with the capital necessary to grow the business, and then sell the assets at an opportune time. They avoid high-risk exploration-oriented companies, which Hersh says have only about a 10% success rate.

History of NGP

Natural Gas Partners was founded in November 1988 by the late Gamble Baldwin, a veteran energy analyst formerly with Credit Suisse First Boston and Fort Worth financier Richard Rainwater. Baldwin had retired that year as managing director of CSFB to co-found Natural Gas Partners with Rainwater, although Baldwin soon relinquished management responsibility to younger partners. Baldwin died in 2003.

Rainwater, who got his start managing the portfolio of the Bass family of Fort Worth in the 1970s and ‘80s, has amassed a personal fortune estimated at more than $2 billion. Although he was never directly involved with NGP, Rainwater’s contrarian ideas of investing in the natural gas industry when it was down were the inspiration for the company’s early origins. Philosophically, the firm continues to embrace the idea that, if done right, there is still a lot of money to be made in the oil and gas business.

William Quinn joined NGP in 1995 and serves as a managing partner.

NGP is today managed by Hersh, who joined the firm in 1989; David R. Albin, a co-founder who offices in Santa Fe, NM; and William J. Quinn, a managing partner in the Irving office. The company also has an office in Greenwich, Conn., that is run by John S. Foster, a managing director.

Hersh co-manages NGP’s investment portfolio and oversees the firm’s ongoing investment sourcing, analysis, and execution efforts. He is a frequent speaker at investment and energy events and studies trends in the energy sector. Before joining NGP, he was employed from 1985 to 1987 in the energy group within Morgan Stanley & Co.’s investment banking division, where he specialized in oil and gas financing and merger and acquisition transactions. He actually began work for NGP in 1989 while he was working on his MBA requirements at Stanford University.

Albin also co-manages NGP’s investment portfolio and the day-to-day investment sourcing efforts of the firm. Prior to joining NGP, he was a partner in the Bass Investment Limited Partnership, and before that he was a member of the oil and gas group in the investment banking division of Goldman, Sachs & Co. He takes a keen interest in analyzing macroeconomic data relevant to the energy industry in order to identify early trends that may impact NGP’s investment strategy.

Quinn joined NGP in 1995. He co-manages the firm’s investment portfolio and plays an active role in the full range of NGP’s investment process, from transaction sourcing through analysis, execution, and exit. Quinn previously was employed in the Mexico City office of Hicks, Muse, Tate and Furst, where he focused on evaluating private equity investment opportunities in Latin America. Before that, he worked as an analyst in the investment banking divisions of Bear Stearns & Co. and BT Securities Corp.

Interestingly, all the managing partners have connections to Stanford University. Hersh, who has an undergraduate degree in politics from Princeton University, has an MBA from Stanford. Albin has a BS degree in physics and an MBA degree from Stanford. And Quinn has a BSE in finance from the Wharton School of the University of Pennsylvania and an MBA from Stanford. Deutch, the managing director of NGP Energy Technology Partners, earned a BA degree from Amherst College and a JD degree from Stanford Law School.

Other key players for NGP include Richard L. Covington, managing director; John A. Weinzierl, managing director; David W. Hayes, principal; Christopher D. Ray, principal and general counsel; Colin F. Raymond, principal; Tony R. Weber, principal and director of corporate finance; and John S. Foster, managing director, who also serves as NGP’s CFO and head of investor relations.

Capital for the energy industry

NGP’s focus remains on providing private equity funding to upstream oil and gas producers and midstream companies. The firm’s approach is to partner with the best management teams and help them build and sell companies. About 75% of the capital has been invested in companies that acquire and enhance existing oil and gas properties, with the remainder spread across companies involved in development drilling, natural gas gathering and transmission, and oilfield services.

One indicator of the success of the company’s strategy is that, after selling a company together, NGP often restarts with the same management team and the same business plan.

“We have done this 23 times, including some teams that are running their third company with NGP’s backing,” said Hersh.

NGP likes to invest between $5 million and $100 million in its portfolio companies. However, Hersh points out that the firm has backed numerous start-up companies and has made incremental investments as the companies grew.

NGP has invested more than $1.6 billion in the past 17 years in privately-held independent producers and midstream companies, although some of the companies have made the decision to go public as they have grown and prospered. About 80% of the funding has gone to US companies, while the remaining 20% has been extended to Canadian producers.

Over the years, NGP has applied one abiding principle to its funding: Back an experienced management team that has a proven track record in building a company and enhancing equity value.

“We like to invest in a company that wants to acquire already-producing wells and then enhance them by cutting operational costs and improving production,” says Hersh. “Plus, we need the management team to demonstrate their commitment to the venture by investing a portion of their net worth to the project as well. When we find individuals who fit this mold, we often do business with them repeatedly, helping them build and sell several companies.”

Hersh continued, “We have to find management teams we can trust because good business is a cooperative effort. We do not employ geologists or petroleum engineers at NGP. We have to rely on management’s knowledge in these areas. Our expertise is in the financial sector and in our ability to find the right companies to work with. Our job is to make sure our interests are aligned and that we have a sustainable business proposition.”

Over the 17 years of its existence, NGP claims in excess of a 30% compounded annual rate of return - a statistic that is immensely helpful when the company is seeking new investment dollars. The firm’s principals are well connected to the investment community and have had little trouble attracting investors over the years.

David Albin co-founded NGP in 1988 and serves as a managing partner.

Although NGP mainly backs young private E&P companies, the company has completed large corporate transactions as well. For example, NGP and Richard Rainwater teamed up to buy Mesa Petroleum from noted corporate raider T. Boone Pickens and renamed the company Pioneer Natural Resources Co. after Hersh negotiated the merger between Mesa and Parker and Parsley Petroleum. Pioneer is now the 18th largest public oil and gas producer in the US.

In addition to its main private equity fund, Natural Gas Partners VIII LP and NGP Energy Technology Partners LP, NGP also oversees the activities of NGP Capital Resources Company (NASDAQ: “NGPC”), a publicly-traded entity that provides senior and mezzanine capital to energy companies.

Venture partners

In the past few years, several individuals have joined NGP as venture partners after each enjoyed a previous relationship with the firm as a ranking executive with one of NGP’s portfolio companies.

In 2001, Eric R. Pitcher joined the firm as a venture partner. Previously, he had served as chairman at Synergy Oil & Gas, a portfolio company of NGP. Synergy’s initial capitalization of $20,000, along with a $20 million equity infusion from NGP in 1998, grew to be worth $112 million prior to its ultimate sale to Penn Virginia Corp. in July 2001.

Philip B. Smith became a venture partner in 2002. He was chairman and CEO of Prize Energy Corp., an NGP portfolio company. Smith co-founded Prize with NGP in 1999 concurrent with a $245 million purchase of assets from Pioneer Natural Resources and guided the company until its $600 million merger with Magnum Hunter Resources in March of 2002. He also grew Tide West, also a former NGP portfolio company, from less than $10 million in assets to more than $200 million in assets at the time it was sold to HS Resources in 1997.

This past March, Charles R. Stephenson joined NGP as a venture partner. In 1996, he served as COO of Spring Holding Co., a $10 million start-up portfolio company sponsored by NGP that was sold for $250 million in 1999. Capitalizing on Stephenson’s deal-finding skills, NGP sponsored a second company, Bravo Natural Resources, which began operations under Stephenson’s leadership in 1999 with $12 million of NGP equity. Ultimately, Bravo was sold for $119 million in December 2002, and Stephenson and NGP immediately re-formed Bravo Natural Resource Holdings (Bravo II) with a $20 million commitment from NGP. Bravo II was sold in August 2004 for $335 million. Recently, Stephenson formed Bravo III in partnership with NGP with total capitalization of $40 million.

Acquire and exploit

NGP has been called a savvy industry partner by those E&P companies that have partnered with them. The firm’s acquire-and-exploit strategy has served it well over the years.

As one former portfolio company executive put it, “NGP is a company that wants an exit. The idea is not to stay married, but to build a successful company and then sell it for a premium.”

NGP also encourages its portfolio companies to behave opportunistically without size constraints. The firm’s extensive investment connections allow it to marshal significant amounts of capital when companies need it, permitting companies to respond when opportunities arise.

Trends and strategy

NGP’s Hersh, a trained economist and businessman, believes the next five years will be different from the past five in at least one aspect. “There will be a lot more volatility in the next five years,” he said.

Commodity prices will go up and down. There will be higher highs and higher lows due mainly to increased risk factors. From weather, such as more frequent hurricane activity in the oil and gas-producing areas of the Gulf of Mexico, to increased political risk, the volatilities are magnified when supply and demand are in equilibrium, said Hersh.

“Prices are higher because the risk factor in a barrel of oil is higher - not because it costs that much more to extract a barrel of oil than it used to,” he said.

Commenting on current market conditions, Hersh noted: “If you couldn’t make money during the last five years, you should be voted off the island.”

As for the cyclical nature of the business, Hersh had this to say: “When supply and demand are in equilibrium, volatility becomes the norm. The trick is to figure out how to make money despite the swings in prices.”

Making money for their investors, their portfolio companies, and themselves seems to be one of the things NGP management does best. Now, with the firm’s new family of investment funds, NGP has the ability to match the right capital with the right opportunity, whether it be private equity, structured finance, or growth capital. $