The next wave of oil and gas leaders

OGFJ: We hear it takes just as much time and effort to close a small deal as a large one. Does NGP have a minimum deal size?

TOMAS ACKERMAN: One of NGP's most important differentiators is the fact that we do not have a minimum equity commitment we look to deploy. Many of our contemporaries are no longer interested in equity commitments below a couple hundred million dollars - but some business plans just don't need that much capital to succeed, and we want to make sure we don't miss those opportunities. Our current commitments range from $20 million to $400 million, and we have a wide range of business strategies we back - from the South Texas aggregator that's done 50 deals in the $1 million to $2 million range to a company making $1 billion to $2 billion bids on large packages being sold by the majors. We have the capital to execute on large transactions, but the flexibility to stay small when we need to.

Tomas Ackerman, managing director

OGFJ: You have an internal philosophy of "finding and feeding the winners." What do you mean by that?

CRAIG GLICK: Long-term relationships are integral to our success, so once we have success with a team, we are eager to put more money with them or back them again in a new venture. About two-thirds of our capital is reinvested with teams that have been successful in the past, meaning our initial investment often starts a relationship that may last for decades. We have several companies that are on their third or fourth iteration with us. Backing repeat teams that have been successful helps mitigate risk in our business. In addition to backing teams repeatedly, we are continually looking for ways to reallocate funds to existing teams that are performing at very high standards. Our companies are never capital constrained. If they find good opportunities, the money is always there for them. This whole process is what we refer to as "feeding the winners."

Craig Glick, senior managing director

OGFJ: From our initial discussions, NGP believes it has found the "next wave of value creation." From whom and where do you believe the next wave of valuation creation will come from in our business?

GLICK: The industry has seen resurgence since the early 2000s driven by resource play expansion and the widespread use of horizontal drilling and multi-stage fracture stimulation. This renaissance has attracted a large and sustained new generation of energy professionals to the industry. This younger generation is well-trained on horizontal drilling and hydraulic fracturing, precisely the technologies needed to develop unconventional resources. They are a talented group, and are testing the historical norms for what is the appropriate age to lead an oil and gas company.

WEBER: The next wave of resource play development will be driven by these young entrepreneurs. Over the last five years, we've implemented a "Leaders under 40 Program" to target executives earlier in their careers who are capable of assuming senior level roles in new oil and gas companies. We target energy professionals younger than 40 years old, and we provide them with an opportunity to prove themselves earlier in their careers. We are willing to target oil and gas executive teams at an earlier age than most of our competitors. In fact, NGP has backed more than a dozen CEOs under 35 years old, and several of these portfolio company CEOs have been women.

OGFJ: NGP hasn't stopped backing management teams over 40 years old, but tell us more about the Leaders under 40 Program and how it got started?

WEBER: The spark that ignited the idea occurred when we began to realize that the younger set was playing an integral part in the technology revolution that's unlocked the unconventional resource plays. We make the analogy to what's happening in Silicon Valley, where most of the leading tech companies are led by young entrepreneurs. Advancements in technology are driving new efficiencies in drilling and completions, and entrepreneurs in their mid-30s have spent their entire careers utilizing these technologies and working to make them better. It is only natural that they would be the ones to question old practices and be open to change, which is something we've seen the new generation really excel at. So we embraced the notion of backing relatively young management teams who had spent their entire career exploiting unconventional plays with the latest technology. Early recognition of this trend put us in a position to partner with some of these younger management teams.

GLICK: We still have plenty of companies led by older management teams, and they continue to do a great job. We simply expanded our horizons by not excluding the 35-year-old guys from starting and running their own companies. There is great talent and really smart people who are under 40 that can and should be backed. A lot of times we find that entrepreneurs under 40 have concerns about starting their own companies. It can seem a bit daunting to start a company from scratch, but that's where we can come in. We have the process down - we help them obtain the capital resources and the counsel they need to get their company up and running, so they can focus on the assets.

OGFJ: How is this strategy to promote and empower young management teams working out for NGP?

GLICK: The talent pool from this young, emerging oil and gas class doesn't stop with engineers and geologists. The fresh, unique expertise of these professionals has spilled over into other oil and gas segments, such as private equity and finance. NGP's young team leaders for example are coming up with new, innovative financing structures we've never used before.

WEBER: We have a whole host of 35-year-olds who have taken on significant roles at NGP. You wouldn't find many firms, our size, with a 35-year-old running a significantly important office, like Houston or with a 35-year-old co-managing our business development. Tomas and Roy, who are with us today, are both 35-year-old managing directors. Tomas runs our Houston office, and Roy co-heads our deal-sourcing efforts. They are both full partners who are beginning to help us run things.

ACKERMAN: I've spent my entire career at NGP. Started here in 2002, and really, from day one, it's been a very open environment for young people. We realize good ideas can come from people of all ages, and we actively solicit input from the youngest members of our investment team. We've seen what challenging conventional wisdom can do in the oil patch and the same is true in our business. We want to be a valuable resource for our portfolio companies, and that means always striving to come up with new and creative ways to help them take their assets to the next level. Personally, NGP has been a great place to develop as an investor and a leader being surrounded by some of the sharpest minds in private equity. At the age of 35, I have the ability to go out and carry the NGP flag in Houston as we seek out new portfolio company management teams and investment opportunities. It's very uplifting to work in an organization that has that sort of trust and faith in its younger team members and allows them to assume leadership positions inside the firm.

ROY ANEED: When I joined NGP in 2007, it was really telling of the firm that shortly after I joined, they asked me to be integrally involved in the Canadian investment practice, which I did for the firm for several years. Then, three years ago the firm asked me to represent the firm in the Rockies and Mid-Continent effort and placed a lot of trust in me. When you look across NGP, we have a tremendous amount of flexibility in our investment styles. We target investments in acquire-and-exploit companies, waterfloods, horizontal development drilling, and we back companies to start midstream and oilfield service companies. This flexibility is emblematic of our culture that embraces talent and leadership at any age.

Roy Aneed, managing director

OGFJ: Craig mentioned that Roy and Tomas have been responsible for some new and unique financial structures that have never been done at NGP before. Can you tell our readers about a few?

ANEED: One that comes immediately to mind is the structuring of Memorial Resource Development (MRD) which was a five-way merger of companies with a subsequent dropdown of assets from three of the companies to create a publicly traded master limited partnership called Memorial Production Partners (MEMP). Earlier this year, the top entity, MRD, also had a successful IPO, providing partial liquidity and a publicly traded security for our funds. NGP also led the $120 million convertible note offering into Denver-based Triangle Petroleum (TPLM), a publicly traded company, with a subsequent $55 million common Private Investment Public Entity (PIPE). These have been good investments for NGP.

ACKERMAN: Two recent structures NGP put in place were Crimson Midstream and PennTex Midstream Partners. Crimson Midstream was a minority preferred equity deal. Unlike some other private equity firms, we don't always have a controlling position when we partner with our teams. We're comfortable taking a minority position to help a team to secure the capital it needs to grow the business. Crimson used our capital to purchase midstream assets at an opportune time, and they have already paid out our entire equity investment from cash flow. And, we funded the PennTex start-up to provide much needed processing capacity and reduce production constraints for NGP-backed E&P companies. We recognized the lack of processing capacity and turned a problem into an opportunity by helping get PennTex off the ground. Having NGP on both sides of the gas production stream creates a high level of confidence in each party's ability to fulfill its obligations to each other and allows NGP to capture value from both the upstream and midstream segments of the business.

OGFJ: Tomas and Roy, why has NGP been successful at attracting and retaining young management teams?

ACKERMAN: The private equity business is all about building trust and maintaining relationships over the long run. Approaching a private equity firm is not an easy decision for many oil and gas entrepreneurs thinking about taking the next step or entering the next stage of their career. If a team or individual decides to take the leap, they have to feel comfortable with their partner and believe that they will be there to support them through the ups and downs. We believe people are most comfortable with those who share their priorities and values. As Tony and Craig said earlier, NGP has empowered its 35-year-olds to find new investment opportunities. When a 35-year-old entrepreneur sits down with an NGP executive under 40, they see someone they can relate to, who understands their concerns, and with whom they can feel a strong sense of partnership.

ANEED: Building this type of trust doesn't happen overnight - it takes time at any age. And, what's great about NGP is that we have the ability to be patient. As a 26-year-old firm, we don't have to find new management teams this quarter to meet a quota, get a promotion, or a get a raise. There are no demands on the team here to close a deal this quarter or the next. We have the luxury of being patient, which is good for both NGP and the management teams we back. By targeting younger people, we have a longer courtship, which helps everyone get to know one another before we partner. Also, we are mindful that it is a two-way street and entrepreneurs are making their own decisions about partnering with NGP. Having more touch points during the process leads to shared expectations up front and a better long-term relationship.

OGFJ: Why should a young oil and gas entrepreneur call NGP?

ANEED: Even though we currently have over $14 billion under management, we're still a place where a team can get backed with a smaller equity commitment. We know the challenges associated with starting a business. Our large rolodex can help fill gaps on the team as the company grows. If needed, we can help teams recruit and retain high quality people, a scarce resource. And equally important, NGP has navigated and endured many cycles. We know that buying assets at the right price is often more important than getting top dollar when you go to market to sell. When prices dip, teams can count on NGP to say "let's go buy things" instead of saying "let's run for the hills." A seasoned oil and gas entrepreneur knows that you need to have a like-minded mentality with your partners if you want to make money through the cycles.

ACKERMAN: One other thing I would add is that we have a number of our successful CEOs who have agreed to be available to provide informal strategic advice to our companies when needed. This group of industry veterans, many of whom have run more than one company backed by NGP, can be an invaluable asset for a young management team. We encourage young entrepreneurs to take advantage of this resource as they seek to better understand the challenges and opportunities of starting their own endeavor.

GLICK: It's important for prospective partners to realize that we're there to help you on the financial side and with strategy and capital markets, but we're going to get out of your way on the technical side and let you run your business. You're the technical expert in this field and the team we've chosen to back. In the Marcellus shale play, Rice Energy is on the cutting edge of drilling and completions. They've built a full team and they've figured out a program, and a real strategy to help them optimize drilling. And so they are able to drill wells more efficiently, in a more cost-effective manner which gives them a real competitive advantage. We backed the Rice Energy team because they are good operators, and we don't want to get in their way. In fact, we do what we can to give our teams as much freedom as they need to run their business day-in and day-out.

OGFJ: Not only did you have tremendous success in 2014 with the IPO market, but many of the teams you backed that entered the public markets were young teams. Why was 2014 so successful?

WEBER: Companies such as Memorial Resource Development, Rice Energy, Parsley Energy, and RSP Permian, all with young management teams, continue to capture the attention of the large institutional growth investors who invest in the public capital markets. In fact, six exploration and production companies backed by NGP completed successful IPOs during 2014, and we have another two already slated for 2015. And, believe it or not, most of the management teams are under 40. We made our first commitment to the Rice brothers at Rice Energy when they were in their twenties, and to Bryan Sheffield, at Parsley Energy, when he was in his early thirties. As we said earlier, age is not a barrier to talent.

ACKERMAN: Over the last four to five years, we partnered with exceptional teams that assembled high quality assets that were able to access the capital markets this year - and they have done very well for investors after going public. As we look forward to next year, we're planning to continue business as usual. We have a whole new set of teams that we expect to be ready to access the public markets. However, if the IPO market or the capital markets slow down or are not attractive to access, we are comfortable that we've built companies that can access capital and exit in many different ways. We purposely create businesses that give us and our teams multiple ways to exit successfully. The only way to do that is to back strong teams and invest in core assets. And that's what we've always done at NGP. Although we've made a bit of a splash with the IPOs, what people don't see behind the scenes is the work we do to make sure our teams and companies have more than one way to win.

OGFJ: Thank you all for your time today.