EnCap Investments on track to raise 2.5 billion in newest fund

Chad Eric Watt, Houston Business Journal

An energy private equity fund that raised $1.5 billion last year has deployed all that money in seven months and is raising funds again.

EnCap Investments LP, with offices in Houston and Dallas, aims to close its seventh energy private equity fund by the end of July. This time, it's on track to raise $2.5 billion.

"In retrospect, we should have raised $2.5 (billion) to $3 billion last time," says David Miller, the fund's Dallas-based partner. EnCap's three other partners -- Gary Peterson, D. Martin Phillips and Robert Zorich -- are in Houston.

A furious level of activity in the energy sector, combined with consolidation at the top of the industry, has contributed to EnCap's rapid deployment.

After a decade of languishing, opportunities in the energy sector have blossomed.

Most of those opportunities, from drilling wells to building natural gas pipelines, require a lot of capital.

Driven by higher prices for oil and natural gas, work that once didn't make economic sense has now become feasible, Miller says.

For example, the Barnett Shale region in Fort Worth and parts west has long been known to hold natural gas deposits but, until the last decade, the technique and technology to get at that fuel was limited, and the price of natural gas was too low to extract it economically.

Similar "unconventional" sources for oil and gas elsewhere in North America are experiencing production booms like the Barnett.

And as wells proliferate in the Barnett Shale, drillers are finding a new need for natural gas processing and pipeline systems.

Among EnCap's more recent investments are several Houston-area companies: Destiny Oil & Gas, based in The Woodlands, which focuses on oil and gas properties in Louisiana and Mississippi; Oasis Petroleum LLC, founded by former senior managers of Burlington Resources Inc.; and Paloma Resources LLC, an upstream oil and gas company focused on the Barnett Shale play.

The current shortage of pipelines is a natural fit for the current abundance of private equity seeking investment, says Kathleen McLaurin, a Dallas energy attorney at the Jones Day law firm.

"All of a sudden, there's a ton of capital going, 'Oh, look at this'," she says.

Familiar leaders
While other funders ignored the energy segment, it's been the only thing EnCap has focused on since 1988, when its four founding partners left the energy trading desk at the former Republic Bank.

Nearly half of the 23 ventures backed by the $1.5 billion fund are led by management teams that EnCap has backed before.

"The continued consolidation in the industry spawns some outstanding management teams," Miller says.

That's something that's been snowballing since EnCap's third private equity fund.

"Fifteen percent of that fund was committed to people we'd backed successfully before in the past," Miller says. That grew to 25 percent, then 32 percent and now just under 50 percent.

For the most part, the executives backed by EnCap have built up energy businesses that have been acquired by industry giants and then repeated that cycle.

In addition to its former investees, EnCap has invested in at least another seven ventures that have done the same sort of cycle with other investors behind them.

"In this round, they've decided to align themselves with us," Miller says.

Risk and return
Private-equity groups providing capital to energy firms focus on limiting risk, not on making wild gambles.

"The risks are more about timing of execution and cost control," Miller says.

Risk is down across the energy business.

Wildcat wells that once sported a one-in-10 success rate now succeed 40 percent of the time, thanks in large part to advances in seismic scanning technology.

"That's still not who we are," Miller says.

EnCap has completed more than 100 investments and has lost "small amounts" of money on four of those deals.

EnCap's first stop in raising its newest fund has been investors it turned down for the $1.5 billion fund.

Miller says EnCap's next fund should take a couple of years to deploy. That's the kind of pace the firm is best suited for.

"Our business is about investing the capital," Miller says. "And frankly, spending three or four months raising the capital is inefficient for us."

Chad Eric Watt is a reporter with the Dallas Business Journal, an affiliated publication.

Copyright 2007 Houston Business Journal