Energy financier taps fresh foreign cash in big push beyond the oil sand
By Yadullah Hussain, Aug. 14, 2014
Energy financier Richard Grafton is planning a series of deals in the Canadian oil patch over the next 18 months after securing $675-million in funding from a U.S. private equity firm and a UAE sovereign wealth fund.
He will lead Canadian Non-Operated Resources LP which launched Tuesday with backing from New York-based Riverstone Holdings, an undisclosed UAE state-owned investor and Grafton Asset Management Inc.
“Over the next 18 months we want to deploy the capital. Our target is to deploy between $150-million to $250-million on each of the deals,” Mr. Grafton said in a phone interview from the Scottish Highlands where he was vacationing. “A perfect portfolio would be between five-seven companies.”
Co-founder of Calgary-based FirstEnergy Capital Corp., Mr. Grafton has worked for a number of Alberta investment shops including Canaccord Capital Corp. and Peters & Co. over a career spanning three decades.
“I am more excited in the energy business now — and looking forward to the next 20 years — than I ever have been,” Mr Grafton said.
He launched Grafton Asset Management in 2010. It invested in a number of intermediate companies including a $250-million joint venture with Calgary-based Bellatrix Exploration Ltd., with operations in Cardium and Notikewin/Falher in Alberta.
“We felt there was an opportunity to do multiple partnerships like these, but we wanted to get capital in play first.”
The industry has changed dramatically in the past three years and the resource business has becoming “too expensive for many companies and we realized we needed to tap into long-term, patient capital,” said Mr. Grafton.
Enter Riverstone, an energy-focused private equity firm run by former Goldman Sachs executives. In March, a unit of the the firm injected a $133-million investment in Canadian International Oil Corp., which has land in the Montney and Duvernay across 400,000 acres. The PE firm also has stakes in Gibson Energy Inc., Mistral Energy Inc. and Northern Blizzard Resources Inc., among others.
The challenge for many junior and mid-sized companies, says Mr. Grafton, is they reach a point where bank debt and cash flows are not sufficient to fund their next growth spurt.
“In the past, companies would grow and get to a certain size, and they would sell it to a trust. But they are never going to get the value in the marketplace on these assets unless they develop them over the long term. We want to partner with these companies, as they fully develop the resource in front of them.”
CNOR, which is singularly focused on Canadian companies, will seek condensate and liquids-rich natural gas plays in places like the Montney.
“Canadian producers are experiencing the same balance sheet pressures that we have seen in the United States as a result of the increased capital intensity that comes with greater unconventional resource development,” Pierre Lapeyre and David Leuschen, co‐founders of Riverstone, said in a statement.
“We believe CNOR’s technical capabilities and deep, local relationships will be very complementary to Riverstone’s and will provide access to proprietary investment opportunities.”
As much as 54% of the world’s investable oil reserves — or deposits not controlled by state-owned companies — are in Canada, a Grafton Asset Management presentation states.
“We are looking at wells and drilling programs where we can drill these wells, hook them up and have them on production, within sixty, ninety to 120 days,” said Mr. Grafton.
Despite the long-term promise of the oil sands, investors are favouring tight oil plays where costs are coming down.
“You can’t provide capital to something where you are not able to calculate the rate of return. Having deep pockets is not enough,” Mr. Grafton said. “You need certainty on a rate of return on the capital that you are going to provide – and the oil sands currently cannot give you that certainty.”
Which is not to say oil sands will remain out of favour for too long as large Canadian companies and international majors will continue to expand.
“The oil sands’ world is not for the independent E&P company. But within the next five years as infrastructure and LNG [liquefied natural gas] is built, and we get access to global markets — that will do nothing but help the oil sands as well.
“That day will come, but right now the riches in front of us are the liquid, rich natural gas companies condensate, light oil plays in Saskatchewan in the Bakken and Viking. It is those plays that make the most economic sense.”
The energy investment industry in Calgary has suffered in recent years with job cuts as deals dried up amid a natural gas price collapse. Mr. Grafton, who has been involved in deals worth $22-billion, thinks the investment environment is improving as natural gas prices flirt with the $4-5 price per million British thermal units again.
“There is more private equity in Calgary today then there has been in the last 30 years.”
And more is on the way.
“Our goal was to bring global investors into Canadian businesses that hadn’t been here in the past. I feel this partnership with Riverstone, including with the Middle Eastern SWF, has achieved that.”
While heavyweight Middle East funds and companies have dabbled in Canadian oil and gas in the past, the CNOR deal is unlikely to see a rush of deep-pocketed Arab investors heading to Calgary.
“They are looking for global opportunities. When I went to the Middle East over the past three years, they said, ‘Gee, No — we are not interested.’ This deal was more of a specific opportunity that drove them, but I don’t necessarily see that if the structure isn’t right they are jumping to go to Canada.”