Former Warburg Pincus Executives’ New Firm Seeks $750 Million for Oil-and-Gas Bets
David Habachy and David Krieger recently formed Covalence Investment Partners, which aims to raise a debut fund, marketing documents show
Covalence Investment Partners, a new firm founded by two former executives of Warburg Pincus, is seeking $750 million to invest in the oil patch, pitching its debut fund as an opportunity to buy mature fields at bargain prices.
David Habachy and David Krieger, who launched Covalence early this year, both previously worked as managing directors at Warburg and led investments in oil and gas for the New York private-equity firm, according to a fund-marketing presentation viewed by WSJ Pro Private Equity. Warburg has sold several of its oil-and-gas holdings in the past year or so, as it retreats from the sector.
The new Houston-based firm is marketing its first fund, Covalence Equity Income Fund, to focus on buying oil-and-gas fields that have been in operation for years across several regions in the U.S. The fund’s 15-year term, which is longer than the 10-year duration of most private-equity vehicles, will help Covalence match its investments with the remaining life of the acquired assets, according to the presentation.
A history of poor returns in the shale industry—combined with concerns about the future value of the assets as the world shifts away from fossil fuels—is leading investors in traditional energy subsectors to favor fund strategies that generate the bulk of their profits from dividend payments rather than asset sales, said Al Carnrite, a managing director in the U.S. energy practice of consulting firm Alvarez & Marsal. That’s increasing the popularity of strategies that target so-called proved, developed and producing, or PDP, energy assets, he said.
“PDP strategies got rejuvenated about three or four years ago and part of that was driven by the downturn in oil prices,” Carnrite said. “Oil-and-gas investors are saying, ‘I want distributions. I don’t want my money locked up for years in the hope that there’s going to be some kind of transaction.’”
A sharp decline in oil prices that started in 2014 hit many private equity-backed producers in the following years, and Warburg had its share of losses. Sheridan Production Partners II, which was part of a broader business that the private-equity firm had backed in 2006, filed for bankruptcy in 2019 after raising $1.8 billion, mostly from institutional investors, WSJ Pro Bankruptcy reported at the time.
More recent Warburg investments in the sector have fared better. For example, oil-and-gas producer Ensign Natural Resources sold its assets in South Texas’ Eagle Ford shale region to Marathon Oil for $3 billion. Warburg backed Ensign in 2017 and helped it expand through acquisitions. In 2020, Warburg sold data-analytics company RS Energy Group to peer Enverus for about $1 billion. RS Energy’s annual recurring revenue increased nearly fourfold during Warburg’s four-year ownership, according to Covalence’s investor presentation.
Warburg Pincus Energy, a $4 billion oil and gas-focused fund that Warburg wrapped up in 2014, recorded a 3.68% internal rate of return as of the end of last year, according to a document from the Public Employees’ Retirement Association of Colorado, which committed $50 million to the fund.
Covalence sees opportunities to buy assets valued at 2.5 to 3.5 times their cash flows, well below the up to ninefold multiples recorded in 2016, at the peak of the shale boom, the marketing presentation showed. A shortage of capital in the sector is depressing asset prices. But sellers are finding deal conditions acceptable after a recent period of relatively stable oil prices, Carnrite said.
“Deals are obviously getting done, so there are buyers and sellers that are able to negotiate prices,” he said.
Deals among U.S. oil-and-gas producers totaled $46.6 billion across 61 transactions through September, compared with $58 billion across 160 deals in all of last year, according to Enverus. Two large deals announced in October—Exxon Mobil’s nearly $60 billion agreement to buy Pioneer Natural Resources and Chevron’s $53 billion takeover of Hess—dwarf the recent statistics. Additionally, Occidental Petroleum this week agreed to a $10.8 billion deal for CrownRock, an oil-and-gas company backed by Lime Rock Management that operates in West Texas’ Midland basin, which is part of the broader Permian basin.
The wave of consolidation sweeping through the U.S. shale industry creates opportunities for investment firms, as energy companies often shed less-desired assets after mergers, according to Carnrite and other industry consultants.
Covalence’s presentation showed a pipeline of four potential “near-term” transactions worth a total of $390 million that the firm has already identified. They include two public operators selling noncore oil fields in the Eagle Ford.
As opportunities abound, perhaps the main hurdle facing private-equity firms looking to invest in the oil patch is attracting investors reluctant to back fossil fuel-related assets, the consultants said.
“Many limited partners of private-equity firms have clearly signaled that they aren’t interested in oil-and-gas investments,” Carnrite said. But he added that some of them appeared to be changing their mind, as indicated by several specialist firms that recently raised new funds.
“The best way for the industry to attract investor capital is to continue to generate the great returns we have seen [in] the last couple of years while maintaining capital discipline,” he said.