[Editor's note: A version of this story appears in the Capital Options 2019 edition of Oil and Gas Investor. Subscribe to the magazine here.]

Redbird Capital Partners LLC

Focus: A New York and Dallas-based private equity firm, Redbird focuses on investing in energy and energy services companies and also provides long-term capital for communications infrastructure, business and financial services, sports, leisure and hospitality, industrial services and media and entertainment companies. Redbird tends to invest $75- to $200 million in companies with an existing management team over a longer period of time. The firm was founded by Goldman Sachs alum Gerry Cardinale.

Latest deals: Redbird made its latest investment this May in FireBird Energy, an independent Texas-based oil and gas company that operates and develops crude oil and natural gas producing assets in the western Midland Basin. The FireBird team is comprised of former RSP Permian team members and other industry veterans. The deal terms were undisclosed.

Strategy: The firm’s strategy is to focus on partnering with management teams to help them acquire assets where upside can be achieved with technological advances, according to Hunter Carpenter, a partner at Redbird.

“Approximately a quarter of RedBird’s activities are energy related, and we offer entrepreneurs longer-term capital,” he said.“We like backing teams where there is a line of sight on a deal with assets already identified.”The firm plans to extend additional capital this year to its existing portfolio companies to “actively grow our positions,” he added.

Since 2015, the firm has held steadfast to its strategy of building a company and scaling it, instead of the shorter-term strategy of drilling two wells and selling the acreage, he said.

Market outlook: While the economic conditions for the remainder of 2019 and heading into 2020 remain murky, Redbird plans to deal with any uncertainties by continuing to work with its partners on its “very aggressive hedging programs” and “always” analyzing commodity prices, execution and its pacing of capital, Carpenter explained.

“Our biggest concern is how the uncertainty in the market emanating from trade concerns will impact demand over the next 18 to 24 months.” Many opportunities still exist as majors and independents reallocate and reprioritize capital, driving them to divest quality assets, he noted. 

“It’s a good time to be a buyer,” he said. “There are assets that are being sold that are undermanaged and undercapitalized, and when you put an entrepreneurial team on it, the company will create value

Carnelian Energy Capital Management

Focus: An energy investment firm based in Houston, Carnelian has approximately $1.8 billion of cumulative equity commitments. The firm focuses on lower-to-middle market equity investments in the North American upstream, midstream and oilfield services sectors in partnership with management teams, said Preston Powell, a managing director of Carnelian. 

Carnelian typically focuses on investments requiring less than $100 million of equity, although the firm has the ability to “expand meaningfully for the right opportunities,” he added.

Latest deals: Founded in 2015, Carnelian’s inaugural $400 million fund closed in 2015, and its $600 million second fund closed in 2017.

It closed its most recent fund, Fund III, at its hard cap of $775 million in June 2019. The firm specializes in partnering with next-generation, entrepreneurial owner-managers, and with concentrated portfolios of eight to 10 investments per fund, Carnelian “is able to provide differentiated focus and attention to each portfolio company,” Powell said.

The firm recently partnered with Selenite Energy Partners, an Oklahoma City-based company that was formed to capitalize on the current environment by pursuing middle market special situation transactions in the North American energy space.

“The company has a solid combination of financial and technical acumen that provides it the flexibility to be opportunistic in its approach,” he said.

Strategy: The firm’s primary investment structures include pre-asset equity line of credit commitments as well as growth equity investments in companies with existing assets. Carnelian’s recent successful exits include Percussion Petroleum LLC, Bison Oil and Gas and OneEnergy Partners among others.

Market outlook: The energy market continues to undergo many changes, Powell said, noting that the energy market gyrations we are observing are akin to a pendulum.

Prior to 2018, companies were living large.

“A lot of rigs were running, drilling in excess of cash flow, company and asset valuations were high based largely on inflated location counts and sizable acquisitions were executed often with disregard to the actual strategic fit to the story,” he said.

In 2018 and 2019, the pendulum has swung the other direction and too far. “Investors want companies to primarily drill within cash flow regardless of the economics of their inventory. Large acquisitions are frowned upon regardless of the price paid or the strategic benefit, and public companies are trading at historically low multiples,” he said.

The pendulum will end up somewhere between the extremes of the past and the current environment, Powell said. Companies are currently and can continue making smart acquisitions at reasonable prices and can drill wells that are highly economic within or even conservatively in excess of cash flow.

“As investors see prudent behavior play out, we expect the energy space to receive more mind share from Wall Street,” he said. “In the meantime, while many operators are on the sidelines, we see the current state of the markets as an attractive opportunity to deploy capital and build great companies with great assets.”

The energy market could turn around in the future.

“Setting aside the traditional supply and demand factors that affect commodity prices, we believe that generalist capital should and will eventually return to the public energy equity and debt markets to take advantage of the rare combination of top tier assets that provide both a dividend and attractive growth, all at very attractive, multi-year low entry multiples,” Powell said. “Once capital flows into the system, shares and bonds will trade up and give companies additional confidence to drill and acquire quality complementary assets at accretive prices.”

Environmental, social and governance has emerged as an increasingly frequent topic of conversation whereby investors expect and deserve thoughtful and thorough programs to systematically monitor and enhance ESG best practices throughout the portfolio.

“As it relates to the broader fundraising environment, we found our investors were largely excited about the opportunity to acquire assets given the current market backdrop,” he said.

Talara Capital Management LLC

Focus: Founded in 2010 and based in Houston, Talara provides equity capital to the upstream oil and gas industry’s middle market companies.

Strategy: Talara looks to deploy about $400 million of capital over the next few years for upstream oil and gas assets in the U.S., said David Zusman, co-founder and managing partner. The firm, alongside management teams, has not only bought controlling interests in assets it intends to develop but also has led restructurings, joint ventures and farm-outs.

“Our focus right now is on the Gulf Coast since the assets in the region have fast cash payback periods,” Zusman said. “We’re buying assets that pay back within three years.”

In early 2019, the firm closed its most recent fund. The firm typically focuses on assets or structured transactions that require about $100 million in equity to fund both the initial acquisition as well as a multi-year development program.

Latest deals: Talara’s largest transaction was the $130 million it committed to the restructuring and development of Caza Oil & Gas Inc., a formerly distressed oil producer in the Permian Basin with top tier shale assets in New Mexico. During the past couple of years, Caza has seen tenfold growth in production volumes and is now largely being funded out of internal cash flows. It has also recently been acquiring conventional production and development opportunities along the Gulf Coast in Texas and Louisiana.

In January, Talara provided a $75 million equity commitment to Crescent Pass Energy LLC, a Spring, Texas-based company that is focused on acquiring producing assets in East Texas and Louisiana. Crescent Pass is also developing about 7,500 acres in the liquids-rich Cotton Valley trend.

Market outlook: The A&D market has changed dramatically in the past year, Zusman said. A trend has emerged as commodity prices have weakened. Talara has seen more motivated sellers place assets on the market, particularly smaller companies.

“Companies need to be able to self-monetize through their own manufacturing-like development programs and return cash to shareholders,” he said.

In the Permian Basin, private equity firms and other buyers can purchase smaller acreage blocks for $5,000 to $15,000 an acre that are worth $50,000 to $100,000 once they are developed, he noted.

“You need very good rock, a strong technical team that knows the manufacturing process and enough capital to get economies of scale.”

Companies can succeed “with the right capital partner and a strong balance sheet with multi-year production 
hedges,” he stated.

Zusman stands by one motto consistently: “We and our companies should not be dependent on a strategic sale of a company to create value. Cash flow is king.” With stagnant oil prices in the $50 range and both the capital markets and A&D markets entering a transition phase, Zusman said the “market is increasingly coming to us.”

A stalemate A&D market could continue for a while, but recently the market has seen “more motivated sellers and groups looking to bridge valuation gaps with structured transactions,” he said. “Either way, we’re very patient investors at Talara. There is no rush. We only need to do one or two great deals a year.”

The largest opportunity remains in overlooked conventional oil assets. There will be more divestitures of assets from larger players looking to right-size their development, more restructurings, more bankruptcies, more joint ventures and creatively structured preferreds, Zusman said.

Pearl Energy Investments

Focus: A Dallas-based energy investment firm, Pearl has $1.2 billion of committed capital under management. The firm’s Fund II closed at $600 million in July 2017.

Pearl focuses on partnering with management teams to invest in the lower-to-middle market North American upstream, midstream and oilfield services sectors and typically invests $25 million to $100 million of equity capital.

Latest deals: In July, the firm backed Streamline Innovations Inc., a San Antonio-based technology provider specializing in hydrogen sulfide treatment for natural gas and water, with a $24 million commitment. Streamline’s technology removes hydrogen sulfide from natural gas, produced water and wastewater. Founded in 2015, Streamline deploys advanced technologies for water and gas treating and related processes to help oil and gas, utilities, industrial, and municipal customers, both domestically and internationally.

In March, Pearl made a $150 million commitment to Red Wolf Natural Resources, a newly formed upstream exploration and production company based in Oklahoma City. Red Wolf will pursue upstream development and acquisition opportunities focused in the Midcontinent region as well as several Rockies basins.

Market outlook: Pearl said funding more startups is a possibility. “We will continue to evaluate opportunities to partner with new management teams pursuing differentiated business plans,” said Stewart Coleman, managing director.

For an E&P start-up opportunity, the firm prefers to partner with management teams and does not require an asset in hand in order to make an initial investment, he said. Pearl plans to extend additional capital to its current portfolio companies.

“We view the current market as an attractive opportunity to deploy capital alongside great teams,” said Coleman. The firm’s strategy is to build companies around assets that provide long-term value creation opportunities with “optionality in evolving market conditions,” he said.

While economic conditions for 2019 and 2020 are unknown, Pearl said it continues to scout potential deals.

“While subdued equity markets are creating exit uncertainty in the marketplace, we are committed to investing patiently and are constantly evaluating opportunities to return capital to our investors,” Coleman said.

CSG Investments Inc.

Focus: A global buy-and-hold institution headquartered in Dallas, CSG is an affiliate of Beal Bank and Beal Bank USA, which have total assets of $7 billion as of June 30. CSG focuses on transactions ranging from $50 million to $600 million and does not plan on funding any startups in 2019, said Hans Hubbard, a managing director of CSG.

“CSG’s transactions generally require substantial durable, tangible collateral, and we prefer E&P opportunities with existing production already in place,” he said.

The company is open to extending additional capital to existing borrowers only within the context of existing facilities or for a new facility, depending on the circumstances, Hubbard said.

The typical hold period for CSG is three to five years. “We’re generally prepared for the longer end of that range,” Hubbard said.

Latest deals: In May 2019, CSG originated a $250 million senior secured term loan with full funding provided by Beal Bank to U.S. Well Services LLC, a Houston-based electric hydraulic fracturing services and technology company. The capital will give the company an opportunity to fund its growth initiatives to capitalize on the growing market demand for electric-powered fracturing services.

Market outlook: The energy sector still has various opportunities available, according to Hubbard. “Within the energy sector, the biggest opportunity is simply being available with capital and flexible, customized solutions tailored to meet borrower needs,” he said.