Shale Boom Buyout King Sees Redemption After $2 Billion Meltdown

(Bloomberg) -- John Walker was a toddler in 1947 when his father died of a heart attack. He bused tables to work his way through Texas Tech University and then spent a year on a naval destroyer fighting in the Vietnam War.

Shale Boom Buyout King Sees Redemption After $2 Billion Meltdown

The past four years, though, may have been “the worst period of my life," Walker says. The reason: EnerVest Ltd., his energy-focused private equity firm, endured one of the buyout industry’s most spectacular flameouts during that time, losing more than $2 billion for investors and lenders as commodity prices plunged.

Now Walker, at 72, sees redemption ahead as oil prices rise and EnerVest gets its finances in order. The Houston-based firm has amassed one of the biggest U.S. drilling portfolios, with stakes in 40,000 oil and gas wells. And it’s retained $7 billion in assets, even after selling off drilling rights to thousands of acres in the past year. Walker said he’s set to be a “consolidator" again, joining a recent spate of private equity dealmaking in the oil patch.

“I’ve had more bullets fly at me over the last four years than I had in Vietnam," Walker said in an interview from Houston earlier this month. But after recapitalizing his funds, “we are still looking to expand," he said. “We are definitely back in the market."

With oil prices on the mend, buyout firms spent $19.8 billion on North American oil and gas exploration last year, the highest in five years, according to industry researcher IHS Markit Ltd. Private equity has expanded activity even as publicly traded stalwarts like Pioneer Natural Resources Co. and Devon Energy Corp. face demands for more restraint from their own investors.

“The public companies are no longer buying like crazy," said Sven Del Pozzo, director of upstream research and analysis at IHS. Equity firms “are more willing to wait out the price cycles right now, and that’s given them an advantage over others with a shorter time frame."

Restructuring

EnerVest passed another milestone last week, winning bankruptcy court approval for the restructuring of its publicly traded partnership, EV Energy Partners LP.

Shale Boom Buyout King Sees Redemption After $2 Billion Meltdown

In March, it announced a $2.66 billion sale of rights in Texas’ Eagle Ford shale basin to Magnolia Oil & Gas Corp., another equity-backed explorer. EnerVest retained a 51 percent stake in Magnolia and will run on-the-ground operations.

Walker, meanwhile, said EnerVest is close to announcing two more “significant deals,” and next year plans to begin raising investments for its 15th energy-focused fund.

Founded 26 years ago by Walker and partner John Rex Jones, EnerVest’s holdings stretch across shale fields and conventional properties from Ohio to Virginia to Texas and Utah. It’s carved out a niche in the oil and gas business as an equity firm that operates its projects over the long haul, rather than quickly financing and flipping them.

Market Crash

But like many of its drilling peers, EnerVest borrowed heavily to expand operations when crude prices soared above $100 a barrel in 2014 and then found itself overextended as the market crashed over the next two years. Three funds worth a combined $4.5 billion posted losses for a litany of pension funds, college endowments and other institutional investors.

The worst performing, Fund XIII, lost 90 percent of its $2 billion value and is “a giant disappointment," Walker said. EnerVest was forced to lay off about 260 employees and to sell off drilling rights in Oklahoma and the coveted Permian basin, the most prolific U.S. shale field. The company sold off more rights in the Barnett shale-gas region in Texas to fellow equity firm Mountain Capital Management LLC. Walker and his partners at EnerVest also paid $85 million to satisfy creditors, he said.

Magnolia Sale

The company gave up more assets in its Magnolia sale in the Eagle Ford, but that deal offers a blueprint for what EnerVest’s next act may look like, Walker’s son, Jud, said in an interview. With its history as an operator, EnerVest sees opportunities to partner with -- or buy out -- private equity cousins just now entering the shale market.

“A lot of these teams paid a lot of money but don’t really have the technical staff and are just starting to realize they’ve gotten in over their heads," said Jud Walker, who runs EnerVest’s operating subsidiary. “We think we’re going to start to see a lot of turnover."

EnerVest’s $2.4 billion Fund XIV, started in 2015, has fared better, with an internal rate of return of 2.9 percent so far, according to investor reports compiled by Bloomberg. There’s still work to be done to repair the company’s reputation, but investors have shown enough interest to plan a new fund in 2019, John Walker said.

“We’re at the point where we’re very near to getting all of our problems behind us," the CEO said. “We’ll continue to invest and hopefully learn those lessons and not make the same mistakes again."

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