Why LPs Should Utilize Upstream Oil & Gas Assets | Edward Geiser, Managing Partner, Juniper Capital Advisors | Exclusive Q&A
Edward Geiser is a managing partner and head of the investment committee at Juniper Capital Advisors, a private equity firm based in Houston, Texas. The firm focuses on control equity investments in middle market oil and gas companies that have assets in established basins all located onshore in the United States. The Juniper team is comprised of 10 experienced individuals, including three partners who began working together over 17 years ago. Juniper also employs a proprietary database which can display and adjust the returns on over 170,000 wells drilled across the United States. The firm uses that database to quickly and efficiently filter its potential investments.
Geiser will represent Juniper at the Trusted Insight Alpha Conference on June 14 in San Francisco. This interview is a sneak preview to his presentation. Geiser discusses the upstream oil and gas market, the impacts of the decline in oil prices and what makes an ideal institutional investor partner.
Trusted Insight: What market need is Juniper filling?
Edward Geiser: Oil and gas is one of the largest industries in the world, and it's one of the most capital-intensive industries, because your asset base isn't a large fixed asset that generates cash flow and depreciates slowly over time. Instead, your asset base is a portfolio of oil and gas wells, the production from which declines over time, meaning new capital is always required to grow. There are approximately 10,000 operating oil and gas companies in the U.S. alone, and most of those companies aren't multi-billion-dollar publicly traded companies.
So, when you combine the fact that all oil and gas companies need capital in order to grow and the thousands of smaller oil and gas companies in operation in the U.S., Juniper fills the need for capital to those smaller companies and it uses its network, experience and analysis to identify the best places and teams to invest that capital. We help provide capital to the smaller energy companies, so that they can grow and eventually be acquired by the larger firms.
Trusted Insight: Is M&A typically the exit strategy?
Edward Geiser: Yes, generally. Because of the size range that we're in, we generally don't look to an IPO as the most likely exit. However, occasionally we are approached by groups that want to combine with our assets in order to take a company public.
Trusted Insight: Why should institutional investors take an interest in upstream opportunities versus other energy market opportunities?
Edward Geiser: The energy industry is one of the largest in the world and remains vital to society and the global economy. Due to its capital-intensive nature, the energy industry -- and the upstream sector specifically -- requires capital on an ongoing basis to grow. Institutions can capture attractive risk-adjusted returns by making investments in upstream opportunities throughout the cycles in commodity prices.
Specific to the near-term, the volatility and the general low price of oil over the last few years has really enhanced the opportunity set for those groups with capital and the ability to deploy that capital in an intelligent way.
Trusted Insight: How has the fall in oil prices from its mid-2014 peak effected Juniper's overall investment strategy and investment opportunities?
Edward Geiser: It hasn't impacted our investment strategy much. We've always been focused on the most cost competitive investments that have the lowest break-even costs in the United States. So, [oil price is] not a major impact on strategy.
Prices have had a massive impact on the industry in general and the opportunity set more specifically. All groups, whether it's public companies or private equity firms, have to scrutinize their investments a lot more. When oil is at $90 a barrel, most formations within the U.S. work, but at $40 to $50, a lot less of them work. Many areas that would have gotten investment dollars just a few year ago have been more or less abandoned, and rig counts have dropped by 80-plus percent. At the same time, service cost have come down; operators became more efficient; and new technologies have unlocked the productive potential in different areas.
From our standpoint, overall, I would say the drop in prices has made Juniper more selective in its evaluation of opportunities, and it has made available opportunities that we would not have otherwise had because of advances in technology, enhanced efficiencies and general distress throughout the industry.
Trusted Insight: What do you look for in a typical investment?
Edward Geiser: First and foremost, you've got to have a management team that has experience and expertise in a specific area, because they're going to be on the ground drilling the wells and producing oil and natural gas. Because of that, we require them to have experience in the specific play or basin, and we do a lot of due diligence around what that experience is.
Just about as important as that, we look at what the underlying returns are in a lower-for-longer type of commodity price environment for the asset. That's really where the database we've created internally comes in. It allows you to look at all of the wells around a given potential investment, assess what the break-even price is for each well and what the return thresholds are for the area. Generally, that provides a good indicator of whether a specific investment is going to be robust in a sub-$50 oil environment over a long period of time.
Trusted Insight: In the context of the broader upstream market, what is the market size for the targeted group of assets?
Edward Geiser: Generally, in terms of the number of transactions that happen at the sub-$100 million range, there are over 100 transactions each year. And that's whether oil prices are high or low. There doesn't seem to be a high correlation between high prices and high deal activity. So, there's generally a lot of deal flow.
Additionally, what gets missed are the startup type of investments. A lot of our investments are “grass-roots” investments, where we partner with a management team to go out and lease the acreage, do the science work, and drill wells. There are tens of millions of acres that are prospective for oil and gas development and millions of acres at any given time that remain unleased in productive basins. I'm not going to say the universe is endless for those investment opportunities, because you need to be pretty selective, but we see dozens of potential opportunities every quarter.
Trusted Insight: What separates you from some of your competitors that are trying to do business in upstream?
Edward Geiser: There are a few different factors. We feel like we've got the right combination of an experienced team and an extensive network in the industry from our existing relationships, which generates a lot of unique deal flow. Then we overlay that with our proprietary database that allows us to quickly sort good assets from bad assets based upon hard empirical data, as opposed to just our gut feel or what the industry is pointing to at the time.
It's a combination of an experienced and connected team with the ability to sort through lots of deals very quickly that we feel differentiates us versus our competitors.
Trusted Insight: Every institutional investor emphasizes GP-LP alignment. What does the ideal LP look like for Juniper?
Edward Geiser: First, from an alignment perspective, we feel it’s important that the GP has material skin in the game. All qualifying employees of Juniper have a portion of their personal net worth at risk along-side of our LPs.
As for the ideal LP, from our standpoint, it’s a group who's looking for a true partnership over a long period of time, not just for a single fund. The business model that we employ is one that we see lots of investments, and we are a team set up to capture those over the long-term.
I'm in my late 30's, so I expect to be running this firm for at least the next couple of decades, knocking on wood. That's why the perfect LP for us is one that's looking for a true partnership over not just one fund, but multiple funds in the future where we continue to do exactly what we're doing now.
Hear more insights from LPs and GPs at the Trusted Insight Alpha Conference.