TPG Weighs Paying Up On Energy Cos.’ Bills –

Texas Pacific Group in the last several weeks has been deciding whether to commit new capital to its investments in the energy industry in order to alleviate the companies’ debt loads.

Like other energy companies, TPG’s investments-Denbury Resources and Belden & Blake Corp.-are trying to stay solvent at a time when oil and gas are beginning to emerge from historically low prices.

However, unlike other energy companies, TPG’s investments carry heavy debt loads. “I think the volatility is extreme in this industry, and that combined with leverage is a double whammy,” said Cathleen Ellsworth, a partner at First Reserve Corp., a fund that invests in the energy sector.

TPG last month managed to stabilize Denbury. The firm invested an additional $100 million in the oil and gas company at $5.39 per share, increasing its stake to about 60% from 40%. In 1995, it had made an initial $40 million equity investment in Denbury at about $4 per share. As a result of the cash infusion, Standard & Poor’s has raised its credit rating on Denbury’s loans to B+ from B and revised its outlook on the company to positive from stable. S&P also confirmed its CCC+ subordinated debt rating.

Meanwhile, TPG is exploring strategic alternatives for Belden & Blake, a natural gas and oil concern. TPG in 1997 committed $100 million in equity to the business as part of a $425 million buyout.

S&P last month downgraded Belden & Blake’s $225 million senior subordinated note due 2007 to CCC- from CCC. The next note coupon payment date is June 15.

In its April report, S&P stated that, “the downgrade reflects concerns about decreasing production and reduced reserves as a result of inadequate re-investment.”

Recently, Energy Was a Hot Industry

Partners at TPG acknowledged that oil and gas is a capital-intensive industry, and said the firm may increase its commitment to Belden & Blake.

“We made our acquisitions as long-time strategic investments. In order for the investments to be successful, they need capital,” said William Price, a TPG managing director, referring to the need to explore for new sources of fuel.

Several of the biggest buyout firms in the last few years-including Apollo Advisors, Hicks, Muse, Tate & Furst Inc. and Madison Dearborn Partners-have considered investing in energy as protection against a downturn in the economy. TPG, however, was one of the only firms, along with Hicks Muse, to have closed any of these deals.

“A number of groups that have historically not been energy investors perceived an opportunity, and, in retrospect, those guys were too early,” said Frank Pottow, a director in Societe Generale’s merchant banking group that invests in energy companies.

However, the state of TPG’s investments looked much different only five months ago when Denbury’s stock was trading at $17 per share.

“I would say the volatility has been greater than expected on the upside and on the low side,” Mr. Price said. “We say, Let’s see how these investments look at the end of the game.'”

Mr. Price said he believes oil and natural gas prices soon will stabilize because producers can not maintain their production levels at the prices of a few months ago. The price for oil has increased to $18.05 a barrel at press time from $10.73 a barrel in the winter. He also says TPG’s investments are in defensible niches and can generate good returns even at current prices.

Mr. Pottow said he believes the energy industry may be in the incipient stages of a recovery, and conditions could get worse before they get better.

TPG knows from recent experience that committing additional capital to an investment is no guarantee against that investment falling into bankruptcy. A few months ago, the firm issued a $17 million senior unsecured note to portfolio company Favorite Brands International, but the company still filed for bankruptcy protection (BUYOUTS May 3, p. 3).