- Co-founded upstream oil and gas investment firm
- Partners to develop assets under $100 mln at inception
- Previously uneconomical deals now feasible
Ben Stamets and Josh Batchelor had known each other for around 30 years when they founded Sage Road Capital in 2011. Both grew up in Oklahoma City, and “through a series of coincidences we ended up as partners beginning in 2007 at our prior firm,” Quantum Energy Partners, Stamets said. Based on those decades of mutual experience, they decided “to make that entrepreneurial leap” and launch their own firm, a Houston-based private equity investor in upstream oil and gas companies.
They did so, Stamets explained, “with a view that there was a real void in the private capital markets that had developed over the decade of the 2000s.” As energy PE firms raised larger and larger funds, to match the industry’s rising capital needs, many of them “moved pretty dramatically out of the [lower-middle] market.” The result was a “terrible mismatch between opportunity and available capital”: More than 90 percent of oil and gas operators have enterprise values of less than $50 million, “yet only a modest fraction of the private capital that’s been raised to invest in the industry is targeting that segment of the market.”
To exploit that gap, Sage Road looks for opportunities of less than $100 million at inception, and typically writes equity checks of $20 million to $50 million.
“We’re big believers in the importance of having control,” Stamets said, “particularly as you think about having a tool to mitigate risk.” The collapse of oil prices “was a great real-time test” of this model; Stamets said the firm was able to make decisions quickly in early 2015, adjusting budgets and changing strategies as margins got compressed.
Stamets, whose father worked in oil and gas, said he’s “been in and around the industry basically my entire life. The downside of that is I lived through what was probably the most sustained downturn, in the mid-’80s, but the upside was I learned the business at a very early age.” He began his career with Credit Suisse, doing upstream corporate finance and M&A investment banking, then “made the jump over to the principal investing side” at energy PE firm First Reserve. In 2005 he joined Quantum, where Batchelor arrived in 2007 after a decade as a generalist PE investor.
The core of their approach is “partnering with talented operators that have a true competitive advantage,” Stamets said. While the importance of backing the right people has been a constant in energy investing, the range of opportunities has expanded, as new technology opens up resources that were inaccessible a decade ago: “The nature of the assets that we’re developing today is certainly different than some of the deals we were looking at back then.”
One such project is a partnership with an industry veteran “to effectively redevelop, via horizontal drilling, a reservoir that has been known about [and] produced for a hundred years, the San Andres play in the Permian Basin.” Thanks to horizontal drilling and artificial lift — a process to move large amounts of fluid from thousands of feet below to the surface — this field “is now wildly economical, even at $50 a barrel,” Stamets said. “We’re the beneficiaries of that technology.”