Q&A On First Reserve’s Singapore Exploration Deal

First Reserve is a Greenwich, Conn.-based buyout shop sitting on nearly $9 billion to invest exclusively in the energy sector. Today the firm announced it would commit $500 million to back a management team in building a new energy exploration company called KrisEnergy Holdings, to be based in Singapore.

It’s the second time First Reserve pursued this management team. Last year the trio of Keith Cameron, Chris Gibson-Robinson and Richard Allen were preparing to sell Pearl Energy, the exploration and production company they formed in 2000. First Reserve was interested but shied away because valuations were too rich, according to Will Honeybourne, a managing director with First Reserve.

But the firm left the door open for future collaboration with the trio, which eventually led to KrisEnergy.

The $500 million in equity will go towards a roll-up strategy. KrisEnergy’s managers have already been engaging potential exploration, development and production targets in the Southeast Asia region, Honeybourne said.

peHUB: Is this more of a growth investment than the firm is used to?

WH: It is definitely a growth investment and that’s consistent with what we do. We buy and build companies. To give you a little macro-context, we see Southeast Asia as a region with continued economic growth and with energy demands increasing at a faster pace than elsewhere in the world. The demand is very much there. On the supply side, if you look relative to Europe and North America, the resources in the region are underexplored. More than 130 known basins are underdeveloped. There is an opportunity on the supply side. The context of the region is stable fiscal regimes and ongoing development of the energy infrastructure. So considering all of that, First Reserve sees that as an attractive region. It’s a growth region within the energy sector.

Will we see the company actively acquiring companies or assets?

Well, one thing that attracted us to this team is that they have highly developed pipeline of potential deals. Some of which are buying pieces of companies, some are acquiring assets. Some of it is onshore, some are off shore, some are oil, some are gas, and they are in several of the countries within the SE region.

What is the target size for acquisitions?

It’s a guesstimate around the total size, but the buying power is somewhere around double the amount we invested.

How close are you to announcing any deals?

We’re fairly advanced in negotiating a number of deals. It truly is an excellent pipeline of deals in the making.

Is this the firm’s deal in Asia?

We are investors in coal in China and Australia, and several of our international portfolio companies have operations there. It is an area that we have knowledge of and would like, frankly, to do more in.

This investment is coming from the firm’s 12th fund (a $9 billion pool which closed earlier this year)?

Yes. It is not the first deal we’ve done from that fund.

How has the credit crunch and economy affected the way you look at your investment strategy?

To say that anybody isn’t affected by the global economy would be unreal. But there’re a number of things that happened as a result. Knock-on effects. One is the availability of debt. Our value creation model is around growth, so we’ll certainly use some leverage but its not at the core of our strategy. There’s the whole slowdown of the economy that has an effect on energy demand and that creates a slowdown but it presents buying opportunities as well and, if anything, it takes some of the generalist funds out of our sector.

Asia has been less affected, especially if you cut China and India out of that equation. Our strategy in broad terms remains the same. You’ll see more equity going in, and there are some issues in terms of new acquisitions in the sense that the valuations in some areas have not come down as much as one might expect. The pace of investment does slow a little bit but the quality of deals and terms have increased.

Even though the markets are difficult, there are opportunities for companies like to move ahead with a public offering. (First Reserve filed to take public portfolio company Cobalt Energy for $1.15 billion.) Our Spanish and Italian solar company 9Ren, recently secured 70 million Euros for a credit facility, as well.

Are you thinking of harvesting any of your existing investments?

Clearly right now is not a particularly good time to exit. If you look at what is being exited, it’s being exited out of desperation; they are stressed situations. We don’t have those in our portfolio. The companies that we have are continuing to do well. The reality is that we’re having to hold onto them a little longer as the markets come back. That’s a tactical decision.

There are one or two exceptions, Cobalt Energy being one of them. That company is an interesting parallel to KrisEnergy. We backed a management team with deep expertise. We have other things in our portfolio that the markets will open for in the not too distant future.