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EMG sees 4x return in five months on Utica shale

  • Based on $5 billion implied value for American Energy – Utica
  • EMG has three seats on five-member board for Utica venture
  • John Raymond praises Aubrey McClendon despite ”noise”

So said EMG CEO John Raymond in an April 30 presentation to the Oregon Investment Council, according to an audio recording of the meeting posted recently on the pension fund’s website. Oregon approved a maximum $250 million commitment to Energy & Minerals Group Fund III, which was $50 million above the $200 million recommendation by staff.

During the meeting, Raymond took a couple of questions about McClendon, who generated controversy ahead of his departure from Chesapeake Energy Corp in 2013 after clashes over spending; also a series of Reuters investigations led to civil and criminal probes. The U.S. Securities and Exchange Commission ended its investigation in May.

Raymond described McClendon as “very talented, capable individual” with a management team of more than 300 people behind him.

“There’s a lot of noise that goes with Aubrey—I’m sensitive and appreciative of that,” Raymond said. But when it comes to management, McClendon’s team at American Energy Partners LP lowers the execution risk in well development and exploration, he said.

Moreover, Energy & Minerals Group holds three of the five seats on the board of American Energy – Utica LLC, giving the firm power to steer spending plans.

“If we didn’t have that position, we wouldn’t do this,” Raymond said.

Energy & Minerals Group initially took a stake in American Energy – Utica LLC in October as the lead investor in a total capital raise of $1.7 billion. First Reserve Corp also took part. The lead debt investor in the deal was GSO Capital Partners, a unit of The Blackstone Group, with additional debt supplied by BlackRock and Magnetar Capital, according to a statement at the time.

On Feb 28, American Energy – Utica announced a $1.25 billion capital raise, which included notes convertible upon the first, qualified registered  public offering of AEU into shares of the same class of common stock, according to a prepared statement on the deal.

Raymond said the debt deal implied a valuation of about $5 billion for American Energy – Utica, or about 4x Energy & Minerals Group’s initial investment of $1.2 billion.

Early drilling results in the Utica drove the value, because McClendon’s team has been able to execute their development plans at low cost for the region, he said. American Energy – Utica has constructed wells for less than $8 million, compared to $15 million to $20 million by competitors and in less time—about 15 days versus 35 to 50 days, he said.

Raymond said the Texas-based private equity firm also conducted due diligence on McClendon’s firm prior to its investment.

Meanwhile, Energy & Minerals Group was expected to hit a $3.5 billion target for its Fund III by the middle of this year, according to a report by Buyouts.  During the meeting with Oregon on April 30, Raymond said the fund was oversubscribed, with about $3.4 billion in commitments thus far and a hard cap of $4 billion.

McClendon’s roughly $3 billion raised for investment via American Energy – Utica LLC landed it on the top of a ranking of significant general investments compiled earlier this year by the Regional Marketing Alliance of Northeast Ohio. American Energy – Utica LLC ranked ahead of Markwest, Access Midstream/EV Energy Partners, and Vallourec in its investment in the region.

Thomas Gellrich, an analyst at TopLine Analytics who studies investments in the Utica, said American Energy has purchased acreage from Hess Corp and XTO Energy, which is now owned by Exxon Mobil. While the Utica offers lucrative natural gas liquids as well as access to crude oil, the geology of the region varies. “The Utica isn’t always as predictable as other areas,” he said.

Representatives of American Energy and Energy & Minerals Group could not be reached for comment.

McClendon founded American Energy Partners LP in April 2013, to focus on unconventional resource plays onshore in the United States, according to the firm’s website.