Energy Wrap: Buyout Firms Stay Charged

Buyout deals in the energy sector began their ascent last year, and the rush to take ownership in these types of companies has yet to die down.

Sources say the California energy crisis has contributed to a greater awareness of the sector among investors by demonstrating that energy interests are desperate for growth and improvement. Mergers in the sector have also led to divestitures, with buyout firms poised to pounce on the orphaned companies.

“[The recent activity] is one of the pleasant outcomes that results from being a long-time investor and dealing with the cyclicality of energy prices,” said Christopher Behrens, a general partner with long-time energy investors J.P. Morgan Partners. “But it?s also because of more fundamental trends in the power industry in the last year.”

Although only two buyout deals in the energy sector have closed since the beginning of the year ? totaling more than $1.6 billion, the selling of assets has become a priority in this unpredictable financial climate.

On the buy-side, one deal in particular ? First Reserve Corp. and Odyssey Investments Partners? purchase of Dresser Equipment Co. ? jumps out because not only is it the largest energy buyout deal ever, but also because it is both the largest buyout deal completed this year and the third leveraged buyout transaction since Jan. 1 to work a piece of high yield debt into its financing structure.

The transaction, which was signed in February but closed April 10, gives the investment firms 95% of Dresser, while former parent Haliburton Co. retains a 5% stake.

Sell Out

So far in 2001, J.P. Morgan Partners has realized approximately $500 million in proceeds from the sales of its energy assets.

Most notably, last month the firm sold its stake in Bear Paw Energy, which owns thousands of miles of pipelines, to Northern Border Partners LP in a $370 million transaction. The sale generated a return of more than four times J.P. Morgan?s original investment.

Behrens said his firm decided to exit Bear Paw after studying energy industry trends and deciding that natural gas prices would stay high compared to prices in previous years. As such, the firm figured that having a secure source of natural gas would be highly valued.

Other firms that have divested themselves of their energy assets recently include Triumph Capital and Evercore Partners.

Those who are known to make investments and are expected to jump back on the bandwagon include Kohlberg, Kravis, Roberts & Co., Texas Pacific Group, Harvest Partners and Haddington Ventures.Contact Leslie Green.