Angelo Gordon & Co announced in October that it has hired an energy team to be based in Houston, led by Todd Dittmann. The team will focus on a credit-oriented approach to investing in the energy sector, especially at the small end of the market.
1. Between the advent of new technologies and America becoming such a strong player in oil and gas, how do you see the industry evolving over the next five or 10 years?
Over the last decade, investment risks have decreased as a result of new drilling technologies, increasing success rates. But the capital needs have continued to increase because of these technologies. This has impacted all points along the value chain, including oilfield service companies, midstream gas gathering companies, pipeline companies, transportation companies and heavy equipment companies. With these recent developments, capital budgets have expanded dramatically.
I don’t see a reason for that to change. The outlook remains good, especially in the oil sector, for expanded capital budgets, particularly for development, and continued robust funding needs. What has gone unmet is the funding gap for smaller companies. These companies are too small to access the regular way high yield markets. They can access regional banks, but that is a limited pool with a limited risk appetite. The other option is private or project equity. There’s not much capital in between. As a result, funding smaller companies is attractive.
2. Do you worry that if this industry is as successful as it seems to be becoming that it could depress returns?
Part of our underwriting premise is based on the proved producing component of reserves. So we are able to require that borrowers hedge a good portion of price risk through the term of the loans. I worry far less about that than would an equity-oriented investor, for whom a price premise may be a significant part of the investment thesis.
3. On the flip side, do you worry that increased regulation of technologies such as hydraulic fracturing could inhibit the growth of the industry and limit the investments you could make?
There are areas of the country where regulation of hydraulic fracturing is a possibility. Again, our advances will largely be supported by existing production. If something is yet to be fracked, it’s not a component of existing production. It’s non-producing or undeveloped.
Fortunately, unlike renewables and other subsectors that are often reliant on subsidies, for years the oil and gas sector has demonstrated its investment merit while burdened with costly regulation and taxation.
4. How do you find the kind of borrowers you are looking for?
We have a very broad sourcing network. Having done almost 100 transactions, we have direct relationships with borrowers and issuers and well established relationships with regional and local banks, which banks have relationships with multiple borrowers across the energy patch. We will often get access to those borrowers by being a good junior lending partner. We also have great relationships with institutional co-investors. They bring us transactions, and we bring them transactions. There are local market deal brokers and boutique investment bankers, hedging counterparties, energy private equity firms, law firms, engineering firms, industry groups and last of all Wall Street. It’s a large sourcing network and it produces a lot of opportunities.
5. We talked about junior capital. Are you going to focus on mezzanine investing?
I would describe our main focus as senior, first or second lien-secured, and occasionally mezzanine. Smaller energy companies are underserved by the traditional capital markets. As a result, we expect to see plenty of high yielding secured loan opportunities in the space between the banks and mezzanine funds. We’re going to be opportunistic.
Edited for clarity