Fundraising Aethon Energy takes conservative approach to deals

  • Aethon Energy follows up $200 mln debut fund from 2000s
  • Exec considers possibility of lower oil prices
  • Firm may do more deals with RedBird Capital

It’s been nearly a year since oil prices started falling sharply, sending waves of distress into highly leveraged energy companies backed by private equity firms.

While $40 oil has wreaked havoc with balance sheets of some companies, Dallas-based Aethon Energy tries to think about oil going as low as $10 a barrel and natural gas at $1 per BTU as part of its overall conservative and contrarian approach to deal-making.

“The strategy we have doesn’t require us to have omniscient understanding of where pricing goes,” Albert Huddleston, founder and partner at Aethon, said in a phone interview.

Albert Huddleston, founder and partner, Aethon
Albert Huddleston, founder and partner, Aethon

The 25-year-old firm uses a price hedging strategy to protect itself against big downswings in energy prices, and it sifts for reasonably priced assets that don’t command huge purchase price multiples, he said. Aethon makes sure it’s able to sustain low-price regimes, athough it’s not specifically hedging to $10 oil.

“It’s nothing to do with pricing expectations,” he said. “It’s to promote an attitude on our team to not get too giddy in good times and always be looking down to make sure you don’t step in a financial pothole. We want to act like it’s always lean times.”

Aethon’s approach drew notice this past summer when it teamed up on a couple of energy deals with RedBird Capital Partners, the firm founded in 2013 by Goldman Sachs veteran Gerald Cardinale.

Aethon and RedBird paid an undisclosed sum in July for oil and gas assets in Arkansas, Texas and Louisiana from the SM Energy Company. Two months earlier, the firms paired up to buy Moneta Divide assets from Encana Oil & Gas in Wyoming’s Wind River Basin.

Huddleston said both deals offered existing wells with mature, predictable production and stable cash flow with potential for greater returns and plenty of protection of the firm’s principal investment.

“We worry about the downside: not leaving upside on the table,” he said.

Aethon and RedBird may do more deals in the future, after being introduced around a year ago by a colleague, he said. A spokesman from RedBird declined to comment.

“They liked our strategy and said they’d like to marry their money with us,” Huddleston said. “It’s been an attractive relationship. It’s always nice when someone understands what you do.”

After raising about $200 million for its first buyout fund in the early 2000s, Aethon has been in the market with Aethon II since late 2014, according to a filing. Aethon is nearing a close for Fund II later this year, said a person familiar with the firm. It’s not clear how much Aethon plans to raise for its sophomore fund.

The firm’s website said Huddleston has delivered a net IRR of more than 44 percent for his private equity entities and investors.

Huddleston declined to talk about fundraising.

Looking ahead, Huddleston said the low-price environment could lead to more attractive energy assets being put up for sale. But he didn’t say if the firm’s deal pace would pick up or not. Natural gas properties remain appealing partly because they’re mostly out of favor right now, he said.

Huddleston said it’s important to be ready for whatever comes, whether or not oil drops to $10.

Action Item: Contact Aethon investor relations at 214-750-3838