KRG Digs Black Gold –

Energy-producing natural resources may be the commodity behind the largest supply-demand imbalance in the world. And according to some, the divide is growing-leaving those on the supply-side of the equation in an even more favorable position than they are already in. With the price of a barrel of crude oil dancing around all-time highs, players in all areas of the energy industry seem to be in pole position to take in maximum earnings, even those in the industry’s ancillary markets.

Enticed by the sector’s favorable outlook, KRG Capital Partners has been looking for a platform opportunity in the oilfield services/technology sector for almost four years. The search recently came to an end when the Denver, Colo.-based private equity firm acquired Varel International Inc., a supplier of drill bits for the oil, natural gas and mining industries.

The growing worldwide market for oilfield drill bits is worth about $2 billion, Chuck Hamilton, a managing director at KRG, told Buyouts, adding that Varel currently has a “relatively small” share of the overall market. “We believe that the rising tide of activity can lend itself to Varel seeing an internal growth rate of 15% over the next few years,” he said.

Varel was sold to KRG by an investment team comprised of The University of Texas Investment Management Company (UTIMCO) and 3i Group, which acquired the company in 1998. Jim Nixon, a former Dresser Industries VP dubbed Varel’s president and CEO by 3i and UTIMCO, will continue his leadership role with the company.

Under KRG, Varel’s Carrollton, Texas headquarters will remain in place, as will the company’s manufacturing facilities in Carrollton and Houston, Texas; Matamoros, Mexico; and Tarbes, France. Also, the company has plans on the table for the creation of new sales offices in emerging regions to support Varel’s global marketing and sales objectives for the expanding oil & gas industry. Energy companies currently on Varel’s customer list include Chevron, BP, the Kuwait Oil Company and Total SA.

“Activity in general has been expanding over the past two to three years, and we see that continuing with the general increase in demand,” Nixon said. To this, Jay Couglon, a KRG vice president, added that existing prudent reserves of crude oil are declining by 3% per year while demand is growing at about 4% per year. “It’s like we have to replace the hole in the bottom of the bucket while the size of the bucket is constantly growing,” he said.

But pure demand is not the only thing driving the energy-related drill bit market today. Environmental changes brought about by the depletion of many the larger “elephant fields” are also a factor. “Companies today are drilling more, because today’s [oil] wells tend to be smaller than they were in the past,” Nixon said.

In addition to organic measures and industry trends, growth by acquisition will also play a role in KRG’s strategy to broaden Varel’s presence in the marketplace.

Varel will likely be the last platform company financed with equity from KRG Capital Fund II, a $450 million fund raised in 2001. Fund III, meanwhile, which had an initial close with $552 million earlier this year, is less than a month away from its final close on more than $700 million in limited partner commitments. Debt for this deal was provided by Royal Bank of Scotland, Freeport Financial and Ares Capital Management.


Target: Varel International Inc.

Sponsor: KRG Capital Partners

Sellers: University Of Texas Investment Management Co.; 3i Group

Financial Advisor: Varel: Simmons & Co.

Legal Counsel: KRG: Hogan & Hartson LLP; Varel: Graves, Dougherty, Hearon & Moody

Accountant: KRG: Ernst & Young