TPG Bets On Natural Gas Compressor Co.

In a bet on growing demand for natural gas, TPG has agreed to buy Valerus Compression Services, a Houston-based company that makes critical equipment for the extraction of natural gas, for $500 million.

No one from the company, which was founded in 2002, is cashing out on the deal, and the proceeds are earmarked to help retire debt, invest in new senior debt and provide equity for growth. How the debt and equity components break down is unclear, although a source involved with the deal said the debt package includes a revolver.

Nine-hundred-employee Valerus makes and services compressors, machines that are placed atop natural gas drilling wells to provide the pressure needed to extract the gas. The company, which reportedly generates about $500 million in annual revenue, either leases the compressors to natural gas companies or sells them while providing service and maintenance.

Michael MacDougall, a partner who led the deal for Fort Worth, Texas-based TPG, first met with Valerus management about 18 months ago. With its investment TPG is betting that more natural-gas wells will be drilled as the federal government continues to seek out alternative energy sources to oil. TPG also sees opportunities to expand Valerus’s presence in Brazil and Mexico, as well as the Middle East and Eastern Europe. As an equipment and services supplier, Valerus’s success is somewhat insulated from price swings in natural gas and, as a relatively new company, its equipment is still new, our source said.

TPG is a long-time investor in the energy industry, having previously backed Belden & Blake Corp., a Houston-based oil and gas exploration and development company, and Denbury Resources Inc., a Plano, Texas-based oil and gas exploration and production company.

The investment for TPG, expected to close by the end of the year, comes in part out of TPG Partners VI LP, a $19.8 billion fund TPG closed in September 2008.