Warburg bets on management, not oil prices, in $500 mln oil and gas play

Despite depressed oil prices, Warburg Pincus has committed $500 million to seed efforts by a team of industry veterans to establish an oil and gas exploration and development company.

Now that we “have the right team pursuing the right assets, our goal is to create value through operations, not by taking bets on commodity prices,” said Saurabh Agarwal, principal at Warburg Pincus.

RimRock Oil & Gas plans to use its $500 million line-0f-equity to develop wells in the United States and Canada.

“The goal is not to buy assets that are in distress,” Agarwal said. “The first goal is to buy assets that are high quality where the team can bring about some operational enhancement in line with their prior experience.” He added: “If they happen to come from sellers that are in distress, we’ll obviously look at them.”

Distressed opportunities could become plentiful. Many energy companies that have borrowed heavily are facing critical milestones this year. Twice a year, in April and October, banks revalue reserves in the ground, which they use to determine lending limits. This year could be particularly tough on energy companies given lower oil prices and the expiration of hedging contracts that last up to two years. This fall marks the second anniversary of the steep slide in oil prices.

RimRock Oil & Gas is led by President and Chief Executive Officer Jim Fraser and Managing Director Bob Rooney. Fraser previously led the North American shale division at Talisman Energy. He also worked in executive roles at Chesapeake Energy and Burlington Resources. Rooney worked in various executive roles at Talisman Energy.

Warburg Pincus and Fraser started discussions about the opportunity after the two decided to partner last summer, Agarwal said. “Very quickly we saw alignment in how we were viewing the world,” he said.

This is Fraser’s first time starting a business, Agarwal said, adding that the deal came about in part through Warburg Pincus’s decade-long relationship with Rooney.

The line-of-equity investment allows RimRock Oil & Gas to draw down money as it finds deals. Warburg Pincus is splitting the investment 50-50 between its energy fund, which closed on $4 billion in 2014, and its flagship vehicle, which closed at $12 billion last year.

In December, Warburg Pincus announced a $300 million line-of-equity investment in Rubicon Oilfield International, a startup oil field services company. The firm also made an undisclosed commitment to oil and gas exploration company Terra Energy Partners last month, alongside Kayne Private Equity Income Fund.

Action Item: Learn more about Warburg’s energy efforts here: http://www.warburgpincus.com/

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