A $2 billion EnerVest fund is all but tapped, erasing
investments by pensions, charities
By Ryan Dezember
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (July 17, 2017).
A $2 billion private-equity fund that borrowed heavily to buy
oil and gas wells before energy prices plunged is now worth
essentially nothing, an unusual debacle that is wiping out
investments by major pensions, endowments and charitable
foundations.
EnerVest Ltd., a Houston private-equity firm that focuses on
energy investments, manages the fund. The firm raised and started
investing money in 2013, when oil was trading at more than double
the current price of about $45 a barrel. But the fund added $1.3
billion of borrowed money to boost its buying power. That later
caused it trouble when oil prices tumbled.
Now the fund's lenders, led by Wells Fargo & Co., are
negotiating to take control of the fund's assets to satisfy its
debt, according to people familiar with the matter.
"We are not proud of the result," John Walker, EnerVest's
co-founder and chief executive, wrote in an email to The Wall
Street Journal.
The outcome will leave investors in the 2013 fund with, at most,
pennies for every dollar they invested, the people said. At least
one investor, the Orange County Employees Retirement System,
already has marked its investment down to zero, according to a
pension document.
Though private-equity investments regularly flop, industry
consultants and fund investors say this situation could mark the
first time that a fund larger than $1 billion has lost essentially
all of its value.
EnerVest's collapse shows how debt taken on during the drilling
boom continues to haunt energy investors three years after a glut
of fuel sent prices spiraling down.
At its onset, the oil bust was expected to cause widespread
losses for private-equity investors. While most funds have been
able to navigate the downturn and are hanging on for higher prices,
there have been pockets of acute pain. EnerVest's struggles have
been among the most severe.
Only seven private-equity funds larger than $1 billion have ever
lost money for investors, according to investment firm Cambridge
Associates LLC. Among those of any size to end in the red, losses
greater than 25% or so are almost unheard of, though there are
several energy-focused funds in danger of doing so, according to
public pension records.
EnerVest has attempted to restructure the fund, as well as
another raised in 2010 that has struggled with losses, to meet
repayment demands from lenders who were themselves writing down the
value of assets used as collateral, according to public pension
documents and people familiar with the efforts.
Mr. Walker in an interview last year said he and his partners
put $85 million of their own money toward satisfying the banks, but
it wasn't enough.
A number of prominent institutional investors are at risk of
having their investments wiped out, including Caisse de dépôt et
placement du Québec, Canada's second-largest pension, which
invested more than $100 million. Florida's largest pension fund
manager and the Western Conference of Teamsters Pension Plan, a
manager of retirement savings for union members in nearly 30
states, each invested $100 million, according to public
records.
The fund was popular among charitable organizations as well. The
J. Paul Getty Trust, John D. and Catherine T. MacArthur and
Fletcher Jones foundations each invested millions in the fund,
according to their tax filings.
Michigan State University and a foundation that supports Arizona
State University also have disclosed investments in the fund.
None of these investors commented. It is possible some of them
earlier sold their stakes in the fund, paring losses.
In the earlier interview, Mr. Walker said the struggles of
EnerVest's 2013 and 2010 funds had sparked ire among his investors:
"We've had some chew us out and hang up on us."
EnerVest was launched in 1992 and says it operates more U.S. oil
and gas wells than any other company. It started out investing for
GE Capital, General Electric Corp.'s finance arm. Eventually it
began pooling other big investors' cash, which it used to buy
producing oil and gas wells. EnerVest hunted for fields already
producing oil and gas but neglected by big oil companies. Once
EnerVest bought them, it made improvements and drilled more to
increase output.
The strategy isn't as risky as staking wildcatters or borrowing
heavily to buy entire oil companies, but profits are usually lower.
To juice returns, however, funds managed by EnerVest and rivals
that shared the strategy borrowed money as if they themselves were
oil companies, encumbering all of the funds' assets with the same
debt.
Doing that eliminates a key protection for private-equity
investors, which generally finance each investment independently so
that soured deals don't put good ones at risk. The use of
fund-level debt effectively cross-collateralizes assets, meaning
that good investments can be pulled down by bad ones.
Institutional investors were drawn to these so-called resource
funds because they typically pay out steady streams of cash as soon
as they make their first investments, unlike other private-equity
investments that can take years to bear fruit, said Christian
Busken, who advises endowments and other big energy investors as
director of real assets for Fund Evaluation Group LLC.
"It shouldn't be something where you can be wiped out. But you
are exposed to commodity prices," said Mr. Busken, who hasn't
worked directly with EnerVest.
EnerVest's funds historically returned more than 30% or so,
which enabled it to raise progressively larger pools of cash. In
2010, it raised about $1.5 billion for its 12th fund and added $800
million of debt. Three years later it raised $2 billion for its
next and borrowed $1.3 billion. The fund bought wells in the Texas
Panhandle, Utah, outside Dallas and elsewhere, according to
securities filings from some of the sellers. The purchases were
made largely as U.S. oil prices hovered in the $100-a-barrel range
and when natural-gas prices were higher.
--Andrea Fuller and Dawn Lim contributed to this article.
Write to Ryan Dezember at ryan.dezember@wsj.com
(END) Dow Jones Newswires
July 17, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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