Energy investor Kimmeridge is putting the largest oil-and-gas fund raised since 2020 to work with the goal of creating an integrated gas business, a novel strategy for private equity.
An equity investment in Commonwealth LNG—a terminal for producing liquified natural gas under development on the Louisiana Gulf Coast—lines up a major customer for Kimmeridge’s earlier investment: a portfolio of gas-rich properties in Texas’ Eagle Ford shale region. In the deal announced Monday, Kimmeridge also agreed to purchase LNG from the terminal for 20 years after it begins operations, which is targeted for 2027.
Kimmeridge used about a third of the $1 billion raised for its sixth flagship fund to build the Eagle Ford position, according to the firm’s co-founder, Ben Dell. Kimmeridge Fund VI held its final close Aug. 2.
“Recently, you’ve seen the majors—ConocoPhillips, Total, Chevron—look to build more integration in LNG ownership. I think we’re clearly one of the first people on the PE side to go down that path,” Dell said. “When we started investing in South Texas, we had a very clear vision of what we wanted to build.”
Kimmeridge’s sixth flagship fund, in addition to being the firm’s largest, clocks in as the largest oil-and-gas fund raised since Blackstone Energy Partners III, a 2020 vintage fund that raised $4.4 billion, according to PitchBook data. That was three years after Blackstone stopped pursuing new upstream deals, Buyouts Insider reported.
The investment in Commonwealth LNG drew from Kimmeridge’s sixth fund as well as its fifth flagship fund, which closed in 2019 on $816 million, Dell said.
Kimmeridge raised its largest fund to date during a challenging time for PE fundraising overall. Global PE fund commitments fell 20% from 2021 to 2022, and fundraising tracked even lower in Q1 2023, according to PitchBook’s latest Global Private Market Fundraising Report.
As for oil and gas, Dell said fundraising has recovered, somewhat, from rock bottom, as some exploration and production companies have seen improved cash flows and raised returns to investors.
“In the last decade, [exploration and production] had horrible return on capital employed, and therefore, when the ESG side of the element was brought up, it was convenient and somewhat easy to support not investing in the space,” Dell said.
It’s a market that’s taken off over the last decade as an expansion of shale drilling in the US led to a sustained boost in natural gas production. Super-chilled, liquefied and shipped overseas to gas-dependent energy markets, LNG can produce healthy margins for traders.
Under the agreement with Commonwealth LNG, Kimmeridge will provide natural gas to the liquefaction terminal as well as buy 2 million tons of resultant LNG per year for 20 years, which will be loaded onto tankers and sold into a market soon to have buyers in dozens of countries, Dell said. The returns from LNG sales will go back to the two funds’ LPs.
The size of the firm’s equity investment in the LNG project was not disclosed.
Kimmeridge is one of the first PE firms to commit LP dollars to an LNG offtake agreement. That’s partially because most GPs involved in oil-and-gas investing look to return dollars to LPs within a 10-year horizon, or even sooner, said Stephen Ellis, an energy and utilities equities strategist at Morningstar (PitchBook is a Morningstar company). Two-decade-long commitments don’t typically fit within those expectations.
“My impression of most PE firms investing in the Permian Basin is that they’re looking for a three-to-five-year payback,” said Ellis.
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