NGP’s Approach to Deal Sourcing Who the Energy Specialist Firm Wants to Back David Snow, Privcap: Today, we're joined by Craig Glick, Christopher Ray and Tony Weber of NGP Energy Capital Management. Gentlemen, welcome to Privcap today. Thanks for being here. I'm very interested to hear about the deal environment you're seeing in today's market. Obviously, you have a brand-­‐new, $5.3-­‐
billion fund to deploy. Energy prices are low and I'm sure that's created an interesting opportunity to put money to work. Why don't we start by giving an overview of the types of deals NGP pursues in a private equity context? Christopher Ray, NGP Energy Capital Management: Unlike an operating company that directly owns the assets, we are truly an investment firm that owns equity positions in a portfolio of companies that own and operate the assets. What we're seeking to do is to find the management teams that have the technical and operational capability to find and capture, own and develop oil and gas assets in a way that grows value through enhancing the volumes. Not necessarily just buying production and owning the production and cash flowing it, but certainly, the old saying is, “It's always easier to find oil where it's already been found.” So, trying to avoid true exploration in trying to get risk-­‐adjusted returns to where we play for the upsides and that materialize when you buy something right. You own it well, you can leverage it lightly, you can hedge it, grow the volumes and play for financial engineering or capital market opportunities and exit to where you find the teams that own the left-­‐sided balance sheet, so to speak. We provide the capabilities on the right side of the balance sheet through the financial, the derivatives and otherwise. Snow: How would you break down your portfolio by way of upstream, midstream and services? Just ballpark figures. Ray: Predominantly upstream, midstream and then services. We've done service deals since our inception from a private equity Snow: standpoint—the cycles tend to be a bit more violent in the service sector. Primarily, most of your capital is being put to work in the companies that are actually getting the molecules out of the ground and you're seeking to increase that. Craig Glick, NGP Energy Capital Management: We're trying to find the management teams that can try and find assets to acquire. We spend all of our time, for the most part, doing business development in all the places you would expect us to be: Tulsa, Oklahoma City and now Pittsburgh, Midland and Calgary and places like that—the oil and gas centers of North America. We're there trying to find high-­‐quality technical teams that know how to extract the hydrocarbons and how to operate it. Today, the industry has gone through a renaissance. All everyone wants to talk about is horizontal fracturing in completion and we're trying to find the teams that have drilled the most of those wells and understand how to do that best. That's where we spend our time. Tony Weber, NGP Energy Capital Management: One thing it's important to add is that the alignment we try to create with those management teams is perhaps a bit different from other firms that do what we do for a living. There's a fairly long courtship before we do a business arrangement together, but then we put our capital up right alongside theirs. Just like our LPs want us to have skin in the game and capital exposed to our funds, we want to make sure those management teams have capital exposed to their businesses that they run. Owners think differently. Snow: What if it's a younger management team that knows the technology well, but doesn't have a lot of money in their pocketbook? Weber: We've got a program that's focused on leaders under 40. We've got a terrific track record of finding those folks, backing them, supporting them and making good money. It's a little easier for them to put up more money once they've had one of those victories and they come back to us. Many have already come back to us. But it's not about absolute dollars for us. Ray: Some anecdotal evidence that it works [include] things like in our Fund Ten, which the investment period closed for when we Snow: Weber: Glick: activated Eleven. Every deal in there, we sourced proprietarily. It was either an existing relationship or one that we found on our own. So, we're able to fill up the fund with things that were sourced through our proprietary network. And currently, more than half of our management teams and about two-­‐thirds of the capital are exposed to teams we've backed already at least one time before. Or, in some cases, [it’s] two, three and four times. What do you tell management teams and limited partners about what’s unique about the way you put capital to work that might be different from some other groups in the same field? One of the hallmarks of our firm is that we haven't lost touch with small capital commitments to new teams. For a new management team—maybe a 35-­‐year-­‐old guy who wants his chance to build his first company or a woman who's a vice president at a big company thinks, “Now's my time.” That's great with us. If they're technically capable, if we can scrub down their track record and believe them to be moneymakers and good stewards of our capital and we get the alignment we want, then we're happy to back them with $20 million, $25 million or $30 million. Firms our size that manage funds our size typically don't do that. And that's a situation that we have not wanted to abandon because there's a lot of good money to be made there. Two things that make us a little different from some of our competitors that are attractive to teams out there are (1) we don't have any technical people on staff. Everyone you come to meet at NGP when you come to our offices—none of us are engineers or geos (meaning geologists, geoscientists, petro-­‐physicists or anything like that). We're all finance. Lawyers that can help our portfolio companies, they like that because we don't second-­‐guess them from a technical perspective. We're not telling them where to drill wells. We're not telling them that's a good play or a bad play from a technical perspective. We want to back strong teams who, frankly, are so good at what they do, they would get insulted if we start telling them those kinds of things. But the other thing about that is that we're a little different in that we've done this and only this for 26 years. When this business—
and it always does—has highs and lows, and we're at the bottom of a cycle now, we're not going and doing other things. We're not looking at pharmaceuticals or automotive or anything like that. This is all we do. All we do is energy. And I think the teams we meet out there like that this is what we do and they know we'll stick with them. We stick through highs and lows and we understand them and we don't panic when a low comes. And, frankly, we don't panic when a high comes.