By Ryan Dezember And Daniel Gilbert
Shortly after bagging big profits on a Pennsylvania drilling
deal, George Roberts traveled to Houston to meet with the banker
who had brought the prospect to his private-equity firm, KKR &
Co.
Mr. Roberts, KKR's co-founder, asked about other opportunities
in shale drilling. Ralph Eads unfurled maps on a conference-room
table and pointed out the country's emerging drilling fields. "We
want to be your first call," Mr. Roberts told the Jefferies Group
LLC banker.
KKR went on to complete a couple of relatively small but hugely
profitable shale deals before Jefferies in 2011 pitched the big
one: Samson Investment Co., one of the largest closely held energy
producers in the U.S. KKR bit, in the biggest-ever buyout of an
oil-and-gas company.
Now, the investment is deep in the red, as falling oil prices
amplify struggles Samson has faced since its $7.2 billion
acquisition. Almost immediately after the deal closed, natural-gas
prices plunged to their lowest level in a decade, hurting profits.
Meanwhile, the Tulsa, Okla., company, now known as Samson Resources
Corp., had to contend with $3.6 billion of debt it took on in the
takeover.
The dive in oil prices has crimped Samson's cash flow further
and could make it harder to find buyers for oil-and-gas fields the
company is trying to sell to make ends meet. Samson has lost more
than $3 billion since the buyout, including a $470.7 million loss
this year through September.
Samson's woes stand as a cautionary tale of the U.S. shale boom.
Fed by cash from Wall Street and private-equity firms, drillers in
recent years rushed to tap new oil-and-gas deposits across the
country--and contributed to the collapse in prices for both fuels.
Samson's woes have been exacerbated by the very tools
private-equity firms use to juice their returns: Samson carries
debt used to fund its own purchase and pays fees to its owners.
Last week, Moody's Investors Service downgraded Samson's credit
rating while taking the unusual step of simultaneously flagging the
company for further downgrade.
"It speaks to our level of concern," said Andrew Brooks, a
Moody's senior analyst. "There's no question that the interest
burden this company is carrying is excessive."
For the most part, private equity has been a friend to shale
drilling, which emerged about a decade ago. Wildcatters combined
sideways drilling done miles beneath the surface with a
rock-cracking process called hydraulic fracturing to unlock vast
reserves of fuel. Private-equity firms were poised to profit. At
the time, major oil companies had turned away from the U.S. in
pursuit of far-flung prospects, and bank financing all but dried up
during the recession. The financiers, meanwhile, had piles of cash
raised before the financial crisis for buyouts.
Early successes brought hunger for more deals. Private-equity
investors have dedicated more than $100 billion to specialized
energy funds since the end of 2011, according to data provider
Preqin.
Many investments remain in the black. But the nearly 50% drop in
oil prices since this summer has wiped at least $12.7 billion of
value from private equity's holdings, based on the stock moves of
nine exploration and production companies that represent some of
firms' largest publicly traded energy positions.
An investment group led by Warburg Pincus LLC that launched
Appalachian gas producer Antero Resources Corp. seven years ago
with $1.5 billion was up more than $12 billion until recently.
Since June, the firms' shares in Antero are down 34%, or about $4.6
billion.
EP Energy Corp., subject of a leveraged buyout nearly as large
as Samson's, is down 63% since June, erasing about $2.6 billion of
value from the stake held by its private-equity backers, led by
Apollo Global Management LLC. That deal is teetering around
break-even for the buyout group.
The damage hasn't reduced the appetite for oil-and-gas deals
among buyout barons, they say. "I'm glad we're in the position that
we are, as prices have come down significantly," Henry Kravis,
KKR's co-founder and with Mr. Roberts, co-CEO, said at a conference
earlier this month. "We see this as a real opportunity."
But at Samson, analysts say, the company will have exhausted all
but a sliver of its available credit and run afoul of debt
agreements by early 2016, barring a rise in oil-and-gas prices, an
injection of cash from its private-equity backers or
better-than-expected proceeds from asset sales.
The $4.1 billion that KKR and its partners put into the buyout
shriveled to about one-quarter of that by the end of September,
according to Samson's securities filings. Some of Samson's debt is
trading at 42 cents on the dollar.
Private-equity firms such as KKR can be masters at sustaining
their investments through economic cycles.
Samson has embarked on a strategy of "shrinking the company to a
set of assets that can grow," Chief Executive Randy Limbacher told
investors last month. It is selling properties in Oklahoma, North
Dakota, Wyoming and Colorado.
KKR has been on the winning and losing sides of energy deals.
One costly blunder it led: a $32 billion bet on Texas power
producer TXU Corp., now known as Energy Future Holdings Corp., in a
2007 megabuyout.
Then, too, natural-gas prices soon swooned, and KKR and its deal
partners were left with an overly indebted company. After many
years of financial moves to delay a bankruptcy, the company filed
for such protection this past April.
Still, the ill-fated deal gave KKR an education in the potential
of new drilling technology. Rather than retreat, KKR executives
jumped into investing in oil-and-gas production.
In 2009, tipped by Mr. Eads, KKR invested $312 million in East
Resources Inc., a closely held gas producer with shale acreage in
western Pennsylvania and Ohio that needed money to drill. About a
year later, East was sold, fetching $1.5 billion for its stake.
Along with two other small shale deals, KKR reaped more than the
roughly $2 billion the firm lost for it and its investors at Energy
Future. KKR pushed further, opening a Houston office and staffing
it with engineers and geologists to vet drilling prospects.
Samson, based in Mr. Kravis's hometown, was founded by Charles
Schusterman in 1971 and was being run by his daughter, Stacy
Schusterman, when it hit the auction block.
Samson's debt ballooned with the deal, though KKR and its
partners paid more than half of the price with cash, using much
less debt than is typical in leveraged buyouts. Lenders typically
require more upfront cash in energy deals to protect against
falling commodity prices.
Those concerns were well-placed. Within a month of the buyout
being completed, KKR experienced a TXU redux: U.S. natural-gas
prices dropped, crimping Samson's cash flow.
Meanwhile, the company had big interest expenses for the
takeover debt. Samson also began paying so-called management fees
to its private-equity owners that began at $20 million annually and
increase by 5% a year.
To cut costs, Samson laid off 120 employees. It embarked on
asset sales that have so far brought in more than $1 billion. It is
currently shopping assets that account for about 25% of its
production and are expected to bring in as much as $1.1 billion,
Barclays analysts estimated last month. Samson said it has also
reduced drilling costs.
KKR and its partners last year rolled out a big pay package to
lure Mr. Limbacher, a veteran of big energy producers, according to
a securities filing. His 2013 compensation was valued at $56.6
million, more than the CEOs of Exxon Mobil Corp. and Chevron Corp.
made combined.
Yet most of his compensation was paid in Samson stock that vests
over five years. Samson's woes have slashed the value of those
shares, and in an effort to retain employees, executive pay plans
were revamped last month to include more cash in light of the
stock's swoon and a faster -vesting timetable for the stock.
"At least one of my co-workers suggested to me that God brought
me here to teach me humility," Mr. Limbacher said on a recent
analyst call when asked whether he and his team would stay at the
struggling company.
As for Samson's sellers, the Schustermans have remained in the
oil business, operating assets along the Gulf Coast through its
Samson Energy Co.
"Selling a family business like Samson was one of the most
difficult decisions we have ever made," said Ms. Schusterman.
"Oil-and-gas pricing is currently lower than anyone anticipated,
including us. Despite current pricing, we remain optimistic
concerning the long-term profitability of the oil and gas business,
and there are so many great assets and people at [the company] to
generate positive results."
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