Blackstone, Goldman and Other Wall Street Hedge Fund, Investment Banks Fueling Fracking Boom


Read this preview story from on the Wall Street firm behind much of the controversial shale gas boom in the United States – Goldman-Sachs, the same investment bank credited with driving the housing and derivatives bubble that precipitated the collapse of the US and global economy in recent years. (Oct., 2012)

Heavy capital needs, steady cash flows and rising asset values are the stuff leveraged buyout artists dream of. That’s one reason the private equity gang has recently been piling into oil and gas deals, specifically those associated with the hydraulic-fracturing boom now in full swing in North America.

One deal that opened up the floodgate of big money interest in fracking was KKR’s $312 million investment in June 2009 for 33% of East Resources, a Pennsylvania oil and gas exploration firm founded by Terrence Pegula. Pegula’s company had accumulated more than 650,000 acres in the Marcellus Shale formation in Appalachia. The KKR cash infusion helped East Resources increase the pace of horizontal wells being drilled, and in May 2010 KKR and Pegula were able to flip East Resources to Royal Dutch Shell for $4.7 billion. The deal made Pegula a multibillionaire and netted KKR over $1 billion, for a 371% return in under a year.

Up until this deal KKR had concentrated mostly on financing electric utilities. However, rising energy prices and the viability of fracking for natural gas changed the deal metrics. A conventional vertical well might cost $1 million to build; wells to tap into shale horizontally cost $8 million to build, a steep price for an oil and gas entrepreneur. Enter private equity.


Soon after East Resources, KKR invested $400 million in June 2010 for a 40% stake in Houston‘s Hilcorp Resources, which was drilling in the Eagle Ford Shale formation in South Texas. The KKR money prompted Hilcorp to add four more horizontal rigs, bringing its total to six and allowing it to drill over 40 horizontal wells. A year later Hilcorp was sold to Marathon Oil for $3.5 billion. KKR collected $1.4 billion of the proceeds.


These energy deals, plus others, have catapulted KKR’s Marc Lipschultz, 43, to near the top of FORBES’ ranking. They may have also set him up as the heir apparent at mighty KKR. Lipschultz joined KKR in 1995 after a stint in M&A at Goldman Sachs. “Energy is an extremely complex industry, and it is always consuming capital,” Lipschultz says. “So there’s a natural marriage between what it does and the thing that we ultimately provide.”


In June the Lipschultz team closed KKR’s first-ever natural resources fund at $1.25 billion, bringing the fund’s total capital for natural resources to $1.6 billion. Rival Blackstone Group recently raised $2.5 billion for energy investments, and Goldman Sachs is currently raising a $2 billion fund.

“The shale revolution is to energy what the Internet was to technology,” says Lipschultz. “It was significant, fast and disruptive.”

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