Morgan Stanley PE invests in shale deal

Morgan Stanley Private Equity is teaming with a pipeline provider in shale regions of North Dakota and Colorado, the latest in a series of deals relating to shale gas in the US.

Morgan Stanley Private Equity is collaborating with a veteran management group it has worked with in the past to provide the infrastructure needed for producers to gather natural gas in shale deposits.

The private equity unit, which invests from the $6 billion Morgan Stanley Capital Partners V, is forming a company with the Sterling Energy Company that will provide gas gathering infrastructure in shale deposits in North Dakota and Colorado. Financial details of the transaction were not disclosed. The company will be called Sterling Investment Holdings

Providing pipelines for natural gas to flow from wells to the markets is akin to selling picks and shovels in the gold rush in the 19th Century, according to John Moon, managing director of Morgan Stanley Private Equity.

“Our business is gathering natural gas. We build out to oil and gas wells in these areas where pipeline infrastructure is scarce,” Moon said. “We see this business as the picks-and-shovels business. The guys who sold the picks and shovels in the gold rush were the guys who made the money. Selling picks and shovels is about making money supporting those who are doing the exploring.”

The company will focus on shale oil and gas deposits in the Bakken shale of North Dakota as well as the Niobrara shale of Colorado, which is an emerging shale field compared to some of the more developed areas like the Barnett shale region in north Texas and the Marcellus shale in Pennsylvania and West Virginia.

The structure of the deal is important, as it gives the company assets on hand to offer to producers who are drilling, rather than simply having a team that has capital but no assets in place.

“We can say, ‘we have a low pressure gathering system two miles from where you’re drilling’. It will take us two weeks to connect’. That’s a more certain value proposition for them,” Moon said.

Sterling Energy was founded in 2000 by William Penney, who had previously worked as vice president and general counsel of Cantera Natural Gas, a Morgan Stanley Private Equity-backed natural gas gathering company. Penney had worked at a number of other MSPE-backed energy-related companies dating back to 1991. David Kenyon, who is joining the company as president, also worked for several MSPE-backed energy companies.

Private equity has made big bets on shale. Kohlberg Kravis Roberts has been heavily investing in shale regions over the past year, and The Blackstone Group earlier this year announced a $1 billion joint venture with shale gas developer Alta Resources to form Alta Energy Partners.