How did you get in touch with Carlyle and what is the nature of your relationship with the firm?
In the 1990s, Goldman decided to get into the ownership of energy assets in a significant way. Pierre Lapeyre and I helped the firm build its asset business. We were thinking of doing something new, and since we had always loved energy, the only natural thing to do was try the principal side of the energy business. About that time, 1999, we got an unsolicited call from David Rubenstein. David had a vision of creating a world-class energy private equity group as an independent entity. Riverstone is separately owned by Riverstone professionals, but pursues energy investments jointly with Carlyle. Carlyle's three founders are members of our investment committee.
What do you love about the energy business?
I grew up around the business in Montana and Wyoming. Pierre grew up around the business in Louisiana. We got to know each other at Goldman. It is a business of characters, which fits our personality types. It is arguably the world's largest industry, and is an essential ingredient to everything we do. My first job in the business was during the 1970s, post-Arab embargo. I was a roughneck out in Wyoming. I was covered in oil all day. I went home at night feeling good about what I was doing. It's an industry where you feel like you're in the middle of what's happening in the world. Also, there's ten or twenty times as much private equity money chasing other industries as there is in energy.
You've said energy is a ?humbling industry.? What do you mean?
It can hurt you. It's filled with people who go out one day and gamble $20m drilling a well and end up with a bust. It takes a certain amount of humility and a sense of humor to do that. Most energy fortunes are made and lost several times. This is a tough business and you need good partners. Virtually every deal we do has got a chrome-plated industry partner, or somebody very successful from the industry who is investing alongside us with the same economics.
What are some commonly held myths about energy investing?
Conventional wisdom has it that the energy industry is made up of huge industrial silos that are systemically low-return. The fact is, there are many little sub-groups within each of these that tend to be owned by very large companies, the executives of which are often our personal friends. These sub-groups tend to be run as cost centers. For example, there are hundreds of billions of dollars worth of pipeline businesses that may not be run primarily as profit centers within their corporate parents. They are run for infrastructure reasons – you can't afford to not have gasoline get from Houston to New York. We see myriad low-hanging fruit in that infrastructure business in particular.
The second myth is that it's a commodity-price driven business. We are commodity-price agnostic. We focus on fee-for-service businesses, which have little to do with the commodity price. There are myriad businesses like that, as well.
One of your platform companies is Legend Natural Gas. What's your strategy there?
Legend Natural Gas' management team grew a predecessor company from a very small Texas independent into an $800m property divestiture to one of the larger energy companies, resulting in a very attractive rate of return for the owners. They typically buy oil and gas properties that may not have been fully optimised by others, suck on the straw harder, reduce operating costs and thereby increase cash flow. These are metal-desk, linoleum-floor guys who typically focus on a two-county area of South Texas. We believe they have local knowledge that is second to none. One interesting example of how they have improved cash flow involves the use of something called soap sticks, which look like white sticks of dynamite. These go down the well bore and act like an Alka-Seltzer for gas wells to improve production. A $40,000 investment in the first property Legend purchased added over $3m in cash flow.
Why are relationships so important to success in energy investing?
The quality of the people you partner with is paramount to success. People who do business together frequently tend to do well against outsiders. My dad used to play a lot of poker. He told me the key to success in that game is, ?Look around the table. If you don't see the mullet, you're the mullet.? That's printed over the door at Riverstone.