KKR Teams Up With Chesapeake to Invest $250 Million

KKR & Co. (KKR) and Chesapeake Energy Corp. (CHK), the second-largest U.S. natural-gas producer, formed a $250 million partnership to buy mineral rights and royalties from owners of oil and gas properties.

KKR, the private equity firm run by Henry Kravis and George Roberts, will commit an initial $225 million and Chesapeake will provide $25 million toward the partnership, which will invest in mineral and royalty interests in oil and gas basins, the firms said in a statement today. Owners of oil and gas royalties typically receive a share of production revenue without incurring any of the production cost. In the U.S., owners of mineral rights to a specific piece of property usually negotiate for royalty payments.

Chesapeake expects to buy royalty interests from sellers who “don’t want to wait to see what’s under the ground,” as well as from those who want cash up front for royalties on producing wells, Michael Kehs, a spokesman for Oklahoma City- based Chesapeake, said in a telephone interview. The agreement with KKR is Chesapeake’s first partnership that will acquire royalties, rather than an interest in fields, he said.

“Private equity has been getting more and more into oil and gas, and this is another way in,” said Scott Hanold, a Minneapolis-based analyst for RBC Capital Markets who rates Chesapeake “sector-perform” and doesn’t own the shares. “Chesapeake is a good choice for this because they are deal guys and they didn’t have the cash to do something this size on their own.”

Snapping up Assets

Chesapeake had a net debt load of $10.28 billion as of Dec. 31, according to data compiled by Bloomberg. The company will be responsible for finding, acquiring and managing the investments, according to the statement. Chesapeake is the second-largest U.S. gas producer, behind Exxon Mobil Corp. (XOM), according to data compiled by Bloomberg.

Private equity firms such as KKR and Blackstone Group LP (BX) are snapping up energy assets as the price of oil climbs and the world’s largest energy companies unload mature oil and gas fields to finance new exploration. The value of private equity deals in the energy industry almost doubled last year to $32.2 billion from $16.5 billion in 2010, according to data compiled by Bloomberg.

KKR last year led a group to buy Tulsa, Oklahoma-based Samson Investment Co. for $7.2 billion to capitalize on increased production of shale-based oil and gas. Last month, a group led by Apollo Global Management LLC (APO) agreed to acquire El Paso Corp.’s oil and gas exploration business for $7.15 billion. The deals topped the list of buyouts in the energy production industry and were the biggest private equity deals since 2007.

‘Attractive Opportunities’

“Driven predominantly by the recent advancements in unconventional oil and gas technology, we continue to see attractive opportunities to invest behind the domestic exploration and production of oil and gas,” Robert Antablin, a director at New York-based KKR who leads the firm’s royalties investment strategy, said in the statement.

In November, KKR hired Claire Scobee Farley and David Rockecharlie, energy-industry bankers from Jefferies & Co., as managing directors focusing on its oil and gas investments. Farley and Rockecharlie founded Houston-based RPM Energy LLC, which helps manage those investments.

Chesapeake fell 2.8 percent to $23.56 and KKR dropped 1.8 percent to $13.61 at the close of trading in New York. Chesapeake’s shares have gained 5.7 percent this year, and KKR’s have risen 6.1 percent during that time.

Attracting Capital

Private equity firms have been trumpeting their energy track records in an effort to attract capital from clients who are clamoring for more opportunities to invest in the industry. Blackstone is seeking to raise as much as $3 billion for its first energy-focused fund. If successful, New York-based Blackstone would surpass both Apollo’s and KKR’s efforts to attract capital to dedicated energy pools.

KKR made a fourfold return on its first shale-gas investment, in Warrendale, Pennsylvania-based East Resources Inc., when the company was sold to Royal Dutch Shell Plc in May 2010. KKR did one of its first oil- and gas-production deals in 1985, buying a 50 percent stake in Allied Corp.’s Union Texas Petroleum unit for about $250 million.

“Chesapeake has been the world’s leading discoverer and developer of oil and gas shale plays, which are revolutionizing energy exploration,” Marc Lipschultz, head of global energy and infrastructure at KKR, said in the statement. “We hope that today’s partnership is just the beginning.”

Simpson Thacher & Bartlett LLP, the New York-based law firm, is advising KKR on the joint venture.

To contact the reporters on this story: Devin Banerjee in New York at dbanerjee2@bloomberg.net; Jim Polson in New York at jpolson@bloomberg.net

To contact the editors responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net; Susan Warren at susanwarren@bloomberg.net

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