Why Blackstone Is Betting $7 Billion On Natural Gas
U.S. gas prices are stuck in a rut, which is fine with the world’s largest private-equity firm
By Ryan Dezember
The Wall Street Journal
August 16, 2017
Blackstone Group BX -0.52% LP is making one of its biggest bets on the growth of natural gas production, wagering that even if gas prices remain stuck at depressed levels, it can profit.
The New York private-equity firm has built a roughly $7 billion bet on natural gas by investing in drilling fields, pipelines and a gas export terminal. The latest piece came last month, when it agreed to pay $1.57 billion for a 32.4% stake in the Rover Pipeline, a 710-mile tube being built across Ohio.
Natural gas investments have been popular in recent years among private-equity firms. Many investments count on prices rising to turn profits—and have been doomed by low prices.
Blackstone says its wager is generally more dependent on production volumes increasing than on prices climbing. Most of the $7 billion has been put toward moving gas out of areas where drilling has increased despite low prices. The remainder has been invested in exploration and production in those regions.
“We’re betting on which basins are going to be the winners,” said David Foley, who leads the firm’s energy investing. He’s put Blackstone’s money down in West Texas, Appalachia and Louisiana.
Blackstone raised its latest energy fund, a pool with more than $8 billion, in late 2014 and early 2015, when collapsing crude prices stoked optimism that investors could snap up oil assets on the cheap. The firm has invested billions in oil, but its splashiest deals have been aimed at natural gas.
The natural gas gambit has grown into one of Blackstone’s biggest, comparable in scope to its $10 billion bet on rental homes. But unlike home prices, natural-gas prices have a less-than-bright prognosis.
Goldman Sachs Group Inc., Citigroup Inc. and others say that abundant supply, and production that can be ramped up quickly, should keep U.S. natural gas prices at an average of around $3 per million British thermal units for the next couple of years. Futures contracts for gas to be delivered in the winter, when demand and prices tend to be highest, don’t exceed $3.50 per mmBtu until late 2027, according to FactSet.
Natural gas for September delivery fell 2.4 cents, or 0.81%, Tuesday to $2.9350 per mmBtu on the New York Mercantile Exchange.
Blackstone joins a crowded field of private-equity firms that have barreled into gas investments since the combination of horizontal drilling and a rock-cracking process called hydraulic fracturing unlocked new drilling fields across the country. These firms’ cash helped feed a drilling frenzy that has produced a flood of the heating and power-generation fuel.
Some firms have made disastrous bets, underestimating the new drilling technology and how severely it would affect prices.
The Texas power producer formerly known as TXU Corp. was bankrupted by buyout debt after KKR & Co. and TPG bought the company in 2007 for $32 billion assuming that gas prices, and thus electricity prices, would remain high. Instead, shale gas flooded the market.
Another surge of shale gas sent prices spiraling down shortly after KKR and others paid $7.2 billion for oil-and-gas producer Samson Resources Corp. in 2011. Samson’s bankruptcy case is approaching its second anniversary.
But there have been enough successes to keep investor interest in natural gas alive. KKR once made $1.5 billion in about a year by flipping Pennsylvania shale fields. Big scores like that have helped draw more than $200 billion into energy funds since 2013, according to Preqin.
The earliest of Blackstone’s natural gas investments is poised to begin paying dividends. In 2012, the company put $1.5 billion toward the construction of Cheniere Energy Inc.’s LNG -0.85% facility in Sabine Pass, La., to liquefy natural gas for export.
The facility, which last year became the first to ship U.S. shale gas overseas, is adding capacity and recently reached a construction milestone that triggered Blackstone’s stake to convert to common shares of an entity that distributes 42.5 cents a share each quarter. With more than 202 million shares, Blackstone is due about $86 million quarterly, or $344 million annually.
The Rover Pipeline could be completed as early as autumn, according to Energy Transfer Partners LP, which is building the project. It will connect some of the country’s most prolific wells to markets around the Great Lakes and along the Gulf of Mexico. Once it opens, the Appalachian drillers who have signed up for shipping space on the pipeline will pay fees whether they send gas or not.
Earlier this year, Blackstone paid $2 billion for 375 miles of pipelines in West Texas that gather gas being produced as a byproduct of the frenzied Permian Basin oil drilling, and is therefore not particularly sensitive to gas price movements.
Mr. Foley says owning infrastructure like gas pipelines and export terminals is akin to selling supplies to speculators during the California Gold Rush. “It’s like picks and shovels for gold mining,” he said. “We don’t really care about the gold price, we just need it to be sufficient that people continue to mine.”
Blackstone’s strategy isn’t without price risk. A decline much below $3 could hurt the firm’s investments in exploration and production outfits. Persistently low prices have pressured such companies and limited the places where drilling is profitable.
In Appalachia, Blackstone has placed hundreds of millions of dollars with closely held prospectors, including $250 million with a 105-year-old Pittsburgh outfit called Huntley & Huntley, which it has used to acquire acreage and drill wells near fields that gas giant EQT Corp. has been consolidating. In northwest Louisiana, it spent $1.2 billion on drilling fields and created a company called Vine Resources Inc., which filed paperwork in April to pursue an initial public offering.
Blackstone Group BX -0.52% LP is making one of its biggest bets on the growth of natural gas production, wagering that even if gas prices remain stuck at depressed levels, it can profit.
The New York private-equity firm has built a roughly $7 billion bet on natural gas by investing in drilling fields, pipelines and a gas export terminal. The latest piece came last month, when it agreed to pay $1.57 billion for a 32.4% stake in the Rover Pipeline, a 710-mile tube being built across Ohio.
Natural gas investments have been popular in recent years among private-equity firms. Many investments count on prices rising to turn profits—and have been doomed by low prices.
Blackstone says its wager is generally more dependent on production volumes increasing than on prices climbing. Most of the $7 billion has been put toward moving gas out of areas where drilling has increased despite low prices. The remainder has been invested in exploration and production in those regions.
“We’re betting on which basins are going to be the winners,” said David Foley, who leads the firm’s energy investing. He’s put Blackstone’s money down in West Texas, Appalachia and Louisiana.
Blackstone raised its latest energy fund, a pool with more than $8 billion, in late 2014 and early 2015, when collapsing crude prices stoked optimism that investors could snap up oil assets on the cheap. The firm has invested billions in oil, but its splashiest deals have been aimed at natural gas.
The natural gas gambit has grown into one of Blackstone’s biggest, comparable in scope to its $10 billion bet on rental homes. But unlike home prices, natural-gas prices have a less-than-bright prognosis.
Goldman Sachs Group Inc., Citigroup Inc. and others say that abundant supply, and production that can be ramped up quickly, should keep U.S. natural gas prices at an average of around $3 per million British thermal units for the next couple of years. Futures contracts for gas to be delivered in the winter, when demand and prices tend to be highest, don’t exceed $3.50 per mmBtu until late 2027, according to FactSet.
Natural gas for September delivery fell 2.4 cents, or 0.81%, Tuesday to $2.9350 per mmBtu on the New York Mercantile Exchange.
Blackstone joins a crowded field of private-equity firms that have barreled into gas investments since the combination of horizontal drilling and a rock-cracking process called hydraulic fracturing unlocked new drilling fields across the country. These firms’ cash helped feed a drilling frenzy that has produced a flood of the heating and power-generation fuel.
Some firms have made disastrous bets, underestimating the new drilling technology and how severely it would affect prices.
The Texas power producer formerly known as TXU Corp. was bankrupted by buyout debt after KKR & Co. and TPG bought the company in 2007 for $32 billion assuming that gas prices, and thus electricity prices, would remain high. Instead, shale gas flooded the market.
Another surge of shale gas sent prices spiraling down shortly after KKR and others paid $7.2 billion for oil-and-gas producer Samson Resources Corp. in 2011. Samson’s bankruptcy case is approaching its second anniversary.
But there have been enough successes to keep investor interest in natural gas alive. KKR once made $1.5 billion in about a year by flipping Pennsylvania shale fields. Big scores like that have helped draw more than $200 billion into energy funds since 2013, according to Preqin.
The earliest of Blackstone’s natural gas investments is poised to begin paying dividends. In 2012, the company put $1.5 billion toward the construction of Cheniere Energy Inc.’s LNG -0.85% facility in Sabine Pass, La., to liquefy natural gas for export.
The facility, which last year became the first to ship U.S. shale gas overseas, is adding capacity and recently reached a construction milestone that triggered Blackstone’s stake to convert to common shares of an entity that distributes 42.5 cents a share each quarter. With more than 202 million shares, Blackstone is due about $86 million quarterly, or $344 million annually.
The Rover Pipeline could be completed as early as autumn, according to Energy Transfer Partners LP, which is building the project. It will connect some of the country’s most prolific wells to markets around the Great Lakes and along the Gulf of Mexico. Once it opens, the Appalachian drillers who have signed up for shipping space on the pipeline will pay fees whether they send gas or not.
Earlier this year, Blackstone paid $2 billion for 375 miles of pipelines in West Texas that gather gas being produced as a byproduct of the frenzied Permian Basin oil drilling, and is therefore not particularly sensitive to gas price movements.
Mr. Foley says owning infrastructure like gas pipelines and export terminals is akin to selling supplies to speculators during the California Gold Rush. “It’s like picks and shovels for gold mining,” he said. “We don’t really care about the gold price, we just need it to be sufficient that people continue to mine.”
Blackstone’s strategy isn’t without price risk. A decline much below $3 could hurt the firm’s investments in exploration and production outfits. Persistently low prices have pressured such companies and limited the places where drilling is profitable.
In Appalachia, Blackstone has placed hundreds of millions of dollars with closely held prospectors, including $250 million with a 105-year-old Pittsburgh outfit called Huntley & Huntley, which it has used to acquire acreage and drill wells near fields that gas giant EQT Corp. has been consolidating. In northwest Louisiana, it spent $1.2 billion on drilling fields and created a company called Vine Resources Inc., which filed paperwork in April to pursue an initial public offering.
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