KKR Energy & Infrastructure I nfrastructure Overview Marc S. Lipschultz July 18, 2012
CONFIDENTIAL AND PROPRIETARY: For Investment Professio Professionals nals Only
Table of Contents I.
Introduction
II.
Infrastructure
III.
KKR Natural Resources
IV.
Energy Income
V.
Case Studies
I. Introduction
Summary • Core of energy and infrastructure business built around seizing opportunities resulting from dramatic global changes in supply and demand for energy • KKR brand, culture, team and platform exceptionally powerful for building businesses • Key has been combination of long-term strategic plans based on the impacts of these global changes with short term tactical actions when a market need is discernible • Critical lessons: • Listen to the market and meet the need • Willingness to experiment and adjust • First-time funds are very hard • Always people with similar ideas or people who will follow fast, so need to keep innovating and building our capabilities and platform
Discontinuity = Challenge & Opportunity Yesterday
Today
Tomorrow
?
Discontinuity = Challenge & Opportunity Yesterday
Today
Tomorrow
? > $1 Trillion in Capital
Why Invest in Energy?
#1 Long-Term Demand Outlook is Strong
#2 Asset Intensity is Driving Enormous Capital Needs
#3 Disruptive Technologies are Re-Inventing Energy Industries
#4 Change is Driving Complexity / Inefficiency and Volatility is Increasing Volatility Increasing
#5 Energy is Recognized as an Important Component of Investors’ Portfolios
KKR Energy and Infrastructure Business 2009
2010
2011
2012
Energy PE AUM=$1.3bn
Energy PE AUM=$1.4bn
Energy PE AUM=$2.1bn
Energy PE AUM=$3.0bn
Energy PE AUM=$5bn
Infrastructure AUM=$1.6bn
Infrastructure AUM=$2.2bn
Infrastructure AUM=$2.5bn
Infrastructure AUM=$5bn
KNR AUM=$0.3bn
KNR AUM=$1.4bn
KNR AUM=$1.5bn
KNR AUM=$3.0bn
$3.3bn
Energy Global Opportunities AUM=$0.5bn
Energy Global Opportunities AUM=$0.5bn
Energy Global Opportunities AUM=$2.0bn
Energy Income AUM =$0.1bn
Energy Income AUM =$1.1bn
Energy Income AUM =$2.0bn
$6.3bn
$8.6bn
$1.3bn
2015
Energy Mezz AUM=$1.0bn
Energy Other AUM=$.5bn
$18.5bn
KKR Energy & Infrastructure Platform at Year End 2011 Equity Investment/ Commitments
Holdings
Private Equity
• • • • • •
EFH Texas Crude Hilcorp El Paso Midstream AOT/Battrum Samson Resources
$2.1 bn
Infrastructure
• • • • •
Colonial Pipeline Sorgenia France T-Solar Saba Infraestructuras SunTap
$2.2 bn
Natural Resources
• • • •
EBR Gulf Coast Conoco Barnett Carrizo Barnett EOG Assets
$1.4 bn
Other
• Black Hawk Royalty Interest • Shushufindi • Other Global Energy Opps
TOTAL
$0.6 bn $6.3 bn
Infrastructure: Executing On A Long and Winding Road • Key accomplishments:
• Key challenges experienced:
– NPS Partnership
– Building the optimal team
– Raising significant pools of capital
– Proving our credibility
– Acquiring five attractive Infrastructure assets
– Time to raise capital/First fund challenge
Challenges: Market Environment & First-time Fund
KKR Global Infrastructure Partners Fund Launch
Hancock Parking SMA
Expand Partnership with Korean National Pension Service adding $400mm of AUM
Total capital raised ~$2.2bn
2012
2009
Colonial Pipeline SMA ~$1.1bn
Raised $515mm in first close of fund
Final Close on Fund 5/31/12 at $1.05bn + SMAs for total = $2.4bn AUM ; Profitable on a fully loaded basis in cash and economic net income
KNR: Executing Through Spotting Opportunity and Building Partnership • Shift to unconventionals creates orphan producing assets held by companies who need capital • We established key partnerships to build a strong Natural Resources platform – Premier Natural Resources – Texas Teachers (TRS) Partnership • TRS committed ~$1bn to the KNR strategy ahead of SPN
Six attractive asset acquisitions
$1.0bn of evergreen capital
made for over $950 MM ($500
through a separately managed
Equity)
account
Natural Resources platform at $1.6bn
Areas of Opportunity Going Forward Unconventional North American Supply Basins Abundant supply
International Oil & Gas Partnerships to access underperforming assets
Opportunistic Investments Solutions provider to companies facing credit/liquidity challenges
High Quality Midstream Assets Basins with sustainable activity and volume certainty
North America Private or Public Company E&P Development/ acquisition capital
Yield Oriented Upstream Investments Development drilling and royalty interests
What’s Next…?
New KKR Energy Initiative – Energy Income Drilling Development Strategy
Minerals & Royalties Strategy
• Build on KNR’s strategy delivering a high yield investment opportunity through the development of low-risk, undeveloped oil and gas assets
• Build a differentiated platform to capitalize on favorable market dynamics in this strong asset class
• Have strong technical team in RPM. Will partner with strong drillers • Serve as a solution by providing capital that enables E&P companies to (i) address capital spending gap; (ii) raise capital prior to booking of developed reserves and (iii) retain long-term upside
• Royalties provide real asset exposure, current cashflow, limited cost exposure and ownership of long-lived assets • Commercialization of unconventional basins has vastly increased the size of the opportunity
Real asset ownership with inflation linked cash yield
II. Infrastructure
Why Infrastructure?
Compelling Opportunity
1
Massive global need for infrastructure investment with limited quality investment alternatives
2
Potential for “protected” long-term cash flow streams and insulation from economic and market volatility
1
Opportunity for Attractive RiskAdjusted Returns
Past Strong Record in Infrastructure Investing Using the KKR Model
2
Limited partners require an investment strategy that places significant emphasis on minimizing commercial, operational and financial risks KKR’s differentiated investment strategy for delivering attractive risk-adjusted returns comprises three elements: i) disciplined investment selection ii) deep operational engagement iii) active stakeholder management
1
KKR has a decade of experience investing in—and exiting— infrastructure assets
2
KKR Global Infrastructure Investors will enable KKR’s high quality team to make investments in attractive infrastructure opportunities on a dedicated, long-term basis
Infrastructure Investing Must Evolve to Version 2.0
Investors expected:
1.
Low risk
2.
Conservative leverage
3.
Inflation protection
4.
Low correlation with GDP/other investments
5.
Long duration
Investors should seek Version 2.0:
…but generally received Version 1.0: 1.
Transaction-oriented models staffed by leveraged finance and banking professionals
1.
Experienced team of investors and operators targeting an attractive risk/return profile
2.
Sector-based asset selection without proper regard for risk—high sensitivity to economic cycles
2.
Disciplined asset selection, with focus on risk and sensitivity to economic cycles
3.
As much leverage as individual assets could bear
3.
Leverage appropriate to each asset and the risk profile of the fund
4.
Focus on asset accumulation and fee generation
4.
5.
Reactive approach to stakeholder management
Focus on operational engagement to improve performance and create value
5.
Stakeholder management as a core competence
The KKR Approach: A Value-Added Investment Strategy Our Strategy: Target infrastructure assets with limited commercial, financial and operating risk and drive value creation through operational engagement and stakeholder management
1. Disciplined Investment Selection • A risk-based, not sector-based, approach to filter investment selection • Essential criteria: 1. Physical assets
4. Inflation-hedged
2. Critical to the functioning of the economy
5. Limited correlation with economic cycles
3. High barriers to entry/irreplaceable assets
6. Long-term visibility of cash flows
2. Deep Operational Engagement • Institutionalized high quality processes and dedicated resources focused on value creation 3. Active Stakeholder Management • Deep in-house expertise focused on the alignment of interests from investment through exit and across all constituencies
Infrastructure Investment Experience Approximately $7 Billion of Equity Investments Since 2000(1)
Transportation/ Parking
Alternative Energy
Communications Infrastructure
Contracted/ “Hedgeable” Generation
Waste Management
Electric & Gas Utilities
Midstream
KKR Investments: U.N Ro-Ro
Texas Genco Sorgenia France(2) EFH (Luminant) T-Solar(2)
Saba Infraestructuras(2)
Duales System Bharti Infratel Colonial Pipeline Deutschland PanAmSat El Paso Midstream
DPL EFH (Oncor) ITC Holdings
SunTap Energy(2) AVR – van Gansewinkel(3)
Team Member Experience Outside KKR Includes: Endesa Europa Note:
(1) (2) (3)
Endesa Europa
Targa Resources
Endesa Europa
Past performance is no guarantee of future results. This table is provided for discussion purposes only to demonstrate KKR’s infrastructure-related investment experience. The investments listed possess, to varying degrees, infrastructure-related qualities as determined by the Infrastructure team and are based on the Infr astructure team’s assessment of all investments by KKR. Such determination and assessment involves significant judgment and may differ from another party’s review of KKR’s investments. A nother party’s assessment may include comparable investments not represented above, which may have lower (or negative) investment returns. Includes investments outside of KKR for which current KKR investment professionals had primary responsibility for sourcing and/or overseeing prior to joining KKR. Investments made from KKR Global Infrastructure Investors. Other investments posses to varying degrees, infrastructure-related qualities as determined by the Infrastructure team as further described in the Note above. Primarily a waste management business, with some ancillary alternative energy efforts.
Value-Added Investment Strategy
SECTORS Utilities
Transportation & Social Infrastructure
• Water • Gas • Power
• Highways • Parking • Rail/Mass Transit • Social Infrastructure
Midstream & Contracted Energy • Pipelines • Storage • Generation • Renewables
Investment Focus • Global strategy to access most attractive opportunities • Targeting leading companies, high quality assets and strong management teams • Seeking majority ownership/ control positions • Emphasis on Brownfield, with opportunity for value-add • Predominantly OECD but will access non-OECD where KKR has real presence and experience
III. KKR Natural Resources
Executive Summary The Market Opportunity •
The Investment Strategy
Producers Shifting Focus to Certain Unconventional Assets o
Prolific reserves / growth
o
Attractive finding and development costs
o
Highly economic returns on investment
o
Public market valuation premiums
•
•
•
Near-Term Catalysts for Non-Core Producing Divestures o
Capital intensity of unconventional development
o
Limited upside / growth from non-core, producing assets
Investment Team / PNR Operating
• Conventional Assets are Attractive Opportunities forTeams Financial Buyers •
The Investment Team: KKR o
Executive-suite relationships / sourcing network
o
Transaction diligence and execution
o
Financial structuring and capital deployment
KKR Natural Resources (KNR)
•
Note:
o
Limited capital expenditure requirements
o
Greater ability to accurately project production
o
Often non-core / under-operated
Employ Value Enhancing Methodologies o Enhance existing production o
Reduce operating / capital costs
o
Identify incremental production opportunities
Realize Value through Cash Distributions
Our Competitive Advantages •
•
•
•
Acquire Non-Core Producing Properties
Deep Sourcing Capabilities Investment Acumen, Execution, and Diligence Skills Asset Optimization Experience / Expertise
The Operating Team: PNR o
Regional / industry-level sourcing network
o
Technical diligence
o
Asset optimization
•
Access to the Broad KKR Platform / Relationships
Participation of KKR Private Equity, KKR Capital Markets, and KKR Capstone personnel in the public markets investment process is subject to applicable law and inside information barrier policies and procedures, which may limit the involvement of KKR Private Equity, KKR Capital Markets, and KKR Capstone personnel in certain circumstances and KA M’s ability to leverage such integration with KKR. Discussions with Senior Advisors and employees of the Firm’s managed portfolio companies are also subject to the inside information barrier policies and proce dures, which may restrict or limit discussions and/or collaborations with Public Markets/KAM.
I. •
The Market Opportunity: Overview Recent market dynamics have created an environment where non-core assets are out of favor: Conventional Properties Becoming “Non-Core”
•
•
Certain Unconventional Properties Becoming “Non-Core”
•
•
•
Declining Production Profile of Conventional Assets •
•
Conventional assets have higher finding / development costs and therefore less growth potential than unconventional assets, and distract from operationally intensive unconventional development programs Conventional properties allocated less development capital and management attention Certain areas within unconventional properties generate less attractive returns than other more “core” areas even though these non-core areas contain a significant amount of producing assets These non-core unconventional properties are allocated less development capital and management attention
Public markets emphasize reserve / production growth (require reinvestment of capital to bring new reserves / production online to offset natural production decline) Many conventional reservoirs have limited opportunities to add reserves / production economically today, resulting in a significant base of declining production
Moreover, KKR sees numerous near-term catalysts creating attractive opportunities to acquire non-core-producing assets: •
Capital Intensity of Unconventional Development
•
•
Public Market Valuation Premiums
•
•
Limited Buyer Universe •
Unconventional development programs often require capital expenditures in excess of internally generated cashflow Operators considering divestitures of “non-core” assets to bridge funding gaps; also frees up management time / attention to focus on core assets
Public markets are increasingly valuing companies with an unconventional focus at higher multiples Incentive for public producers to reorient their portfolio composition by divesting non-core assets
Strategic buyers focused on unconventional assets with significant development opportunities; equity markets dislike declining reserve / production profile; and traditional private equity buyers have limited exit opportunities Limited competition creates opportunity to acquire non-core assets at attractive prices
II. The Investment Strategy: The KNR Approach •
KNR intends to generate attractive risk-adjusted returns while providing investors with direct exposure to oil and natural gas by: •
Acquiring Non-Core Producing Properties
•
•
Employing PNR’s Value Enhancement Methodologies
•
•
•
Realizing Value Through Cash Distributions
•
Producing properties have limited incremental capital expenditure requirements and reduced geological / engineering uncertainty o Wells are already producing marketable oil / gas and substantial historical data allows for production to be projected with a higher degree of accuracy Non-core properties are generally allocated minimal capital and receive little managerial focus o Such assets are often under-operated and therefore have upside opportunities through low-risk incremental development; application of new technologies and use of industry best practices
Enhance Existing Production: Employ operational best practices acquired through PNR’s extensive operating experience and apply updated technologies derived from PNR’s extensive industry relationships Reduce Operating / Capital Costs: Implement PNR’s low-cost operating approach Identify Incremental Production Opportunities: Reinvest cashflow to bring new production online without materially altering the risk profile of the investment
Optimize returns with conservative leverage and targeted hedging strategy Distribute most of the cash flow generated on a quarterly basis, with limited amount of capital retained for reinvestment to enhance value through low-risk incremental development
III. Our Investment and Operating Teams: Premier Natural Resources •
•
•
In business since June 2006, Premier Natural Resources, LLC (PNR) is comprised of former senior executives of Vintage Petroleum Inc. (Vintage) o PNR focuses on acquiring and exploiting oil and gas properties and currently operates a portfolio of assets located in the Texas Gulf Coast and the Permian Basin KKR has engaged PNR to operate and enhance non-core producing assets acquired as part of this identified strategy o Founded in 1983, Vintage Petroleum employed a similar strategy of acquiring non-core assets from oil and gas companies, enhancing production and cutting costs o Vintage was acquired by Occidental Petroleum Corporation (“Oxy”) in July of 2005 for $4.1 billion PNR team is comprised of highly experienced professionals from the oil and natural gas industry: o Average industry experience of the senior members of the PNR team is approximately 30 years o PNR team members have attained direct operating or technical evaluation experience in most significant conventional oil and natural gas basins in the United States and Canada • Charles C. Stephenson, Jr. - • Hung Nguyen - Vice Chairman President Exploitation
• Keli Klassen - Engineer / Geologic Technician
• J. Chris Jacobsen - President • Mark Gaby - Geologic • Diane First - Engineering Manager / Acquisitions Analyst • Joe Bielstein - Vice President Business Dev. • Kelly Byram - Senior Staff • Susan Dye - Production Geologist Analyst • Brian Wheeler - Vice President Engineering • Miles Peterson - Geophysist • David Krueger - District / Geologist Production Engineer
• Johnnie Nedbalek Lead Operator, Texas Gulf Coast • Willie Bohuslar Operator, Texas Gulf Coast • Randy Addison - Lead Operator, Texas Barnett • Megan Wondaal Regulatory Compliance
•
(1)
KKR may also partner with one or more other operators that are well-established in the oil and gas industry in the United States and/or Canada to provide operating services relating to the Fund’s investments(1)
PNR's performance is not indicative of the performance of these other operators.
IV. Our Competitive Advantages: A Differentiated Platform
1
Deep sourcing capabilities for new opportunities at multiple levels
2
Substantial investment acumen, execution, and diligence skills
3
Significant experience and expertise in oil and gas asset optimization
4
Access to the broad KKR platform of resources
Note:
Participation of KKR Private Equity, KKR Capital Markets, and KKR Capstone personnel in the public markets investment process is subject to applicable law and inside information barrier policies and procedures, which may limit the involvement of KKR Private Equity, KKR Capital Markets, and KKR Capstone personnel in certain circumstances and KAM’s abil ity to leverage such integration with KK R. Discussions with Senior Advisors and employees of the Firm’s managed portfolio companies are also subject to the inside information barrier policies and procedures, which may restrict or limit discussions and/or collaborations with Public Markets/KAM.
IV. Energy Income
Why Are We Creating a New Approach to Market? •
The emergence of unconventional oil & gas has created a new opportunity set for investors Oil and Gas Operating Considerations Then
Development Focus
Technical Risk Visibility to Production
•
•
•
Exploration of potential reserves Moderate to high Limited, based on success of recent exploration
Now •
•
•
Manufacturing of “proven” reserves Varied, but relatively low in maturing basins Clear, based on large reserve base
Average Well Cost
•
$1-$2 million/well
•
$5-10 million/well
Start-Up Costs to Efficient Operations
•
Modest to moderate
•
Extremely significant
•
Greatly increased the need for external capital amongst companies of all sizes
•
New, flexible approach required
What Are We Seeking To Do with the Energy Income & Growth Fund? • We are seeking to invest behind well-understood industry themes but we are taking a differentiated approach • Making asset-level investments and/or structured investments • Focusing, in part, on out-of-favor or misunderstood assets • Creating a portfolio of investments that generates current income Energy Investment Opportunity Set Asset-Level Investments
Going Concern Investments Build-Ups
Corporate
Need for Industry Capital
High
Moderate
High
Investor Competition
Low
Moderate
Moderate to High
• Mature oil/gas assets
Typical Investment Opportunities
• Unconventional oil & gas development • Minerals and Overriding Royalty interests (ORRIs)
• Unconventional land acquisition and delineation • Greenfield midstream build-ups
• Varied
Investment Strategy for the Energy Income & Growth Fund Our Strategy:
Act as a solution provider to industry by working to structure transactions that enable us to invest in oil and gas assets that generate attractive returns and ongoing yield
1. Leverage KKR’s Deep Sector Relationships 2. Provide Flexible, Differentiated Solutions to Industry •
Invest at the asset-level and/or through structured transactions
•
Craft transactions that meet operators/owners’ unique needs
3. Make Disciplined Investment Decisions •
Invest in assets that benefit from core themes that we know well
•
Leverage our deep bench of internal and external industry and technical expertise to make decisions regarding asset selection
•
Employ consistent criterion in our decisions: • Well understood North American assets • Low-cost positioning to ensure profitability across cycles
• Partner with strong operators • Exposure to beneficial changes in technology and pricing
• Visibility to value realization through cash-on-cash returns
4. Actively Manage Our Investments Post-Closing •
Leverage KKR’s and our operating partners’ expertise to optimize value creation
5. Seek to Deliver Investor Returns Through Periodic Distributions and Capital Appreciation Source: As with any investment, there is the potential for profit as well as the possibility of loss.
Core Focus Areas for the Energy Income & Growth Fund
#2: Oil & Gas Development
#1: Mature Oil & Gas
#3: Minerals & Royalty Interests¹
#4: Opportunistic/ Other
Energy Income & Growth Fund (1)
Throughout, “Royalty Interests” refers to Overriding Royalty Interests (ORRIs).
Core Focus Area #1: Mature Oil and Gas Assets The Market Opportunity Today •
•
•
Producers Shifting Focus to Unconventional (Shale) Assets Numerous Near-Term Catalysts for Non-Core Producing Asset Divestitures
Approach to Value Creation •
Acquire Out-of-Favor Producing Properties
•
Employ Value Enhancing Methodologies
•
Realize Value through Production
Mature Assets are Attractive Opportunities for Financial Buyers Today
Risk-Reward
Execution Capabilities •
Operating Partnership with Premier Natural Resources (“PNR”)
•
Invest in Low-Risk Oil and Gas Assets and Seek Low to Mid Teens Net Returns
•
Focused on Opportunities to Deploy $100 Million to $1.0 Billion of Equity Capital
•
Seek to Protect Return of Capital via Hedging
•
Achieve Commodity Exposure and Inflation Protection via Ownership of “Tail” Reserves
•
Provide Strong Cash-on-Cash Returns
•
Strong Track Record
Note: Please see Important Information slides for notes on target returns.
Core Focus Area #2: Oil and Gas Development The Market Opportunity Today
Approach to Value Creation
•
Increased Focus on Unconventional Assets Generating Significant Capital Needs
•
Provide Development Capital to Producers w/Strained Balance Sheets
•
Fundamentals Pressuring Balance Sheets
•
Employ Flexible Transaction Structures to Meet the Needs of Operators
•
Attractive Opportunity for Investors •
Realize Value Through Development and Production
Risk-Reward
Execution Capabilities •
•
•
Dedicated Resource, RPM Energy Management, Provides Technical Expertise to Evaluate and Manage Asset-Level “Drilling” Investments
•
Seek Mid-to-High Teens Returns, Net to our Investors (Risk Profile Dependent)
•
Achieve Commodity Exposure and Inflation Protection
•
Seek to Provide Combination of Strong Cash-onCash Returns and Capital Appreciation to the Investor
Focused on Opportunities to Deploy $50 to $500 Million of Equity Capital Early Track Record
Note: Please see Important Information slides for notes on target returns.
Core Focus Area #3: Minerals and Royalty Interests The Market Opportunity Today •
•
•
Development of Unconventional Assets Has Increased the Addressable Market for Minerals/Royalty Interests in North America We Believe Few Parties Have the Capabilities Necessary to Invest Behind this Opportunity Set
Approach to Value Creation •
Pursue an Acquisition Strategy that Is Difficult to Replicate
•
Monetize Our Competitive Advantages
•
Realize Value As the Minerals are Developed
Attractive Opportunity Available for Those Few that are Well Positioned
Risk-Reward
Execution Capabilities •
•
•
Joint Venture with Chesapeake Energy Corporation (“CHK”) to Acquire Minerals
•
Seek Mid-to-High Teens Net Returns
•
Achieve Commodity Exposure and Inflation Protection
•
Seek to Provide Combination of Strong Cash-onCash Returns and Capital Appreciation to the Investor, but with a Deferred Cash-on-Cash Yield Profile
Focused on Opportunities to Deploy Capital in Varying Sizes Early Track Record
Note: Please see Important Information slides for notes on target returns.
How EIGF Fits Within KKR’s Energy Platform • The Energy Income & Growth Fund represents a natural extension of KKR’s Energy Platform and directly leverages our vast relationships, resources and capabilities KKR Energy Platform Energy Income & Growth Fund Proved, Developed Producing Properties
Asset Allocation Criterion
• Asset-level investments, with predominance of value from proved developed producing (“PDP)” assets • Seek to generate return via current income
Infrastructure All Other Opportunities • Asset-level and/or structured investments
• Investments in going concern businesses
• Investments in going concern businesses
• Seek to generate return via current income and capital appreciation
• Seek to generate return via growth and current income
• Seek to generate return via growth and capital appreciation
• Infrastructure assets and businesses with limited economic sensitivity
• Oil and gas assets of lesser risk than with development opportunities
Historical KKR Transactions
TX Crude Farm-In
EBR
Eagle Ford ORRI Minerals JV
East TX, LA and MS Assets
Private Equity
Midstream JV
Colonial Pipeline
Operating and Technical Capabilities Critical to Executing Effectively on Opportunity Set Mature Oil & Gas
•
PNR is led by a well-respected group of senior leaders from Vintage Petroleum
•
Outstanding track record at exploiting mature oil and gas properties
•
Relationship with KKR since 2008; exclusive since 2010
Oil & Gas Development
Royalties & Minerals
•
RPM is a team of highlyexperienced oil and gas executives
•
Partner with Chesapeake, leading independent oil and gas company
•
Focused on evaluating asset-level “Drilling” investments
•
Activities in every major North American oil and gas basin
•
Significant experience with unconventional reservoirs
•
•
Exclusive relationship with KKR since 2010
Differentiated insights into key drivers of royalty investments
•
Relationship with KKR since 2005 and exclusive royalties partnership since 2012
• When combined with the experience, perspectives and capabilities of KKR, we believe that we are well positioned to execute across attractive market opportunities today
Portfolio Construction • Our targeted allocations for Energy Income & Growth are as follows: Mature “PDP” Oil and Gas Assets (KNR)
Minerals and Royalty Interests
Development (~40%)
(~20%) • • •
Relatively low-risk Target low-to-mid teens returns Significant cash-oncash yield from day one
Other (~10%)
(~30%) • • •
Moderate to higher-risk Target mid-to-high teens returns Varied cash-on-cash yield profile
• • •
Moderate to higher-risk Target mid-to-high teens returns Deferred cash-on-cash yield profile
• •
Situation specific Examples include midstream, mezzanine
Seeks Mid-Teens Fund-Level Net Returns with Current Yield Note:
Target allocations are subject to change. There is no assurance that the target allocations will be achieved, and actual allocations may be significantly different than that shown here. See Important Information slides for additional notes.
V. Case Studies
Investment in SunTap Energy Transaction Overview
Why We Are Excited About This Investment
• On December 16, 2011, KKR signed a definitive agreement to form SunTap Energy RE LLC (“SunTap Energy”), a strategic partnership with Recurrent Energy, LLC (“Recurrent”) focused on acquiring solar photovoltaic (“PV”) electric generating facilities
• Stable, contracted assets with attractive risk-reward profile: SMUD portfolio assets have a 20-year fixed price Power Purchase Agreement (“PPA”) with attractive terms executed with SMUD, which is an A1/A+ rated counterparty
– KKR has committed to invest $95 million in the strategic partnership, and Recurrent will commit $5 million alongside us • Concurrently, SunTap Energy in partnership with Google Inc. (“Google”) signed an agreement to acquire f rom Recurrent a portfolio of solar PV facilities located in Sacramento County, California and contracted on a 20year fixed price basis with the Sacramento Municipal Utility District (“SMUD”)
• Tax equity relationships: KKR has developed a strong working relationship with many of the leading tax equity providers, including Google for the SMUD portfolio
– The first solar plants in the portfolio reached operation in Q4 2011 – This acquisition will be structured as a leveraged partnership flip structure, with Google participating through passive tax equity
• Exclusive partnership with a leading developer: Recurrent is a leading solar project developer with a strong reputation in the industry, a highly experienced management team, and 2.4 GW pipeline of contracted solar assets under development
• Limited construction and technology risk: SMUD portfolio is currently under construction and has secured all of the major necessary contracts and permits to commence operation when completed. The solar panels and associated equipment are covered through manufacturer warranties and performance guarantees by the contractor. • Attractive regulatory framework : The current regulatory framework in the United States, including the state renewable standard programs and tax incentives associated with solar, has resulted in an attractive time to invest in solar PV assets
Transaction Sourcing • Recurrent ran a limited process for the SMUD portfolio, and we were ultimately selected as the preferred bidder: –
KKR was the only financial buyer included in the process
–
We believe our novel approach to form a partnership, with Recurrent keeping a retained interest, helped us prevail
KNR Acquisition of ConocoPhillips Barnett Shale Properties Transaction Overview •
•
•
In July 2010, KNR entered into negotiations with ConocoPhillips (“COP”) regarding a potential purchase of their Barnett Shale properties (the “Assets”) o COP is selling the assets as part of their announced $10 billion 2010 asset divestiture program As the Assets are largely comprised of PDP reserves and are technically complex to operate, the process involved a limited number of parties (4 or 5) On September 20, after an extended diligence period, KNR was selected as the preferred acquirer and began negotiation of a definitive agreement to acquire the Assets for $148mm; the transaction closed December 23, 2010
Why We Are Excited About the Acquisition •
•
•
Asset Overview •
•
•
•
Located in North Central Texas, the Assets contain 108.6 bcfe of net reserves o 65% Natural Gas / ~100% PDP o Operates 124 of 143 active producers (~100% of value) Large undeveloped acreage position (~47,700 net acres) o Potential for over 60 horizontal locations Located in the “liquids window” of the Barnett Shale play o High btu content gas and significant NGL yield The Assets are situated in the Western portion of the Barnett, considered less attractive from a development perspective o Attractive PDP component, projections aided by 7 years of production history (oldest North American shale play)
•
•
Projection set is ~100% PDP: No value attributed to development locations at current commodity price outlook o Provides “optionality” on PUDs in higher price environments o Limited execution risk Opportunity to Exploit an Under-Operated Asset Base: Standardized approach taken to historical development and operation (opportunity to customize to each well) o Potential benefit from PNR shale expertise Potential Regional Consolidation Opportunity: Acquire additional PDP properties at attractive valuations o Region out of favor from a development standpoint Long-Lived Assets: Opportunity to benefit from long-term commodity price appreciation / “optionality” on PUDs Diversified Commodity Price Exposure: Natural gas is ~65% of production (for the first five years) o Liquids component largely linked to crude oil prices
Chesapeake Royalties Partnership Overview •
The Mineral Rights / Royalty Interest Opportunity
In March 2012, we entered into a partnership with Chesapeake Energy Corp. (“CHK”) to invest in mineral rights and overriding royalty interests in U.S. oil and gas basins
•
Mineral rights entitle landowners to the resources that exist beneath their surface acreage
•
•
KKR and CHK will initially contribute $225mm and $25mm to the Partnership, respectively, with CHK receiving a promoted ownership
KKR and CHK will jointly manage Partnership, and CHK will source, acquire and manage royalty investment opportunities
•
We believe mineral rights / royalty interests represent a compelling asset class for investment because:
-
Real Asset Exposure: Pure exposure to natural gas and oil prices (inflationary hedge)
-
Strong Risk / Reward: Opportunity to price acquisitions at attractive valuations, strong MOIC potential
-
Limited Cost Exposure: Protection from cost appreciation, benefit from capital investment to improve production
-
Long-Lived: Option on commodity prices, technological advancement, and commercialization of new zones
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Attractive Market Dynamics: Ownership fragmented with small buyer universe
Why We Are Partnering with Chesapeake •
As one of the most knowledgeable domestic oil and gas companies, CHK brings strong technical / operating expertise to the Partnership:
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Operating presence in nearly all domestic shale unconventional plays (most active driller in the U.S.)
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Participates in 1 of every 5 wells drilled in North America
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Largest oil and gas leaseholder in the U.S.
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Second largest natural gas producer in the U.S.
Landowners typically lease mineral rights to operators for an upfront payment and a royalty interest (unburdened by costs) in revenue from wells drilled on their acreage
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base
By partnering with Chesapeake, we believe •
CHK will also leverage its operating presence to source and execute opportunities for the Partnership:
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Existing Land Organization: CHK’s network of landmen / landowners in every major unconventional basin provides instant scale with little incremental cost
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Technical / Activity Knowledge: CHK’s operating presence provides a differentiated understanding of economics and drilling pace in every unconventional basin
that we have created a differentiated platform with the ability to acquire a diverse portfolio of high-quality mineral rights and royalty interests at attractive valuations.
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Samson Investment Company Transaction Overview
Investment Thesis
• In November 2011, KKR announced a definitive agreement to acquire Samson Investment Company (the “Company” or “Samson”), one of the largest private Exploration and Production (“E&P”) companies in the United States
• Attractive valuation for approximately 1.6 billion Boe of oil weighted net risked development resources in addition to approximately 2.5 Tcfe of gas weighted proved reserves, with an attractive distribution of risk adjusted returns
• KKR will acquire all of Samson’s assets with the exception of its onshore Gulf Coast and offshore deep water Gulf of Mexico assets, which will continue to be owned by the Schusterman family, for $7.2 billion (excluding fees and expenses, effective June 30, 2011)
• Large, high quality portfolio of assets with significant diversity • Embedded long term options on commodity prices and additional commercial resources realized on vast HBP acreage in basins with hydrocarbon rich systems • Strong management team with an established track record • Size and scale of the asset base provides opportunity for upside from portfolio optimization
Business Description • Samson is one of the largest private E&P companies in the United States, with operations in several basins in North America • The Company is headquartered in Tulsa and has over 1,000 employees. • The Company has a large, diverse portfolio of highquality, low-risk, producing and development oriented oil and natural gas properties located in a number of prolific basins across the United States.
Note: (1)
Transaction closed in December 2011. Gulf Coast assets highlighted on map not included in assets acquired by investor group.
• Resilience in weak commodity price environments
Samson Asset Map(1)
Hilcorp Resources Transaction Overview • In June 2010, an affiliate of KKR entered into a definitive agreement with Hilcorp Energy Company (“Hilcorp”) to invest $400 million in Hilcorp Resources (the “Company”), a newly formed partnership created to own and develop oil and gas properties located in the Eagle Ford Shale trend of South Texas • KKR and Hilcorp had 40% and 60% initial ownership interests, respectively, in the Company (1) • The partnership includes a capital commitment from both parties as well as the initial contribution of approximately 100,000 net acres from Hilcorp (2)
The Eagle Ford Shale • The Eagle Ford has become one of the lowest cost oil and gas development plays in North America • Benefits from significant oil and gas gathering and transportation infrastructure already in place • Large portions of the play produce oil or condensate, which can enhance expected economics to producers
(1) (2) (3)
Background • Following KKR’s investment in East Resources, the team continued its work in the unconventional oil and natural gas shale plays and identified the Eagle Ford as attractive • In April 2010, KKR began exploring the opportunity to invest in a partnership alongside Hilcorp to develop Hilcorp’s acreage position in the Eagle Ford and to acquire and develop additional acreage in the play • KKR developed a differentiated relationship with Jeff Hildebrand, the founder and CEO of Hilcorp • KKR was ultimately selected by Hilcorp to proceed with final diligence/negotiations on the opportunity on an exclusive basis
Exit • In June 2011, KKR announced the exit of its investment in Hilcorp with the signing of a definitive agreement to sell the principal subsidiary of Hilcorp to Marathon Oil Corporation ("Marathon") for a total transaction valuation of approximately $3.5 billion. • Initial equity investment of $418 million generated total equity proceeds to the KKR funds of ~$1.13 billion (3) • Gross MOIC of ~2.7x (~7.4x to the 2006 Fund after reflecting the impact of recycled equity) • The transaction closed in Q4 2011
40% initial ownership represents aggregate KKR investor group, including co-investors. Blended equity interest in exit proceeds will be reduced on a diluted basis, reflecting reversionary splits and negotiated sharing mechanics with Hilcorp. Acreage count has subsequently increased to approximately 140,000 net acres as a result of ongoing leasehold acquisitions. Net of fees and expenses but excluding the impact of any potential purchase price adjustments. Excludes GP carry.
East Resources Transaction Overview
Acquisition Rationale
East Resources, Inc. (“East”) is a leading oil and gas development company in the Appalachian Basin Operated in the basin for 25 years Controls > 1mm net acres in Appalachia / Rockies
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In June 2009, KKR closed its $330mm investment in East
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KKR received 2/5 board seats and negative consent rights
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Structured as a convertible security with downside protection
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Substantial / attractive acreage position in the Marcellus
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Leading Marcellus Shale acreage position ~99% operated position / favorable royalty rates Local knowledge positions East to operate a Marcellus development program Ability to “hold” expiring acreage with conservative drilling program Significant operating flexibility / limited maintenance leasehold capital expenditures Regional concentration / scale provided operational and cost advantages
Asset Map Onondaga
Orleans
Monroe
Niagara Genesee
L iv ni g s to n
Ontario
New York Erie
Exit
Wyoming
Yates
S e n e c a
Delaware
Schuyler Chemung
Sullivan
Allegany
Susquehanna Bradford Tioga
Erie
Lake
Ashtabula
a
es octon
Carroll
Ohio
Hancock J e ff e r s o n
Harrison
Guernsey
Brooke
Wetzel Tyler
t o n
n g Morgan h s i W a
t s n s a l e a P
Wood
Meigs
Wirt
Ritchie
Gilmer Calhoun
Jackson Roane Mason
Kanawha
Lincoln
York Bedford
Fulton
Franklin
Adams
l a r e n i M
Monongalia
Marion r Preston l o y T a Harrison Grant Barbour Tucker r
u Lewis h s p U
h p l o d n a R
Pendleton
Webster
s a t n o h a c o P
West Nicholas Virginia
Fayette
Greenbrier
Raleigh
Morgan Berkeley Jefferson Hampshire
Hardy
Operating Areas Northern WV Western PA NW PA / SW NY North-Central PA / Southern NY Additional East Acreage
Monroe
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Fayette Greene
Boone
Min o Logan
Philadelp Delaware Chester
Braxton Clay
Putnam Cabell
D o d d r d i g e
Lancaster
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Montgomery
DauphinLebanon
l a r b e m C u
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Bucks
Somerset
Monroe
Noble
Blair Huntingdon
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Lehigh
Berks
Perry Pennsylvania n d
Allegheny Westmoreland
Washington
M a sr h a ll
Belmont
Carbon Northampton
Northumberland Schuylkill Snyder
J
Cambria
Ohio
skingum
yne
Columbia Montour
n i l f a f t i a i M u n
Indiana
Lackawanna
Luzerne
Clinton
Centre
Clearfield
Butler Armstrong
ColumbianaBeaver
T u s c a a r w a s
thens
Clarion Jefferson
L a w r e n c e Mahoning
Stark
yne
Mercer
Trumbull
P o r at g e
S u m m t i
Elk
Lycoming
Venango
Geauga ahoga
C a m e r o n
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Pike
Sullivan
Warren Forest
Wayne
Wyoming Lackawanna
Potter
In June 2010, KKR signed a definitive agreement for East's principal subsidiaries to be sold to an affiliate of Royal Dutch Shell Plc In December 2010, East acquired KKR’s interest in the remaining assets of the company KKR invested ~$310 million in East, including ~$90 million of permanent capital and ~$220 million of bridge capital KKR realized ~$1.5 billion of proceeds net of fees Returns on permanent capital: Gross IRR: 759% Net IRR: 628% Gross MOIC: 14.0x Returns on gross equity invested: Gross IRR: 252% Net IRR: 207% Gross MOIC: 4.7x •
Broome
Tioga
Cattaraugus Chautauqua McKean
Schoharie
Cortland Chenango
Tompkins
Steuben
Crawford
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Madison Otsego
Cayuga
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