Pumpjacks at work pumping crude oil near Halkirk, Alta.Larry MacDougal/The Canadian Press
A good relationship can go a long way when it comes to reaching deals in the unstable energy sector.
Years of informal discussions with a trusted industry veteran led to a decision by the Canada Pension Plan Investment Board to dive into the oil and natural gas royalties business with a $450-million (U.S.) investment in a Denver-based upstart – led by that same veteran.
CPPIB said Wednesday that it would become the largest owner of LongPoint Minerals LLC, with about $275-million coming from other institutional investment partners.
The country's largest pension fund has been interested for months in opportunities stemming from the commodity downturn and has made other investment forays, such as leading a $900-million (U.S.) deal for Encana's DJ Basin oil-and-gas assets in Colorado late last year. But this deal is something different.
"About three years ago, we decided as an organization we wanted to diversify and add oil-and-gas mineral royalties," said Adam Vigna, head of principal credit investments at CPPIB. "It's a consistent dividend, it's a consistent cash-flow stream."
CPPIB has been investing in royalty streams over the past seven years, since forming the credit business, but limited its activities to acquiring intellectual property rights from health-care and pharmaceutical companies.
While all of these investments are technically equity-ownership stakes, they generate steady revenue streams similar to high-yield corporate debt from acquisitions, restructurings and other opportunities that the credit group generally targets. So they're housed with those investments under Mr. Vigna.
While in Denver a couple of years ago, Mr. Vigna came across George Solich, a serial energy entrepreneur who also runs the oil-and-gas exploration and production company FourPoint Energy LLC, in whom he found a like-minded investor with technical expertise.
Mr. Solich, who has been backed by various private equity investors over the years, said coincidentally he had also been thinking about creating a new company focused on royalty generation. That company became LongPoint, where he will serve as chief executive officer.
It took a while to pull the deal together. LongPoint has spent several months striking acquisitions in the hearty U.S. mid-continent oil field, which can be traced south from Arkansas through Texas, as well as in some other neighbouring basins. Its initial footprint is only about 2,000 barrels of oil equivalent a day (BOE/D) but it also has hundreds of future drilling locations locked up.
With CPPIB's funding, the company will expand through further acquisitions over the next two to three years. While the energy sector and oil prices have been volatile, Mr. Vigna said that the important thing for an investor is to build protections for the inevitable cyclical ups and downs of the commodities space. In short, he thinks there's still money to be made, even though the industry is in a much different place than it was three years ago.
From CPPIB's standpoint, it's all about how these properties are managed and the expertise behind them. Not all basins are alike, and experience working in one field doesn't necessarily translate to another geographic region. The fact that Mr. Solich has been focused on the same region for about 30 years was a major draw for CPPIB – it doesn't have that knowledge on staff.
LongPoint said in a statement that it would buy assets that provide a current cash flow, as well as undeveloped locations. The company has plans to expand farther afield over time, and Mr. Vigna said he expects there to be opportunities for CPPIB to invest more in LongPoint too.