Mikaila Adams,Associate Editor, OGFJ
Tenaska Capital Management LLC (TCM), an affiliate of Tenaska Energy Inc. and the manager of the $2.4 billion TPF II LP private equity fund, has expanded and diversified its investment in the US midstream natural gas sector by establishing a joint venture that will operate as Frontier Gas Services LLC (Gas Services).
The joint venture has been formed by TCM and Energy Spectrum Partners V LP, a midstream-focused private equity fund, to back Tulsa, Okla.-based Frontier Energy Services LLC, a midstream manager and operator.
The $2.4 billion in commitments to TPF II is nearly three times the size of the company's original Tenaska Power Fund, which when closed in 2005, held commitments of $838 million.
The original fund held two midstream investments and was focused on gas storage. In 2008, TCM announced its Voyager Midstream portfolio company. Based from the Houston office, the company focuses on underground gas storage development.
Seeing the future of natural gas as a "linchpin fuel," TCM has branched out again. "We've expanded our strategy," said TCM senior managing director Daniel E. Lonergan. "The diversification between the gas storage effort and this effort allows us to deploy a broader more capital into this promising sector."
No doubt, Lonergan is optimistic about the future of natural gas. "Certainly there's been a lot of laydown [of rigs], but I think that drillers and E&P companies will explore their finding costs and marginal costs of production. There is market support for continued drilling even at these low and falling prices…this bearish outlook. While he doesn't predict gas prices returning anywhere near $9 in the coming years, he believes drilling activity will continue. "There's a consensus view out there I'd say of $5 to $7, and that will support a lot of shale drilling activity."
With a lot of that shale activity in mind, the company is pushing forward with the joint venture. "The focus will be on the acquisition, development, ownership, and operation of midstream natural gas assets primarily in the Mid-Continent – in the Permian Basin in East Texas and primarily in the shale plays that are creating an awful lot of activity."
Combining the strengths of TPF II, Energy Spectrum, and Frontier Energy, the company hopes to identify and build value in what it deems an attractive, long-term opportunity – the domestic midstream natural gas sector.
In December 2007, Energy Spectrum closed Energy Spectrum Partners V LP, with total limited partner commitments of $600 million. The closing brought Energy Spectrum's total direct equity under management to $1.3 billion.
TPF II and Energy Spectrum will own a majority interest in the joint venture. Both companies plan to invest at least a quarter of a billion dollars in Gas Services.
Frontier Energy will own a non-majority interest the joint venture and will be responsible for its day-to-day operations, including originating and completing investment opportunities. With 32 years of experience in all facets of the industry, Frontier founder, president, and CEO Dave Presley will provide guidance.
Over the years, Frontier's management team has invested over $500 million in the midstream sector.
As part of the initial capitalization of Gas Services, Energy Spectrum and Frontier will contribute from their existing Frontier Midstream partnership the 36 MMcf/d Indian Creek natural gas processing facility located in Roberts County, Texas with production from the Granite Wash formation.
Lonergan believes transactions like this one offer glimpses of what will become the road to economic recovery. "One of the critical elements in infrastructure asset development construction and M&A is the debt capital markets," he noted. "I think that private equity funds like TPF II and Energy Spectrum are well positioned to make wise, but selective equitized investments," but warns the economy isn't out of the woods quite yet.
The real signal of economic recovery, he said, "will be will be when you see a little more liquidity in the debt markets – both the debt capital markets and the bank markets – for non-investment grade deals." While there has been some activity in non-investment grade deals, "we're a long way from where we were 24 months ago," he concluded.
