Fund focus: Kerogen plays the long game

When oil was at $100 per barrel, North Sea oil and gas developments were high cost, high tax, and highly competitive. The end of the commodities boom changed this dynamic: aggressive cost inflation in developed markets has gone into reverse. The UK government is trying to encourage investment in the sector by offering tax incentives, and distressed assets are available at competitive valuations.

This state of affairs explains why the first two investments in Kerogen Capital's second fund - which recently closed at $830 million - are concentrated on the UK continental shelf: North Sea-focused Zennor Petroleum and Hurricane Energy, a specialist in fractured basement reservoirs.

"It's a very different place to invest today than it was even 18-24 months ago," says Jason Cheng, co-founder and managing partner at Kerogen, noting that the dislocation has enabled Zennor to build out 60% of its target portfolio in just seven months. "Private equity is long-dated, which makes it ideal for cyclical industries, whereas other forms of capital struggle with this. With the oil majors focusing on existing portfolios and cutting back on capex, we are seeing some interesting deal flow."

Kerogen was founded by executives from Indonesia-focused Ancora Capital, who had previously led J.P. Morgan's Asia energy and natural resources team. The GP makes growth investments in companies at the appraisal and development stage, and supports them through to early production. Its strategy is underpinned by an appreciation of the role played by small but technically able companies in developing new plays and the importance of Asia to the energy sector as an end user and strategic participant.

The broad objective of Fund II is the same as that of its predecessor, which closed at approximately $1 billion in 2012. However, Zennor and Hurricane are only typical in that the GP is backing management teams it knows well; they differ from older portfolio companies in that they reflect the changed market environment. Kerogen's Fund I forays into Sub-Saharan Africa, Kurdistan and Papua New Guinea (PNG) were driven by the relatively more attractive pricing of emerging markets during $100 oil.

In PNG, for example, that focus appears to be paying off with a substantial rise in M&A now occurring in the liquefied natural gas industry. "A lot of the countries we focused on in Fund I have similar dynamics to PNG - large scale resources at low break even costs - which means they will be attractive through cycle," says Cheng. "Opportunities in these geographies have not gone away and we will look at different geographies on a relative risk-return basis."

Oil prices dropped over 70% during the fundraise, which was problematic for various LPs that were prioritizing portfolio management rather than additional investment in the sector. But Cheng is comfortable deploying a fund of this size in what is increasingly a buyer's market. "Because of the cost deflation and the entry pricing we are seeing, capital goes a lot further than it did in $100 oil," he says.

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• Topics
• Fundraising
• Industrials
• GPs
• Asia
• energy
• Commodities
• Kerogen Capital