First Reserve and Nabors in Venture
London, September 22, 2006 /Financial Times – Carola Hoyos/ — First Reserve, a private equity firm, and Nabors Industries, an oil services company, have created NFR Energy, a $1bn joint venture to produce oil and gas. The two partners will invest $500m each and the company will seek to use its access to drilling equipment in a market of tight supplies to exploit opportunities to drill for oil and gas in established reservoirs, said Ben Guill, president of First Reserve.
First Reserve Fires Up Returns from Coal Investments
As of this week, First Reserve Fund IX, L.P. (“Fund IX”) has completed the successful exit of its remaining domestic coal positions, Alpha Natural Resources, Inc. (“Alpha”) and Foundation Coal Holdings, Inc. (“Foundation”). In total, Fund IX has realized $1.5 billion of proceeds and over a 6.0x multiple on investment in its four domestic coal positions. The other two domestic coal holdings in the Fund IX portfolio were Natural Resource Partners and Pine Mountain Oil & Gas, which were exited prior to 2006.
The sale of our remaining position in Alpha resulted in a 7.9x multiple on investment and a 140.1% IRR. Shortly after the sale of our Alpha position, we distributed the remaining shares of Foundation held by Fund IX which will have an IRR in excess of 800% and a greater than 6.0x multiple on investment (subject to final valuations based on the stock price 10 days prior to the distribution and 10 days following the distribution).
The earliest of the four coal investments, Alpha, was a buy and build strategy that ultimately resulted in nine add-on acquisitions. The investment began in December 2002 with the acquisition of the Pittston Virginia Assets which were combined with the U.S. operations of American Metals & Coal International (“AMCI”), and the operations of Coastal Coal Company in the first quarter of 2003. The average acquisition multiple for the first three transactions was 3.8x EBITDA. At the time of these transactions, the average coal price was approximately $27.00 per ton versus average current prices of $56.00 per ton. At the time of the initial investment in Alpha, we had a conviction that coal would continue to be the lowest cost hydrocarbon fuel source for electricity generation and we believed that as natural gas prices continued to rise, coal would experience robust demand. One year after the initial investment, Alpha underwent a leveraged recapitalization resulting in a $110 million dividend to the owners, resulting in the return of 70% of the investors’ capital. After making significant operating improvements, consolidating the operations and six follow-on acquisitions, Alpha went public in February of 2005 at $19 per share. After the IPO, Fund IX and our partner, AMCI, still retained a 42.5% ownership stake in Alpha. The offering was very well received, resulting in pricing above the original range of $16-$18 per share. As a result of the $644 million IPO, a special dividend was paid to existing shareholders, resulting in a realized 4.6x multiple on investment and a 113% realized rate of return. After the IPO, Alpha continued with its buy and build strategy and completed the acquisition of Nicewonder Coal Group for $315 million, which is expected to add 27 million tons of proven and probable reserves in 2006. From the date of our initial investment, Alpha’s annual sales have increased from 4.3 million tons to 30 million tons per annum. On January 24th, our remaining position in Alpha was sold in a secondary sale, generating net proceeds to Fund IX of $282 million.
Fund IX’s most recent investment in domestic coal was Foundation, a carve-out from a major multi-national corporation, RAG AG. Our investment in Foundation represented a continued interest in the domestic coal market, but compared to Alpha, Foundation had western exposure and large, long lived coal assets. After performing a very successful leveraged buyout of the company, resulting in pro forma leverage of 4.7x Debt / EBITDA, First Reserve, along with our partners, AMCI and the Blackstone Group, took the company public 131 days later in a $544 million IPO. Subsequent to the IPO, First Reserve and our partners completed a $360 million secondary offering in September 2005, resulting in a distribution of $153 million to Fund IX. This week, Fund IX exited its remaining position in Foundation Coal through a stock distribution. Prior to the distribution, Fund IX owned 9.6% of Foundation, compared to its peak ownership of 42% of the company.
Other recent domestic coal exits include Natural Resource Partners and Pine Mountain Oil & Gas. We exited our entire position in Natural Resource Partners in the fourth quarter of 2005 after taking our subordinated units public in the third quarter of 2005 for an IRR of 98% and a 3.2x multiple on investment. Natural Resource Partners is one of the largest owners of coal reserves and leases these reserves to producers in exchange for royalty payments. Pine Mountain, which was sold in December 2004, returned 6.2x our investment with a 281% IRR. First Reserve acquired Pine Mountain from Pittston Coal Company, after Pittston sold their coal assets to Alpha as one of the first three acquisitions that formed the company. The vast majority of Pine Mountain’s production comes from coal bed methane production (natural gas produced from coal seams).
Overall First Reserve has been selling out of its domestic coal positions, and purchasing coal properties internationally with its long-time strategic partner, AMCI. Coal not only generates over 50% of the power in the U.S. but over 40% of the power globally, including over 70% of the power in China. The current coal properties in the portfolio are located in Australia, China, Eastern Europe and to a lesser extent South America and Africa. These properties have estimated proven and probable reserves of over 3.5 billion tons with the potential of an additional 7 billion tons of reserves. First Reserve continues to be optimistic regarding the role coal plays in worldwide energy.
Cubitt Jacobs & Prosek for First Reserve Corp.
212-279-3115 ext. 211