GSO Capital Partners is committing $500 million from its existing funds to invest in drilling partnerships for upstream energy companies, Institutional Investor has learned.
These joint ventures — where managers provide funds to drill oil and gas wells in exchange for an ownership interest — are called ‘DrillCos’ in the oil industry.
The new capital pushes GSO’s total commitment for DrillCo energy investments to $1 billion, according to Michael Zawadzki, co-head of GSO Energy. Upstream companies are involved in the more volatile part of the industry, including exploration, extraction, and production related to oil and other deposits. They have been hit hard during the multi-year downturn in energy markets.
GSO partnered with an experienced external operating team to form Sequel Energy Group II, which will pursue the drilling joint ventures and other transactions.
The same team of Doug York, Jeff Hemphil, and Dave Kornder also managed Sequel Energy Group I, formed in November 2016, to invest GSO’s first commitment of more than $500 million. York, Hemphil, and Kornder have backgrounds in exploring, developing and operating oil and gas fields.
“We realized when evaluating opportunities in 2015 and 2016 that we needed an experienced team on the ground who could work closely with the operating teams of our partners,” said Zawadzki. “Having a team helping us would position us well in the market.”
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GSO was the first manager to structure a DrillCo for financial investors. Although it was never funded, GSO worked on its first DrillCo in late 2014 and 2015 for Linn Energy, the largest upstream-oriented master limited partnership at the time. Linn, which was cutting spending as oil prices dropped, wanted the financing to help the company convince shareholders that it would still be developing its business and had future growth ahead of it.
In 2017 and 2018, GSO invested $500 million in four DrillCo deals, one for Eclipse Resources and Ascent Resources, and two for Tracker Resources Development.
