Mountain Capital’s Deal For Compass Production Points Way To Permian

Newcomer Mountain Capital Management is building its portfolio with the acquisition a struggling affiliate of HRG Group Inc.’s (NYSE: HRG) oil and gas business.

HRG Group said July 5 its subsidiary HGI Energy Holdings LLC entered an agreement to divest 100% of its equity interest in Compass Production Partners LP for $145 million cash. At closing, the purchase price will be reduced by the balance of Compass’ credit facility, currently estimated at $125 million, to $20 million.

Mountain Capital’s affiliate will buy the company’s upstream assets in the liquid-rich Permian Basin and the shallow-decline gas plays of East Texas and North Louisiana. Compass currently operates about 1,400 gross wells on about 155,000 net acres, 95% HBP, according to the company's website.

Compass, distressed by the downturn, is cash-strapped. The Addison, Texas-based company has written off $412 million in asset value since low commodity prices began taking root in first-quarter 2015.

The company has also been dependent on HRG to meet interest payments on its debts, according to Securities and Exchange Commission (SEC) filings. An auditor’s report said Compass’ ability to remain a going concern was in doubt, a May SEC filing said.

Mountain Capital is a Houston-based private equity firm recently launched by Sam Oh, a former Apollo Global Management LLC executive. The firm is focused on distressed E&P assets, according to a Bloomberg article published in February.

Compass was formed in 2013 through a joint venture (JV) between HRG Group and Exco Resources Inc. (NYSE: XCO). The JV was created to operate Exco's producing conventional assets in the U.S.

In 2014, HRG acquired Exco's stake in the JV for about $119 million in cash and assumed full control of Compass.

In December 2015, Compass completed the sale of a chunk of its East Texas and North Louisiana properties for about $147.5 million. Proceeds were primarily used to reduce its borrowings under its credit facility.

Mountain Capital’s purchase of Compass is expected to close in August, subject to customary closing adjustments including adjustments for title and environmental defects. The agreement may terminate at any time following Sept. 15 if closing has not occurred.

Upon closing, HGI Energy will be recapitalized with an equity contribution of $110 million in assets or cash to satisfy its future obligations.

HRG Group, based in Rochester, N.Y., has roots to an oil company founded by the 41st U.S. president, George H. W. Bush. The company is formerly known as Harbinger Group Inc. and Zapata Corp.

Emily Moser can be reached at emoser@hartenergy.com.