Like steel arms raised by giant puppeteers, the cranes reach skyward, the rigging straps cradling a natural gas pipeline like a marionette in midair as masts seemingly soar above peaks of the Canadian Rockies in the distance. The aerial dynamics will ultimately result in positioning almost a mile of pipe under the Fraser River in British Columbia.
The imagery of the operation—in itself a virtual graduate seminar in physics—is spectacular, but the financial muscle behind the industrial muscle of Houston-based TNT Crane & Rigging Inc.’s fleet has adopted a far more down-to-earth strategy.
In all of our deals, and I think it’s particularly true in the current environment, we always look for a margin of safety,” said Gary Reaves, managing director of Greenwich, Conn.-based First Reserve, a private equity firm that has focused on energy for 32 years. Playing it safe may appear to be counterintuitive when investing in companies that move hazardous materials or operate crane fleets that can hoist more than 1,300 tons into the air, but First Reserve is experienced in calculating risk.
‘A cyclical business’
“This is a cyclical business,” Reaves told Midstream Business. “We’ve all just experienced the cyclicality of this business and whenever you’re looking at building a business over a four-to six-year time frame—which is what we’re always doing—things rarely go the way that you anticipate. It’s important when you’re looking at a new opportunity and committing to it, whether it be a build-out or purchase of an asset, that you don’t assume everything is going to go exactly according to plan or, equally as important, everything that can go right, will go right.”
So First Reserve seeks out flexibility in opportunities, looking for multiple ways to drive value creation. That kind of optionality gives the firm the cushion it needs to support companies when it needs to wait out rainy days, a lesson First Reserve has learned over the years.
“It seems that rainy days always come in this industry,” Reaves said.
Building businesses
William Macaulay and John Hill founded First Reserve in 1983 with the takeover of a distressed fund. The firm has since raised more than $30 billion and completed more than 550 transactions on six continents. It relies on an investor base that is predominately institutional, including corporate and public retirement funds, sovereign wealth funds, endowments and foundations.
The energy industry has changed a lot in 32 years, but First Reserve’s fundamental business model has not, Reaves said. The firm continues to:
-Seek to buy well-positioned companies and build them for growth;
-Work in the areas of upstream, midstream, downstream and equipment and services; and
-Focus on middle and upper-middle-market transactions, the area in which it believes it can drive the most value.
First Reserve has been in the energy private equity business for its entire history, Reaves said, long before private equity in energy was trendy.
“That’s our bread and butter,” he said. “For a long time it was all we did. Even through the 1980s and 1990s we were really the only ones doing it. In 2009, we also saw an opportunity for a natural product expansion into energy infrastructure investment.”
Pursuing opportunities
The First Reserve team knew the markets and knew that there were plenty of opportunities to pursue—the projects just weren’t traditional private equity types of opportunities. As Reaves described them, they were lower risk, more mature and less oriented toward growth.
Still, they were attractive opportunities. “We said, ‘We think we have a unique perspective on this market. Wouldn’t it be great if we had a pool of capital to capitalize on those opportunities?’”
So they raised the capital and established an energy infrastructure fund. And then another, twice the size of the first, that was completed in 2014.
“What we’ve seen in the six years we’ve been doing it is that there’s a lot of synergy between energy private equity and energy infrastructure,” he said. “Having both of those sources of capital really lets us expand our tool kit in terms of being a solutions-oriented capital provider to companies and ultimately, to a good partner. It’s been a natural extension of our brand and a really good growth area for us.”
The synergy has resulted in, among others, a joint venture (JV) to create a pipeline company in the infrastructure-starved Bakken Shale. The JV with Triangle Petroleum Corp. to form Caliber Midstream Partners LP began with a $150 million equity commitment in October 2012. The company has added over 240 miles of gathering pipeline with capacity for 54,000 barrels per day (bbl/d) and a hub in Alexander, N.D.
First Reserve also partnered with Energy Corporation of America (ECA) to create Charleston, W.Va.-based First ECA Midstream, which is focused on gas gathering systems in the Marcellus Shale. Navigator Energy Services LLC was acquired last December with an equity commitment of up to $250 million. Its major gathering project is the Big Spring Gateway System in the Midland Basin.
In mid-2014, First Reserve committed $1 billion to a partnership with Petrofac, a U.K.-based energy services company, to create PetroFirst Infrastructure Ltd. The company owns two contracted floating production and storage facilities and one contracted mobile offshore production unit, all offshore Southeast Asia.
All good things …
Reaves describes First Reserve as a “thematic” investor in that the firm seeks to identify long-term, durable themes in the marketplace in areas primed for movement. That definition fits the North American unconventional revolution.
“The opportunity set has expanded pretty significantly, and there’s a significant need in the industry for new capital investment in midstream infrastructure in order to connect new sources of supply with demand centers,” he said. “There’s a big organic opportunity there. One of the things that we like a lot about it is that you’re investing primary capital into an industry to support growth and not necessarily just investing secondary capital in existing companies that are already up and running. You’re actually investing in the fundamental growth of the industry.”
The experience of planting corporate seeds and watching them grow may be thrilling but it’s not meant to last forever. First Reserve engages as both investor and strategic adviser with the intention that all good investments must come to an end. Reaves considers that aspect to be a differentiating factor of the firm.
“We’re in the business of creating value but ultimately, that value has to be harvested,” he said. “We exit every investment that we make. We try to avoid deals where there’s only one way to exit. For example, being overly dependent upon an IPO or being overly dependent upon a trade sale; investing in a business that’s not suitable to take public. Neither of those outcomes is bad, in and of themselves, but we try to find opportunities with a multitude of potential exit alternatives.”
On average, First Reserve’s private equity funds hold onto a business for four to six years, Reaves said. On rare occasions, the firm will exit in less than three years. If an investment continues to generate value, the hold may last as long as nine or 10 years.
Competitive advantage
First Reserve boasts a team of about 70 investment professionals in its offices in Greenwich, Houston and London. All these folks do is focus on energy.
“We spend a lot of time talking to industry participants and strategics, comparing notes, talking about industry trends and comparing points of view,” Reaves said. Their mission: Develop a macro point of view and identify trends sooner than anyone else. Their advantage: The firm’s been at it longer than most.
“That’s a 32-year knowledge base, it’s a 32-year experience set, and it’s a 32-year Rolodex of relationships that we can call upon to partner with us to help us execute on an opportunity, to make an introduction to a potential commercial relationship,” he said. “That history is a real competitive advantage.”
Part of that edge involves a disciplined, realistic approach to investing as global oil and gas prices are tossed about by turbulent markets.
“Ultimately, we’re not trying to predict commodity prices,” Reaves said. “We’re trying to identify long-term durable trends that will provide a reasonable environment to make long-term investments.”
The boom in North American unconventional oil and gas production related to shale plays is an example of how that strategy pays off. First Reserve identified the long-term potential of the trend early on and positioned itself to exploit elevated levels of organic spending on the midstream side of the business, Reaves said. Low commodity prices this year may have forced increased spending to take a detour, but the road ahead is still clear.
“Maybe you see a short-term slow-down in spending,” he said. “We don’t think that you necessarily see a significant decline in spending levels, but maybe you see a slowdown in the growth rate in spending in the short term. But long term, all of the midstream infrastructure that was needed last year is still needed now. Over the next 10 to 15 years, you’re going to see a sustained period of elevated levels of spending.”
Opportunities in Mexico
Another example of how First Reserve operates can be found in its partnership with Petróleos Mexicanos (Pemex) to invest in energy infrastructure in Mexico. The $1 billion mutual investment begins with the Los Ramones pipelines, a 462-mile project designed to supply
U.S. natural gas to central Mexico. Construction has begun on the lines, which will be able to move 2.1 billion cubic feet per day after commercial operations begin in mid-2016.
José Manuel Carrera, head of PMI, Pemex’s international unit, called the deal “the first material implementation of the energy reform in Mexico” in an interview with the Wall Street Journal. “This is the start of what we believe is going to be a long series of investments by these and other investors who might follow.”
First Reserve is already planning additional projects with Pemex, though Reaves declined to reveal details. However, he said that combining the two companies’ financing, structuring, industrial and operational experience follows the firm’s approach to strategic partnerships that create value.
Outlook for 2015
A lot of capital flowed into energy markets in the first quarter, particularly into the upstream space where E&Ps raised almost $15 billion of public equity.
That’s a bit too much cash for First Reserve’s comfort level and the firm is taking a cautious stance, Reaves said, but is still seeking opportunities and making investments.
“We’ve done a couple of E&P transactions this year as well as a service transaction and obviously, we’re still active in the midstream market,” he said. “We think the long-term opportunity set there hasn’t really changed. The key is that whenever we’re looking for opportunities, we’re looking for opportunities in low-cost basins, in areas that we have a high degree of confidence that activity and development is going to continue at current commodity prices.”
Recently released MLP regulations by the U.S. Internal Revenue Service won’t hinder First Reserve’s strategy, Reaves said.
“The reality is, the MLP market is a very small piece of the overall energy industry so the proliferation there on a relative basis hasn’t been that significant,” he said. “There’s no question that in the short term it creates uncertainty, but even the proposed regulations as written have a 10-year period before they go into effect and we’re in a comment period. I think it creates uncertainty around the areas that have been the new types of assets coming into MLPs. I don’t think it will create a lot of uncertainty around the traditional midstream assets that have been placed into MLPs.”
‘Good partner’
Mike Appling, CEO of TNT Crane & Rigging, had long-standing relationships with First Reserve executives for years before the opportunity materialized to invest and grow the company. He appreciates that the firm understands his business and takes a long-term approach.
“In the last year, the oil and gas industry’s not been exactly stellar, but they’ve been very supportive,” he told Midstream Business. “We’re doing real well on a relative basis, and I enjoy working with them.”
In addition to the pipeline work in British Columbia and southern Alberta and on TransCanada Corp.’s Keystone XL Pipeline, TNT provides maintenance support for gas processing plants and fractionators. The company operates in numerous plays, including Eagle Ford, Permian, Barnett, Haynesville and Denver-Julesberg.
First Reserve keeps an eye on its companies and does not rubber stamp projects, but Appling sees the interaction as a positive.
“They push on things that they should,” he said. “They make sure that we’re focused on the right things and that’s what a good partner should do.”

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