WL Ross on Upstream’s Rise

The shale revolution has accelerated in the past five years, and its impact on the economy has grown. As its reach has spread to other industries, it has provided private equity with investment opportunities beyond traditional exploration and production.

Shaia Hosseinzadeh, managing director and leader of private equity and credit activities in energy and natural resources at WL Ross & Co., talks to Privcap about the wide-reaching impact of the U.S. shale and natural gas boom—recently highlighted in an Invesco white paper on the feasibility and implications of U.S. energy independence—and how his firm is investing in energy. 

“You have to understand the shale revolution is fundamentally the result of a disruptive technological change,” he says. “Like any technological change, it allows industries touched by it to produce more at a lower cost.”

WL Ross invests in upstream energy, as well as logistics and support services investments, and has recently begun putting capital into subsectors. The firm began looking at shale-related investments in 2010 and so far has invested nearly $1B in a range of businesses that directly or indirectly participate in the upstream sector.

Hosseinzadeh says productivity in the sector has improved rapidly, and is ongoing. According to a recent study by Credit Suisse, the average forecasted production per well in the Marcellus shale formation has increased by a factor of eight in the past five years. For historical context, in the pre-shale era U.S. oil and gas production was on a path of steady decline.

“If you think about the magnitude of that change, I personally can’t think of any other industry that is so big and so critical to the U.S. economy that has experienced such a staggering amount of structural change in such a short period of time,” he says, “and I wouldn’t be surprised if the increase in productivity is the biggest that we’ve seen since the Industrial Revolution.”

The U.S. is “awash in low-cost natural gas,” Hosseinzadeh says. This provides some interesting opportunities for private equity investments. Shale drilling is providing one of the largest infrastructure booms in U.S. history, he says, adding that a study by Merrill Lynch found that shale provides the equivalent of $1B per day of stimulus to the economy.

There’s a second-order effect that’s not really talked about in energy, Hosseinzadeh says, which is that shale is very capital- and resource-intensive. There are many parts on a rig that need to be replaced with each new well that is drilled— “the proverbial picks and shovels,” he says. Also, environmental, health and safety, and operational support services are required. 

“On top of that, to allow for things like well pad drilling, roads will need to be repaved, and many of the crews that will have to go on these drill sites will have to be accommodated in the remote locations,” he says. Other sectors like manufacturing, transportation, and even real estate will be getting in on the action and need “significant capital.”

While liquefied natural gas (LNG) is a major draw for private equity and other investors, WL Ross has been active in the liquefied petroleum gas (LPG) sector, which is a different beast.

“We had developed a thesis that the U.S. was rapidly becoming one of the lowest cost producers of natural gas,” Hosseinzadeh says, “so in 2012, we found a vehicle to put that thesis to work in the LPG market.

“We chose to play in a very niche segment of the market, transporting the LPGs for export. Unlike LNG, shipping LPG is much less capital-intensive, and we are not building the export terminals—we are actually financing the ships, which do not carry any greenfield risk.”