This private equity business did a return of 79 times
The strategic patience exhibited by Lime Rock Management has yielded significant rewards. The private-equity firm has recently divested the shares acquired during the August transaction involving its majority stake in oil-and-gas producer CrownRock, achieving what may be regarded as one of the most significant successes in the buyout sector. Concentrated on energy Lime Rock has achieved a remarkable return, generating 79 times the $96.5 million invested in CrownRock, the Midland, Texas-based oil operator, since its inception 17 years ago, as reported by fund investors and knowledgeable sources. The return encompasses dividends amounting to approximately 15 times Lime Rock’s investment, disbursed from CrownRock’s cash flow throughout the duration of its stake, according to sources.
“It represents the most substantial return I have encountered, not only within the natural-resources sector but also in the realm of private equity—a staggering 79-times gross return, cash on cash, throughout the entire holding period,” remarked private markets investor Greg Jansen. After more than twenty years at asset manager Commonfund Capital, now known as CF Private Equity, he culminated his career by overseeing investments in various strategies, including natural resources, private equity, and venture capital, before retiring in 2016. Lime Rock maintained its CrownRock investment for a duration significantly exceeding the usual five- to eight-year timeframe typically observed in the private-equity sector. The company’s trajectory aligns closely with the progression of the shale industry, initially gaining from advancements in oil-extraction technologies and subsequently capitalizing on energy buyers’ heightened emphasis on cash flow-generating oil fields.
CrownRock has been acquired by Occidental Petroleum, a company supported by Warren Buffett, in a transaction valued at $12.4 billion, which encompasses cash, stock, and the assumption of CrownRock’s debt. The agreement with Occidental comes in the wake of several mergers among major energy firms and the acquisition of various private equity-backed oil assets in recent years, especially within the Permian Basin in Texas and New Mexico, as the consolidation of the U.S. industry has gained momentum. Last year, the cumulative value of mergers and acquisitions within the U.S. oil-and-gas sector soared to an unprecedented $192.24 billion, surpassing the $58.57 billion recorded in 2022 by more than threefold, as reported by industry analyst Enverus. According to Enverus, the year up to September recorded transactions amounting to $94.4 billion.
Prior to the sale, CrownRock navigated through periods of intense deal-making and fluctuations in oil prices that challenged Lime Rock’s commitment to retaining the company, remarked Jonathan Farber, co-founder and managing director of Lime Rock. “Throughout the 17-year holding period of CrownRock, numerous opportunities to divest the business have arisen.” He noted that considerable pressure has been exerted by multiple stakeholders for us to divest. “A comprehension of the asset’s intrinsic worth and trust in the management team provided us with the assurance to maintain the investment significantly longer than the majority would.”
Jansen reaped the rewards of Lime Rock’s strategic forbearance, having engaged in a $1.9 billion continuation fund that the firm established approximately six years prior. This initiative aimed to prolong its stake in CrownRock while providing an exit for earlier investors. The fund yielded a return of 3.8 times the invested capital for Jansen and other new investors, prior to accounting for expenses. The long-term strategy allowed CrownRock to exercise patience as oil producers explored a range of hydraulic fracturing techniques, according to J. McLane, chief investment officer at Lime Rock Partners, which has invested in CrownRock. CrownRock, for instance, commenced drilling its inaugural horizontal well in 2015, a considerable time after directional drilling had gained prevalence across the United States. According to McLane, this approach enabled the company to sidestep the complications associated with interference from neighboring wells and the pressure declines in unextracted crude that troubled the initial users of the technique.
“We have spent considerable time analyzing the most effective drilling strategy regarding well design,” he stated. Lime Rock and CrownQuest Operating, an oil-and-gas investment firm established by Texas oilman and prospective billionaire Tim Dunn alongside his long-time business associate Bobby Floyd, created CrownRock as a partnership in 2007. According to Farber, Lime Rock held approximately a 57% ownership interest in the enterprise. The remaining 43% of CrownRock was held by CrownQuest managers, employees, and other stakeholders, overseeing operations across 94,000 acres in the Midland Basin of West Texas, a segment of the lucrative Permian region.
With CrownRock’s profits on the upswing, a discussion emerged regarding the optimal moment for divestiture, McLane remarked. The discussions gained momentum in 2012, as the firm anticipated a fivefold return. “The pressure began to intensify within Lime Rock,” McLane remarked regarding the internal discourse the following year. The conversation focused on inquiries such as: “What justifies our retention of a 7x, 8x [return] investment within the portfolio?” What accounts for the absence of discourse regarding the potential sale of this asset? A pivotal juncture occurred in 2013 when Lime Rock’s investment team engaged in a three-hour, 50-page presentation that yielded a “eerily accurate” prediction of the returns the company would achieve by adhering to its drilling strategies, according to Farber. That persuaded the managers at Lime Rock to retain their investment, he stated.
The company allocated resources to CrownRock via its Lime Rock Partners IV fund, which concluded in 2006 with a total of $750 million raised. In 2018, Lime Rock initiated a new vehicle to acquire the assets of that fund, simultaneously providing its investors with the choice to either cash out or reinvest their stakes into the newly established fund. HarbourVest Partners, a private-market investor, spearheaded a consortium of both new and existing supporters, securing a total of $741 million in fresh capital for the newly established $1.9 billion continuation fund. In the current landscape, executives at publicly traded energy firms have significantly shifted away from a growth-at-any-cost approach, opting instead to distance themselves from the pursuit of undeveloped assets that fail to deliver sufficient cash flow. CrownRock reacted by increasing its daily production to the equivalent of 140,000 barrels of oil in mid-2022, a significant rise from the end of 2019. By the time Occidental acquired it, production had reached nearly 160,000 barrels per day.
The recent rapid consolidation in the U.S. oil-and-gas sector prompted Lime Rock to determine earlier this year that the moment to divest CrownRock had indeed come. According to McLane, the necessity to return capital to fund investors, particularly those who had not withdrawn any funds from the business over the past 17 years, was a significant consideration. “We are duty-bound to provide these investors with liquidity within the timeline we have conveyed to them,” McLane articulated regarding the firm’s perspective. “Failing to act promptly, while the market remains favorable, may leave us constrained when conditions deteriorate.”
