Asian investor steps into America's shale gas market

By Jim Polson and Supunnabul Suwannakij on 11/17/2017

NEW YORK and BANGKOK (Bloomberg) -- A relentless flow of natural gas from America’s shale basins is drawing bears to the market—and that’s music to the ears of at least one Asia-backed investor.

Kalnin Ventures LLC—an investment company with funding from Thailand’s largest coal miner, Banpu Public Company Ltd.—has spent about $417 million over the past two years snapping up 55,000 net acres in the Marcellus formation in northern Pennsylvania. The company’s co-founder, Christopher Kalnin, was in Thailand earlier this month to drum up more money.

As drillers from Chesapeake Energy Corp. to Carrizo Oil & Gas Inc. shed Marcellus assets to focus on higher-priced crude and liquids in Texas’ Permian Basin, Kalnin is stepping into the void. Rather than chase growth, Kalnin’s BKV Oil and Gas Capital Partners LP fund seeks deals cheap enough to get cash back even as well output dwindles and gas prices remain below their 10-year average.

“People are still pretty skeptical on gas,” Kalnin said in a phone interview from Bangkok. “That’s good. We want them to be skeptical.”

Kalnin says it’s now a top-20 gas producer in Pennsylvania and is looking to get bigger, targeting a 20% rate of return over five years. It’s built up a portfolio of stakes in 355 wells along the state’s upper tier. Denver-based Kalnin’s holdings are currently the only U.S. energy investment for Banpu.

“It’s not a bet on development,” Kalnin said. “It’s a bet on wells that are producing today. The return is lower. That’s OK—I’m taking less risk. This is something the industry has forgotten.”

Banpu Pcl rose as much as 1.2% to 17.30 Thai baht on Thursday, and was trading at 17.20 baht as of 11:46 a.m. in Bangkok. Gas futures are down 18 percent this year to trade at $3.054 at 1:41 p.m on the New York Mercantile Exchange.

Banpu has committed $500 million to Kalnin as part of the coal miner’s strategy to diversify its business to include gas, renewable energy and power plants, Somruedee Chaimongkol, Banpu’s chief executive officer, said in an email. Gas demand in Thailand is set to climb 2.5% a year over the next 30 years, driven by growth in the power industry, she said.

'Investing more'

“We will consider investing more” in Kalnin, Chaimongkol said. The Marcellus “is the single largest gas supply source in the U.S. and one of the biggest in the world, becoming a compelling position to expand further.”

It’s a wager that’s likely to pay off in the long run, even as pipeline delays leave Marcellus supplies trapped in the region and depress prices in the short term, Mark Rossano, an analyst for Bloomberg Intelligence, said by phone. U.S. exports of natural gas have climbed to a record, and the nation is poised to export even more as Asian buyers replace coal-fired power plants with cleaner-burning gas generators.

“If you think about rising U.S. export capacity and you have the timeline to weather delays, these things are a massive home run,” Rossano said. “The view that Asian natural gas demand will be more robust is starting to become more prevalent given that it has outpaced even the most bullish estimates out there.”

Carrizo deal

Kalnin’s biggest deal came last month, when the company agreed to pay $210 million for wells and leases from Carrizo and India’s Reliance Industries Ltd.

Christopher Kalnin likes gas because it’s simple. Production from individual wells declines at about 5% to 7% a year, slower than oil wells. While crude wells can produce varying amounts of oil and gas as they age, so-called dry gas wells produce only methane, which Kalnin hedges out 12 to 24 months to cover costs, he said.

Kalnin can, and has, drilled new wells when it sees profit potential. It’s also betting that completion of new pipelines out of the Appalachian gas patch will raise prices for the fuel, even as opposition from environmental groups and local communities delays some of those links. President Donald Trump’s administration should work to expedite the process, Kalnin said.

“Pipelines critical for taking gas to key markets like New York, Boston and New Jersey are being held hostage by political agendas at the state level,” he said. “We want to see Trump step up to the game and actually make decisions around getting these pipelines built. That’s what the country needs.”

More conduits from the Marcellus could mean bigger profits for Kalnin and more Asian investors in U.S. shale, Kalnin said.

“We’re buying things and making money when prices are what we view as pretty depressed,” he said. “That gives us tremendous upside.”

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