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Don Stowers, Chief Editor of Oil & Gas Financial Journal interviews Intervale Capital Managing Partner, Charles Cherington about his experiences in oilfield services.
CHARLES CHERINGTON: Yes, it has been our sole focus.
"If you're investing in the service business, companies need to provide lower costs or provide a technology that enables drilling to happen in a place it might not otherwise occur.
If you can do either of these things, you can capture market share very rapidly."
OGFJ: You mentioned horizontal drilling.
How has the "Shale Revolution" affected your business and the service companies you invest in?
CHERINGTON: It's almost impossible to overstate the impact of the Shale Revolution.
CHERINGTON: We would certainly look at midstream deals if it involved providing equipment to midstream companies or getting into gathering systems, distribution systems, etc.
The challenge is that the MLP market has really driven up the price for assets in that space.
We've seen good opportunities and attractive companies, but the prices sellers are seeking because of the MLP market are too high for us.
Midstream has a lot of growth potential over the next 10 years, but the prices are going to be real challenges for a lot of prospective investors.
OGFJ: Intervale has raised $1.2 billion over the past eight years and is currently investing from its third fund.
Can you describe the types of investments you are seeking?
CHERINGTON: The most important driver is an outstanding management team.
CHERINGTON: We negotiate directly with the seller.
CHERINGTON: We are size agnostic.
In Fund II, we wrote some initial checks that were less than $5 million.
That's because we thought there was an opportunity to grow the business rapidly through organic growth, but also through acquisitions.
However, typical investments are more on the order of $30 million to $70 million.
OGFJ: Do you ever provide seed money, venture capital, to commercialize a new product or technology that you think could be successfully marketed in the oil and gas sector?
CHERINGTON: We had a couple of small venture deals in Fund I. While the overall returns were good, we had one great success and one failure.
CHERINGTON: They are overwhelmingly US and largely endowments, pensions, and foundations.
As I'm sure you're aware, there's an enormous amount of new fund formation.
I was talking to one of our investors yesterday, and he said he had seen three new funds in the last three weeks.
Getting back to your earlier question about expanding our focus from oilfield services, if we followed the money and raised a bigger fund, I think it would be almost a guarantee of mediocre returns.
It's a unique segment within the energy industry for that reason.
OGFJ: Do you have a standard time period for the investment?
How do you determine when is the best time to monetize?
CHERINGTON: We generally try to get our businesses up to $50 million or more of EBIDTA.
CHERINGTON: Typically we've sold to strategic buyers.
We're building very focused platforms that are built around a single product or service offering.
We really don't want to build large holding companies that are unfocused because those are hard to sell.
We have not sold to financial buyers, but we're seeing a huge upsurge in interest from big generalist funds that are entering the space in growing numbers.
So I would expect a growing number of financial buyers among the successful bidders in the next couple of years.
OGFJ: Finally, how is regulation affecting the petroleum industry, especially with respect to water?
Do you see any business opportunities there?
CHERINGTON: You know, regulation is the service investor's friend, provided that it is modest in scope.
Charles co-founded Intervale Capital in 2006 after successfully managing two smaller private equity firms focused on buyouts in the energy, transportation and manufacturing sectors.Charles has over eighteen years of private equity experience.
Before launching his first fund, Charles spent three years as a vice president at the Vietnam Fund, a British private equity fund.Charles also worked for Credit Suisse in New York.
Charles received an M.B.A., with honors, from the University of Chicago and a B.A. in History from Wesleyan University.
Charles is married with three sons and lives in Houston, Texas.
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