KKR Energy & Infrastructure

Overview
Marc S. Lipschultz
July 18, 2012

CONFIDENTIAL AND PROPRIETARY:

For Investment Professionals Only

Table of Contents

I.

Introduction

II.

Infrastructure

III.

KKR Natural Resources

IV.

Energy Income

V.

Case Studies

I. Introduction

Summary
Core of energy and infrastructure business built around seizing opportunities
resulting from dramatic global changes in supply and demand for energy
KKR brand, culture, team and platform exceptionally powerful for building
businesses
Key has been combination of long-term strategic plans based on the impacts
of these global changes with short term tactical actions when a market need
is discernible
Critical lessons:
Listen to the market and meet the need
Willingness to experiment and adjust
First-time funds are very hard
Always people with similar ideas or people who will follow fast, so need to
keep innovating and building our capabilities and platform

Discontinuity = Challenge & Opportunity

Yesterday

Today

Tomorrow

?
5

Discontinuity = Challenge & Opportunity

Yesterday

Today

Tomorrow

?
> $1 Trillion in Capital
6

Why Invest in Energy?

#1 Long-Term Demand Outlook is Strong

#2 Asset Intensity is Driving Enormous Capital Needs

#3 Disruptive Technologies are Re-Inventing Energy Industries

#4 Change is Driving Complexity / Inefficiency and Volatility is Increasing

Volatility Increasing

#5 Energy is Recognized as an Important Component of Investors Portfolios

KKR Energy and Infrastructure Business

2009

2010

2011

2012

Energy PE
AUM=$1.3bn

Energy PE
AUM=$1.4bn

Energy PE
AUM=$2.1bn

Energy PE
AUM=$3.0bn

Energy PE
AUM=$5bn

Infrastructure
AUM=$1.6bn

Infrastructure
AUM=$2.2bn

Infrastructure
AUM=$2.5bn

Infrastructure
AUM=$5bn

KNR
AUM=$0.3bn

KNR
AUM=$1.4bn

KNR
AUM=$1.5bn

KNR
AUM=$3.0bn

$3.3bn

Energy Global
Opportunities
AUM=$0.5bn

Energy Global
Opportunities
AUM=$0.5bn

Energy Global
Opportunities
AUM=$2.0bn

Energy
Income
AUM =$0.1bn

Energy
Income
AUM =$1.1bn

Energy
Income
AUM =$2.0bn

$6.3bn

$8.6bn

$1.3bn

2015

Energy Mezz
AUM=$1.0bn

Energy Other
AUM=$.5bn

$18.5bn

KKR Energy & Infrastructure Platform at Year End 2011

Equity Investment/
Commitments

Holdings

Private Equity

EFH
Texas Crude
Hilcorp
El Paso Midstream
AOT/Battrum
Samson Resources

$2.1 bn

Infrastructure

Colonial Pipeline
Sorgenia France
T-Solar
Saba Infraestructuras
SunTap

$2.2 bn

Natural Resources

EBR Gulf Coast

Conoco Barnett
Carrizo Barnett
EOG Assets

$1.4 bn

Other

Black Hawk Royalty

Interest
Shushufindi
Other Global Energy Opps

TOTAL
9

$0.6 bn
$6.3 bn

Infrastructure: Executing On A Long and Winding Road

Key accomplishments:

Key challenges experienced:

NPS Partnership

Building the optimal team

Raising significant pools of capital

Proving our credibility

Acquiring five attractive Infrastructure assets

Time to raise capital/First fund challenge

Challenges: Market Environment & First-time Fund

KKR Global
Infrastructure
Partners Fund
Launch

Hancock
Parking SMA

Expand Partnership with

Korean National Pension
Service adding $400mm
of AUM

2012

2009

Colonial Pipeline
SMA ~$1.1bn

10

Total capital raised

~$2.2bn

Raised $515mm
in first close of
fund

Final Close on Fund 5/31/12 at

$1.05bn + SMAs for total =
$2.4bn AUM ; Profitable on a
fully loaded basis in cash and
economic net income

KNR: Executing Through Spotting Opportunity and Building

Partnership
Shift to unconventionals creates orphan producing assets held by companies who need capital
We established key partnerships to build a strong Natural Resources platform
Premier Natural Resources
Texas Teachers (TRS) Partnership
TRS committed ~$1bn to the KNR strategy ahead of SPN

Six attractive asset acquisitions

$1.0bn of evergreen capital

made for over $950 MM ($500

through a separately managed

Equity)

account

Natural Resources platform at $1.6bn

11

Areas of Opportunity Going Forward

Unconventional
North American
Supply Basins
Abundant supply

International Oil &

Gas
Partnerships to access
underperforming assets

Opportunistic
Investments
Solutions provider to
companies facing
credit/liquidity
challenges
12

High Quality
Midstream Assets
Basins with sustainable
activity and volume
certainty

North America
Private or Public
Company E&P
Development/
acquisition capital

Yield Oriented
Upstream
Investments
Development drilling
and royalty interests

Whats
Next?

New KKR Energy Initiative Energy Income

Drilling Development Strategy

Minerals & Royalties Strategy

Build on KNRs strategy delivering a high

yield investment opportunity through the
development of low-risk, undeveloped oil
and gas assets

Build a differentiated platform to

capitalize on favorable market dynamics
in this strong asset class

Have strong technical team in RPM. Will

partner with strong drillers
Serve as a solution by providing capital
that enables E&P companies to (i)
address capital spending gap; (ii) raise
capital prior to booking of developed
reserves and (iii) retain long-term upside

Royalties provide real asset exposure,

current cashflow, limited cost exposure
and ownership of long-lived assets

Commercialization of unconventional
basins has vastly increased the size of the
opportunity

Real asset ownership with inflation linked cash yield

13

II. Infrastructure

14

Why Infrastructure?

Compelling
Opportunity

Massive global need for infrastructure investment with limited

quality investment alternatives

Potential for protected long-term cash flow streams and

insulation from economic and market volatility

Opportunity for
Attractive RiskAdjusted
Returns

Past Strong
Record
in
Infrastructure
Investing Using
the KKR Model
15

Limited partners require an investment strategy that places

significant emphasis on minimizing commercial, operational and
financial risks
KKRs differentiated investment strategy for delivering attractive
risk-adjusted returns comprises three elements:
i) disciplined investment selection
ii) deep operational engagement
iii) active stakeholder management

KKR has a decade of experience investing inand exiting

infrastructure assets

KKR Global Infrastructure Investors will enable KKRs high quality

team to make investments in attractive infrastructure
opportunities on a dedicated, long-term basis

Infrastructure Investing Must Evolve to Version 2.0

Investors expected:

1.

Low risk

2.

Conservative
leverage

3.

Inflation protection

4.

Low correlation with

GDP/other
investments

5.

Long duration

16

Investors
should
seek Version
2.0:

but
generally
received Version
1.0:
1.

Transaction-oriented
models staffed by
leveraged finance and
banking professionals

1.

Experienced team of
investors and operators
targeting an attractive
risk/return profile

2.

Sector-based asset
selection without proper
regard for riskhigh
sensitivity to economic
cycles

2.

Disciplined asset selection,

with focus on risk and
sensitivity to economic
cycles

3.

As much leverage as
individual assets could
bear

3.

Leverage appropriate to
each asset and the risk
profile of the fund

4.

Focus on asset
accumulation and fee
generation

4.

5.

Reactive approach to
stakeholder management

Focus on operational
engagement to improve
performance and create
value

5.

Stakeholder management as
a core competence

The KKR Approach:

A Value-Added Investment Strategy
Our Strategy: Target infrastructure assets with limited commercial, financial and operating
risk and drive value creation through operational engagement and stakeholder
management

1. Disciplined Investment Selection

A risk-based, not sector-based, approach to filter investment selection
Essential criteria:
1. Physical assets

4. Inflation-hedged

2. Critical to the functioning of the

economy

5. Limited correlation with economic cycles

3. High barriers to entry/irreplaceable

assets

6. Long-term visibility of cash flows

2. Deep Operational Engagement

Institutionalized high quality processes and dedicated resources focused on value
creation
3. Active Stakeholder Management
Deep in-house expertise focused on the alignment of interests from investment
through exit and across all constituencies
17

Infrastructure Investment Experience

Approximately $7 Billion of Equity Investments Since 2000(1)

Transportation/
Parking

Alternative
Energy

Contracted/
Hedgeable
Generation

Communications
Infrastructure

Waste
Management

Electric & Gas

Utilities

Midstream

KKR Investments:
U.N Ro-Ro

Texas Genco
Sorgenia France(2) Duales System Bharti Infratel Colonial Pipeline
EFH (Luminant)
Deutschland
PanAmSat
El Paso Midstream
T-Solar(2)

Saba
Infraestructuras(2)

DPL
EFH (Oncor)
ITC Holdings

SunTap Energy(2) AVR van Gansewinkel(3)

Team Member Experience Outside KKR Includes:

Endesa Europa
Note:

(1)
(2)
(3)

18

Endesa Europa

Targa
Resources

Endesa Europa

Past performance is no guarantee of future results. This table is provided for discussion purposes only to demonstrate KKRs infrastructure-related investment experience. The investments listed
possess, to varying degrees, infrastructure-related qualities as determined by the Infrastructure team and are based on the Infrastructure teams assessment of all investments by KKR. Such
determination and assessment involves significant judgment and may differ from another partys review of KKRs investments. Another partys assessment may include comparable investments
not represented above, which may have lower (or negative) investment returns.
Includes investments outside of KKR for which current KKR investment professionals had primary responsibility for sourcing and/or overseeing prior to joining KKR.
Investments made from KKR Global Infrastructure Investors. Other investments posses to varying degrees, infrastructure-related qualities as determined by the Infrastructure team as further
described in the Note above.
Primarily a waste management business, with some ancillary alternative energy efforts.

Value-Added Investment Strategy

SECTORS
Transportation &
Social Infrastructure

Utilities

Water
Gas
Power

Highways
Parking
Rail/Mass Transit
Social Infrastructure

Midstream &
Contracted Energy

19

Pipelines
Storage
Generation
Renewables

Investment Focus
Global strategy to access most
attractive opportunities
Targeting leading companies,
high quality assets and strong
management teams
Seeking majority ownership/
control positions
Emphasis on Brownfield, with
opportunity for value-add
Predominantly OECD but will
access non-OECD where KKR
has real presence and
experience

III. KKR Natural Resources

20

Executive Summary
The Market Opportunity

The Investment Strategy

Producers Shifting Focus to Certain

Unconventional Assets
o Prolific reserves / growth
o Attractive finding and development costs
o Highly economic returns on investment
o Public market valuation premiums
Near-Term Catalysts for Non-Core Producing
Divestures
o Capital intensity of unconventional
development
o Limited upside / growth from non-core,
producing assets

Teamare
/ PNR
Operating
Investment
Conventional Assets
Attractive
Opportunities forTeams
Financial Buyers
The Investment Team: KKR
o Executive-suite relationships / sourcing
network
o Transaction diligence and execution
o Financial structuring and capital deployment

Acquire Non-Core Producing Properties

o Limited capital expenditure requirements
o Greater ability to accurately project
production
o Often non-core / under-operated

KKR
Natural
Resources
(KNR)

Employ Value Enhancing Methodologies

o Enhance existing production
o Reduce operating / capital costs
o Identify incremental production opportunities
Realize Value through Cash Distributions

Our Competitive Advantages

Deep Sourcing Capabilities
Investment Acumen, Execution, and
Diligence Skills
Asset Optimization Experience / Expertise

Note:

21

The Operating Team: PNR

o Regional / industry-level sourcing network
o Technical diligence
o Asset optimization

Access to the Broad KKR Platform /

Relationships

Participation of KKR Private Equity, KKR Capital Markets, and KKR Capstone personnel in the public markets investment process is subject to applicable law and inside information barrier policies and procedures, which
may limit the involvement of KKR Private Equity, KKR Capital Markets, and KKR Capstone personnel in certain circumstances and KAMs ability to leverage such integration with KKR. Discussions with Senior Advisors
and employees of the Firms managed portfolio companies are also subject to the inside information barrier policies and procedures, which may restrict or limit discussions and/or collaborations with Public
Markets/KAM.

I.

The Market Opportunity: Overview

Recent market dynamics have created an environment where non-core assets are out of favor:
Conventional
Properties Becoming
Non-Core

Certain
Unconventional
Properties Becoming
Non-Core

Declining Production
Profile of Conventional
Assets

Conventional assets have higher finding / development costs and therefore less growth potential
than unconventional assets, and distract from operationally intensive unconventional
development programs

Conventional properties allocated less development capital and management attention

Certain areas within unconventional properties generate less attractive returns than other more
core areas even though these non-core areas contain a significant amount of producing assets

These non-core unconventional properties are allocated less development capital and
management attention

Public markets emphasize reserve / production growth (require reinvestment of capital to bring
new reserves / production online to offset natural production decline)

Many conventional reservoirs have limited opportunities to add reserves / production

economically today, resulting in a significant base of declining production

Moreover, KKR sees numerous near-term catalysts creating attractive opportunities to acquire non-core-producing assets:
Capital Intensity of
Unconventional
Development

Public Market
Valuation Premiums

Limited Buyer
Universe

22

Note:

Unconventional development programs often require capital expenditures in excess of internally

generated cashflow

Operators considering divestitures of non-core assets to bridge funding gaps; also frees up
management time / attention to focus on core assets

Public markets are increasingly valuing companies with an unconventional focus at higher
multiples

Incentive for public producers to reorient their portfolio composition by divesting non-core assets

Strategic buyers focused on unconventional assets with significant development opportunities;

equity markets dislike declining reserve / production profile; and traditional private equity buyers
have limited exit opportunities

Limited competition creates opportunity to acquire non-core assets at attractive prices

Unless indicated, the above reflects the current market views, opinions and expectations of KKR based on its historic experience. Historic market trends are not reliable indicators of actual future market
behavior or future performance of any particular investment or any KKR fund, vehicle or account which, may differ materially, and are not to be relied upon as such. There can be no assurance that
investors in any KKR fund, vehicle or account will receive a return of capital.

II. The Investment Strategy: The KNR Approach

KNR intends to generate attractive risk-adjusted returns while providing
investors with direct exposure to oil and natural gas by:

Acquiring
Non-Core
Producing
Properties

Employing PNRs
Value
Enhancement
Methodologies

Realizing Value
Through Cash
Distributions

23

Producing properties have limited incremental capital expenditure requirements and

reduced geological / engineering uncertainty
o Wells are already producing marketable oil / gas and substantial historical data
allows for production to be projected with a higher degree of accuracy

Non-core properties are generally allocated minimal capital and receive little
managerial focus
o Such assets are often under-operated and therefore have upside opportunities
through low-risk incremental development; application of new technologies and
use of industry best practices

Enhance Existing Production: Employ operational best practices acquired through

PNRs extensive operating experience and apply updated technologies derived from
PNRs extensive industry relationships

Reduce Operating / Capital Costs: Implement PNRs low-cost operating approach

Identify Incremental Production Opportunities: Reinvest cashflow to bring new

production online without materially altering the risk profile of the investment

Optimize returns with conservative leverage and targeted hedging strategy

Distribute most of the cash flow generated on a quarterly basis, with limited amount
of capital retained for reinvestment to enhance value through low-risk incremental
development

III. Our Investment and Operating Teams:

Premier Natural Resources

In business since June 2006, Premier Natural Resources, LLC (PNR) is comprised of former senior executives of
Vintage Petroleum Inc. (Vintage)
o PNR focuses on acquiring and exploiting oil and gas properties and currently operates a portfolio of
assets located in the Texas Gulf Coast and the Permian Basin

KKR has engaged PNR to operate and enhance non-core producing assets acquired as part of this identified
strategy
o Founded in 1983, Vintage Petroleum employed a similar strategy of acquiring non-core assets from oil
and gas companies, enhancing production and cutting costs
o Vintage was acquired by Occidental Petroleum Corporation (Oxy) in July of 2005 for $4.1 billion

PNR team is comprised of highly experienced professionals from the oil and natural gas industry:
o Average industry experience of the senior members of the PNR team is approximately 30 years
o PNR team members have attained direct operating or technical evaluation experience in most significant
conventional oil and natural gas basins in the United States and Canada
Charles C. Stephenson, Jr. - Hung Nguyen - Vice
Chairman
President Exploitation

Keli Klassen - Engineer /

Geologic Technician

J. Chris Jacobsen - President Mark Gaby - Geologic

Diane First - Engineering
Manager / Acquisitions
Analyst
Joe Bielstein - Vice President
Business Dev.
Kelly Byram - Senior Staff Susan Dye - Production
Geologist
Analyst
Brian Wheeler - Vice
President Engineering
Miles Peterson - Geophysist David Krueger - District
/ Geologist
Production Engineer

(1)

24

Johnnie Nedbalek Lead Operator, Texas Gulf

Coast
Willie Bohuslar Operator, Texas Gulf
Coast
Randy Addison - Lead
Operator, Texas Barnett
Megan Wondaal Regulatory Compliance

KKR may also partner with one or more other operators that are well-established in the oil and gas industry in
the United States and/or Canada to provide operating services relating to the Funds investments(1)

PNR's performance is not indicative of the performance of these other operators.

IV. Our Competitive Advantages:

A Differentiated Platform

Deep sourcing capabilities for new opportunities at multiple levels

Substantial investment acumen, execution, and diligence skills

Significant experience and expertise in oil and gas asset optimization

Access to the broad KKR platform of resources

Note:

25

Participation of KKR Private Equity, KKR Capital Markets, and KKR Capstone personnel in the public markets investment process is subject to applicable
law and inside information barrier policies and procedures, which may limit the involvement of KKR Private Equity, KKR Capital Markets, and KKR
Capstone personnel in certain circumstances and KAMs ability to leverage such integration with KKR. Discussions with Senior Advisors and employees of
the Firms managed portfolio companies are also subject to the inside information barrier policies and procedures, which may restrict or limit discussions
and/or collaborations with Public Markets/KAM.

IV. Energy Income

26

Why Are We Creating a New Approach to Market?

The emergence of unconventional oil & gas has created a new opportunity set for
investors
Oil and Gas Operating Considerations
Then

Now

Development Focus

Exploration of potential
reserves

Manufacturing of proven
reserves

Technical Risk

Moderate to high

Varied, but relatively low in

maturing basins

Visibility to
Production

Limited, based on success of

recent exploration

Clear, based on large reserve

base

Average
Well Cost

$1-$2 million/well

$5-10 million/well

Start-Up Costs to
Efficient Operations

Modest to moderate

Extremely significant

Greatly increased the need for external capital amongst companies of all sizes

New, flexible approach required

27

What Are We Seeking To Do with the Energy Income & Growth Fund?
We are seeking to invest behind well-understood industry themes but we are
taking a differentiated approach
Making asset-level investments and/or structured investments
Focusing, in part, on out-of-favor or misunderstood assets
Creating a portfolio of investments that generates current income
Energy Investment Opportunity Set
Asset-Level
Investments

Build-Ups

Corporate

Need for Industry

Capital

High

Moderate

High

Investor Competition

Low

Moderate

Moderate
to High

Mature oil/gas assets

Typical Investment
Opportunities

28

Going Concern Investments

Unconventional oil &

gas development
Minerals and
Overriding Royalty
interests (ORRIs)

Unconventional land
acquisition and
delineation
Greenfield midstream
build-ups

Varied

Investment Strategy for the Energy Income & Growth Fund

Our Strategy:

Act as a solution provider to industry by working to structure

transactions that enable us to invest in oil and gas assets that
generate attractive returns and ongoing yield

1. Leverage KKRs Deep Sector Relationships

2. Provide Flexible, Differentiated Solutions to Industry

Invest at the asset-level and/or through structured transactions

Craft transactions that meet operators/owners unique needs

3. Make Disciplined Investment Decisions

Invest in assets that benefit from core themes that we know well

Leverage our deep bench of internal and external industry and technical expertise to make
decisions regarding asset selection

Employ consistent criterion in our decisions:

Well understood North American
assets
Low-cost positioning to ensure
profitability across cycles

Partner with strong operators

Exposure to beneficial changes in
technology and pricing

Visibility to value realization

through cash-on-cash
returns

4. Actively Manage Our Investments Post-Closing

Leverage KKRs and our operating partners expertise to optimize value creation

5. Seek to Deliver Investor Returns Through Periodic Distributions and Capital Appreciation
Source: As with any investment, there is the potential for profit as well as the possibility of loss.

29

Core Focus Areas for the Energy Income & Growth Fund

#2:
Oil
& Gas
Development

#1:
Mature
Oil &
Gas

#3:
Minerals &
Royalty
Interests

#4:
Opportunistic/
Other

Energy Income & Growth Fund

(1)

30

Throughout, Royalty Interests refers to Overriding Royalty Interests (ORRIs).

Core Focus Area #1: Mature Oil and Gas Assets

The Market Opportunity Today

Producers Shifting Focus to Unconventional

(Shale) Assets

Numerous Near-Term Catalysts for Non-Core

Producing Asset Divestitures

Approach to Value Creation

Acquire Out-of-Favor Producing Properties

Employ Value Enhancing Methodologies

Realize Value through Production

Mature Assets are Attractive Opportunities for

Financial Buyers Today

Risk-Reward

Execution Capabilities

Operating Partnership with Premier Natural

Resources (PNR)

Invest in Low-Risk Oil and Gas Assets and Seek

Low to Mid Teens Net Returns

Focused on Opportunities to Deploy $100 Million

to $1.0 Billion of Equity Capital

Seek to Protect Return of Capital via Hedging

Achieve Commodity Exposure and Inflation

Protection via Ownership of Tail Reserves

Provide Strong Cash-on-Cash Returns

Strong Track Record

Note: Please see Important Information slides for notes on target returns.

31

Core Focus Area #2: Oil and Gas Development

The Market Opportunity Today

Approach to Value Creation

Increased Focus on Unconventional Assets

Generating Significant Capital Needs

Provide Development Capital to Producers

w/Strained Balance Sheets

Fundamentals Pressuring Balance Sheets

Employ Flexible Transaction Structures to Meet

the Needs of Operators

Attractive Opportunity for Investors

Realize Value Through Development and

Production

Risk-Reward

Execution Capabilities

Dedicated Resource, RPM Energy Management,

Provides Technical Expertise to Evaluate and
Manage Asset-Level Drilling Investments

Focused on Opportunities to Deploy $50 to $500

Million of Equity Capital

Early Track Record

Note: Please see Important Information slides for notes on target returns.

32

Seek Mid-to-High Teens Returns, Net to our

Investors (Risk Profile Dependent)

Achieve Commodity Exposure and Inflation

Protection

Seek to Provide Combination of Strong Cash-onCash Returns and Capital Appreciation to the
Investor

Core Focus Area #3: Minerals and Royalty Interests

The Market Opportunity Today

Development of Unconventional Assets Has

Increased the Addressable Market for
Minerals/Royalty Interests in North America
We Believe Few Parties Have the Capabilities
Necessary to Invest Behind this Opportunity Set

Approach to Value Creation

Pursue an Acquisition Strategy that Is Difficult to

Replicate

Monetize Our Competitive Advantages

Realize Value As the Minerals are Developed

Attractive Opportunity Available for Those Few

that are Well Positioned

Risk-Reward

Execution Capabilities

Joint Venture with Chesapeake Energy

Corporation (CHK) to Acquire Minerals
Focused on Opportunities to Deploy Capital in
Varying Sizes
Early Track Record

Note: Please see Important Information slides for notes on target returns.

33

Seek Mid-to-High Teens Net Returns

Achieve Commodity Exposure and Inflation

Protection

Seek to Provide Combination of Strong Cash-onCash Returns and Capital Appreciation to the
Investor, but with a Deferred Cash-on-Cash Yield
Profile

How EIGF Fits Within KKRs Energy Platform

The Energy Income & Growth Fund represents a natural extension of KKRs Energy
Platform and directly leverages our vast relationships, resources and capabilities
KKR Energy Platform
Energy Income & Growth Fund
Proved, Developed
Producing
Properties

Asset Allocation
Criterion

Asset-level investments,
with predominance of value
from proved developed
producing (PDP) assets
Seek to generate return via
current income

Infrastructure
All Other
Opportunities
Asset-level and/or
structured investments

Investments in going
concern businesses

Investments in going
concern businesses

Seek to generate return

via current income and
capital appreciation

Seek to generate return

via growth and current
income

Seek to generate return

via growth and capital
appreciation

Infrastructure assets and

businesses with limited
economic sensitivity

Oil and gas assets of lesser

risk than with development
opportunities

Historical KKR
Transactions

TX Crude Farm-In

EBR

Private Equity

Eagle Ford ORRI

Colonial
Pipeline

Minerals
JV

East TX, LA and MS

Assets

34

Note:

Midstream
JV

See Important Information slides for notes. The specific portfolio companies identified are not representative of all of the portfolio companies
purchased, sold or recommended for KKR Funds, and it should not be assumed that the investment in the portfolio companies identified were or
will be profitable.

Operating and Technical Capabilities

Critical to Executing Effectively on Opportunity Set
Mature Oil & Gas

PNR is led by a well-respected

group of senior leaders from
Vintage Petroleum

Outstanding track record at

exploiting mature oil and gas
properties

Relationship with KKR since

2008; exclusive since 2010

Oil & Gas Development

Royalties & Minerals

RPM is a team of highlyexperienced oil and gas

executives

Partner with Chesapeake,

leading independent oil
and gas company

Focused on evaluating
asset-level Drilling
investments

Activities in every major

North American oil and
gas basin

Significant experience with

unconventional reservoirs

Exclusive relationship with

KKR since 2010

Differentiated insights into

key drivers of royalty
investments

Relationship with KKR since

2005 and exclusive royalties
partnership since 2012

When combined with the experience, perspectives and capabilities of KKR, we believe
that we are well positioned to execute across attractive market opportunities today

35

Portfolio Construction
Our targeted allocations for Energy Income & Growth are as follows:
Mature PDP
Oil and Gas
Assets (KNR)

(~40%)

(~20%)

Relatively low-risk
Target low-to-mid teens
returns
Significant cash-oncash yield from day one

Minerals and
Royalty
Interests

Development

Moderate to higher-risk
Target mid-to-high
teens returns
Varied cash-on-cash
yield profile

Other
(~10%)

(~30%)

Moderate to higher-risk
Target mid-to-high
teens returns
Deferred cash-on-cash
yield profile

Situation specific
Examples include
midstream, mezzanine

Seeks Mid-Teens Fund-Level Net Returns with Current Yield

Note:

36

Target allocations are subject to change. There is no assurance that the target allocations will be achieved, and actual allocations
may be significantly different than that shown here. See Important Information slides for additional notes.

V. Case Studies

37

Investment in SunTap Energy

Transaction Overview
On December 16, 2011, KKR signed a definitive agreement
to form SunTap Energy RE LLC (SunTap Energy), a
strategic partnership with Recurrent Energy, LLC
(Recurrent) focused on acquiring solar photovoltaic
(PV) electric generating facilities
KKR has committed to invest $95 million in the
strategic partnership, and Recurrent will commit $5
million alongside us
Concurrently, SunTap Energy in partnership with Google
Inc. (Google) signed an agreement to acquire from
Recurrent a portfolio of solar PV facilities located in
Sacramento County, California and contracted on a 20year fixed price basis with the Sacramento Municipal Utility
District (SMUD)
The first solar plants in the portfolio reached
operation in Q4 2011
This acquisition will be structured as a leveraged
partnership flip structure, with Google participating
through passive tax equity

Why We Are Excited About This Investment

Stable, contracted assets with attractive risk-reward profile:
SMUD portfolio assets have a 20-year fixed price Power
Purchase Agreement (PPA) with attractive terms executed
with SMUD, which is an A1/A+ rated counterparty
Exclusive partnership with a leading developer: Recurrent is a
leading solar project developer with a strong reputation in the
industry, a highly experienced management team, and 2.4 GW
pipeline of contracted solar assets under development
Tax equity relationships: KKR has developed a strong working
relationship with many of the leading tax equity providers,
including Google for the SMUD portfolio
Limited construction and technology risk: SMUD portfolio is
currently under construction and has secured all of the major
necessary contracts and permits to commence operation when
completed. The solar panels and associated equipment are
covered through manufacturer warranties and performance
guarantees by the contractor.
Attractive regulatory framework: The current regulatory
framework in the United States, including the state renewable
standard programs and tax incentives associated with solar,
has resulted in an attractive time to invest in solar PV assets

Transaction Sourcing
Recurrent ran a limited process for the SMUD portfolio, and
we were ultimately selected as the preferred bidder:

KKR was the only financial buyer included in the

process

We believe our novel approach to form a partnership,

with Recurrent keeping a retained interest, helped us
prevail
38

KNR Acquisition of ConocoPhillips Barnett Shale Properties

Transaction Overview
In July 2010, KNR entered into negotiations with
ConocoPhillips (COP) regarding a potential purchase of
their Barnett Shale properties (the Assets)
o COP is selling the assets as part of their announced $10
billion 2010 asset divestiture program
As the Assets are largely comprised of PDP reserves and are
technically complex to operate, the process involved a
limited number of parties (4 or 5)
On September 20, after an extended diligence period, KNR
was selected as the preferred acquirer and began
negotiation of a definitive agreement to acquire the Assets
for $148mm; the transaction closed December 23, 2010

Asset Overview
Located in North Central Texas, the Assets contain 108.6
bcfe of net reserves
o 65% Natural Gas / ~100% PDP
o Operates 124 of 143 active producers (~100% of value)
Large undeveloped acreage position (~47,700 net acres)
o Potential for over 60 horizontal locations
Located in the liquids window of the Barnett Shale play
o High btu content gas and significant NGL yield
The Assets are situated in the Western portion of the
Barnett, considered less attractive from a development
perspective
o Attractive PDP component, projections aided by 7 years
of production history (oldest North American shale play)

39

Why We Are Excited About the Acquisition

Projection set is ~100% PDP: No value attributed to
development locations at current commodity price outlook
o Provides optionality on PUDs in higher price
environments
o Limited execution risk
Opportunity to Exploit an Under-Operated Asset Base:
Standardized approach taken to historical development and
operation (opportunity to customize to each well)
o Potential benefit from PNR shale expertise
Potential Regional Consolidation Opportunity: Acquire
additional PDP properties at attractive valuations
o Region out of favor from a development standpoint
Long-Lived Assets: Opportunity to benefit from long-term
commodity price appreciation / optionality on PUDs
Diversified Commodity Price Exposure: Natural gas is
~65% of production (for the first five years)
o Liquids component largely linked to crude oil prices

Chesapeake Royalties Partnership

Overview

The Mineral Rights / Royalty Interest Opportunity

In March 2012, we entered into a partnership with

Chesapeake Energy Corp. (CHK) to invest in mineral rights
and overriding royalty interests in U.S. oil and gas basins
KKR and CHK will initially contribute $225mm and $25mm to
the Partnership, respectively, with CHK receiving a promoted
ownership
KKR and CHK will jointly manage Partnership, and CHK will
source, acquire and manage royalty investment opportunities

Mineral rights entitle landowners to the resources that exist

beneath their surface acreage
-

We believe mineral rights / royalty interests represent a

compelling asset class for investment because:
-

Real Asset Exposure: Pure exposure to natural gas and

oil prices (inflationary hedge)

Strong Risk / Reward: Opportunity to price acquisitions

at attractive valuations, strong MOIC potential

Limited Cost Exposure: Protection from cost appreciation,

benefit from capital investment to improve production

Long-Lived: Option on commodity prices, technological

advancement, and commercialization of new zones

Attractive Market Dynamics:

Ownership
fragmented with small buyer universe

Why We Are Partnering with Chesapeake

40

As one of the most knowledgeable domestic oil and gas

companies, CHK brings strong technical / operating expertise
to the Partnership:
-

Operating presence in nearly all domestic shale

unconventional plays (most active driller in the U.S.)

Participates in 1 of every 5 wells drilled in North America

Largest oil and gas leaseholder in the U.S.

Second largest natural gas producer in the U.S.

CHK will also leverage its operating presence to source and

execute opportunities for the Partnership:
-

Existing Land Organization: CHKs network of landmen /

landowners in every major unconventional basin provides
instant scale with little incremental cost

Technical / Activity Knowledge: CHKs operating presence

provides a differentiated understanding of economics and
drilling pace in every unconventional basin

Landowners typically lease mineral rights to operators for

an upfront payment and a royalty interest (unburdened
by costs) in revenue from wells drilled on their acreage

base

By partnering with Chesapeake, we believe

that we have created a differentiated
platform with the ability to acquire a diverse
portfolio of high-quality mineral rights and
royalty interests at attractive valuations.

is

Samson Investment Company

Transaction Overview

Investment Thesis

In November 2011, KKR announced a definitive

agreement to acquire Samson Investment Company
(the Company or Samson), one of the largest
private Exploration and Production (E&P) companies
in the United States

Attractive valuation for approximately 1.6 billion Boe of

oil weighted net risked development resources in
addition to approximately 2.5 Tcfe of gas weighted
proved reserves, with an attractive distribution of risk
adjusted returns

KKR will acquire all of Samsons assets with the

exception of its onshore Gulf Coast and offshore deep
water Gulf of Mexico assets, which will continue to be
owned by the Schusterman family, for $7.2 billion
(excluding fees and expenses, effective June 30, 2011)

Large, high quality portfolio of assets with significant

diversity
Embedded long term options on commodity prices and
additional commercial resources realized on vast HBP
acreage in basins with hydrocarbon rich systems
Strong management team with an established track
record
Size and scale of the asset base provides opportunity
for upside from portfolio optimization

Business Description
Samson is one of the largest private E&P companies in
the United States, with operations in several basins in
North America
The Company is headquartered in Tulsa and has over
1,000 employees.
The Company has a large, diverse portfolio of highquality, low-risk, producing and development oriented
oil and natural gas properties located in a number of
prolific basins across the United States.

Note:
(1)

41

Transaction closed in December 2011.

Gulf Coast assets highlighted on map not included in assets acquired by investor group.

Resilience in weak commodity price environments

Samson Asset Map(1)

Hilcorp Resources
Transaction Overview
In June 2010, an affiliate of KKR entered into a definitive
agreement with Hilcorp Energy Company (Hilcorp) to
invest $400 million in Hilcorp Resources (the Company), a
newly formed partnership created to own and develop oil and
gas properties located in the Eagle Ford Shale trend of South
Texas
KKR and Hilcorp had 40% and 60% initial ownership
interests, respectively, in the Company (1)
The partnership includes a capital commitment from both
parties as well as the initial contribution of approximately
100,000 net acres from Hilcorp (2)

The Eagle Ford Shale

The Eagle Ford has become one of the lowest cost oil and gas
development plays in North America
Benefits from significant oil and gas gathering and
transportation infrastructure already in place
Large portions of the play produce oil or condensate, which
can enhance expected economics to producers

(1)
(2)
(3)

42

Background
Following KKRs investment in East Resources, the
team continued its work in the unconventional oil
and natural gas shale plays and identified the
Eagle Ford as attractive
In April 2010, KKR began exploring the
opportunity to invest in a partnership alongside
Hilcorp to develop Hilcorps acreage position in the
Eagle Ford and to acquire and develop additional
acreage in the play
KKR developed a differentiated relationship with
Jeff Hildebrand, the founder and CEO of Hilcorp
KKR was ultimately selected by Hilcorp to proceed
with final diligence/negotiations on the opportunity
on an exclusive basis

Exit
In June 2011, KKR announced the exit of its
investment in Hilcorp with the signing of a definitive
agreement to sell the principal subsidiary of Hilcorp to
Marathon Oil Corporation ("Marathon") for a total
transaction valuation of approximately $3.5 billion.

Initial equity investment of $418 million

generated total equity proceeds to the KKR
funds of ~$1.13 billion (3)

Gross MOIC of ~2.7x (~7.4x to the 2006

Fund after reflecting the impact of recycled
equity)
The transaction closed in Q4 2011

40% initial ownership represents aggregate KKR investor group, including co-investors. Blended equity interest in exit proceeds will be reduced on a diluted basis, reflecting
reversionary splits and negotiated sharing mechanics with Hilcorp.
Acreage count has subsequently increased to approximately 140,000 net acres as a result of ongoing leasehold acquisitions.
Net of fees and expenses but excluding the impact of any potential purchase price adjustments. Excludes GP carry.

East Resources
Transaction Overview

East Resources, Inc. (East) is a leading oil and gas

development company in the Appalachian Basin
Operated in the basin for 25 years
Controls > 1mm net acres in Appalachia / Rockies

In June 2009, KKR closed its $330mm investment inFranklin

East

Clinton

Saint Lawrence
KKR received 2/5 board seats and negative consent
rights

Structured as a convertible security with downside protection

Substantial / attractive acreage position in the

Marcellus
Hamilton
Lewis

Essex

Jefferson

Warren

Leading Marcellus Shale acreage position

~99% operated position / favorable royalty rates
Local knowledge positions East to operate a Marcellus
development program
Ability to hold expiring acreage with conservative
drilling program
Significant operating flexibility / limited maintenance
leasehold capital expenditures
Regional concentration / scale provided operational and
cost advantages

Washington
Herkimer

Asset Map

Fulton

Oneida

Oswego

Exit

Saratoga

SchenectadyRensselaer
Orleans

Onondaga

Monroe

Livingston

Genesee

Ontario

New York
Wyoming

Erie

Yates

Cayuga

Chemung

Allegany

Cattaraugus

Webster

Fayette

Mi
fflin
nia
ta
Ju

Fulton

Franklin

Adams

ral
Min
e
Grant

Morgan
Berkeley
Jefferson

Hampshire
Hardy

olp
h

Operating Areas
Pendleton

Northern WV

Greenbrier

Western PA
NW PA / SW NY
North-Central PA / Southern NY

Boone
Raleigh
Wyoming

43

Tucker

West
Nicholas Virginia

Kanawha

Mingo Logan

SummersMonroe

Mercer
McDowell

Philadelphia
ChesterDelaware

Braxton
Clay

Lincoln
Wayne

Barbour
Lewis

Gilmer
Calhoun

Putnam
Cabell

Preston

ylo

Ta

hur

Ritchie

Marion
Harrison

Lancaster

nd

Wirt

nts

Jackson
Roane
Mason

Lawrence

Monongalia

Jackson

Scioto

asa
Ple

Wood

Meigs

Greene

Wetzel
Tyler

erla
mb
Cu

Huntingdon

Bronx
Nassau
Queens
Kings

Bucks
Montgomery

Somerset

Fayette

Monroe

gto

Perry
Pennsylvania
nd

York
Bedford

Washington

Ra

shin

Athens

Vinton

Gallia

Adams

Pike

Wa

Blair

Westchester
Rockland

Lehigh
Berks

Lebanon
Dauphin

Westmoreland

aho
nta

Highland

Morgan

Cambria

Orange
Pike

Carbon
Northampton

Northumberland
Schuylkill
Snyder

Allegheny

Ohio

Doddridge

Ross

Perry

Hocking

Indiana

Poc

Fairfield
Pickaway

Armstrong

Ups

Muskingum
Noble

Fayette

Butler

Marshall

Madison

Brooke

Belmont

Guernsey

Licking
Franklin

Columbia
Montour

Centre

Clearfield

Wayne

Lackawanna

Luzerne

Clinton

ron

Harrison
Ohio

Delaware

me

Ca

Coshocton

Hancock

Jefferson

Knox

renc

Clarion Jefferson

Columbiana Beaver
Carroll

Tuscarawas

Union

Morrow

Holmes

Law

Mahoning

Stark

Wayne

Mercer

Trumbull

Portage

Richland

Crawford

Marion

Ashland

andot

Medina

Huron

Seneca

Summit

ndusky

Elk

Dutchess

Sullivan
Lycoming

Venango

Geauga
Cuyahoga
Lorain

Erie

Ulster

Wyoming
Lackawanna

Potter

McKean

Columbia

Sullivan

Bradford

Forest

Ashtabula

Lake

Greene

Broome

Tioga

Tioga
Warren

Albany

Delaware

Susquehanna

Chautauqua
Erie

Schoharie

Cortland Chenango

Tompkins

Schuyler
Steuben

Crawford

Madison
Otsego

Seneca

Niagara

wa

Acquisition Rationale

Additional East Acreage

In June 2010, KKR signed a definitive agreement for East's

principal subsidiaries to be sold to an affiliate of Royal
Dutch Shell Plc

In December 2010, East acquired KKRs interest in

the remaining assets of the company
KKR invested ~$310 million in East, including ~$90 million
of permanent capital and ~$220 million of bridge capital
KKR realized ~$1.5 billion of proceeds net of fees
Returns on permanent capital:

Gross IRR: 759%

Net IRR: 628%

Gross MOIC: 14.0x

Returns on gross equity invested:

Gross IRR: 252%

Net IRR: 207%

Gross MOIC: 4.7x

Petrohawks Black Hawk

Transaction Background
KKR had identified royalty interests in unconventional fields as an emerging market opportunity
KKR had extensive knowledge of the Eagle Ford shale
In February of 2011, KKR acquired a 1.6% ORRI in Petrohawks (now BHPs) Black Hawk Field in the
Eagle Ford shale for $55mm
Represented a strong opportunity to invest behind KKRs proprietary view of the Eagle Ford
shale and, as a result, do so on the basis of a substantially advantaged risk/reward
Building a new business to acquire these interests leveraging proprietary insights into unconventional
basins

$2.4

60%

$2.0

50%

$1.6

40%

$1.2

30%

$0.8

20%

$0.4

10%

Cash Flow per Month

Annualized Yield

Note:
(1) Cash flow profile shown above represents normalized adjusted cash flow to KKRs interests inclusive of any anticipated tax payments made by Noble
above their implied tax liability

44

May '12

Apr '12

Mar '12

Feb '12

Jan '12

Dec '11

Nov '11

Oct '11

Sep '11

Aug '11

Jul '11

Jun '11

May '11

Apr '11

Mar '11

Feb '11

Jan '11

Dec '10

Nov '10

--

Oct '10

--

Annualized Yield

Cash Flow ($mm)

Transaction Background