While the rest of the world races to address the climate crisis, KKR is redoubling on fracking by merging its Independence Energy with Contango Oil & Gas Co to create a consolidation-focused oil and gas company with an enterprise value of about $5.7 billion.
The merger brings KKR’s Independence together with Fort Worth billionaire John Goff’s Contango. Goff “has been busy bottom feeding” for the past two years, Forbes reports. “As low commodity prices crushed overextended oil companies, his publicly traded Contango Oil & Gas has invested hundreds of millions to snap up some 400,000 acres of drillable acreage in Texas, Oklahoma and Wyoming, and now produces about 25,000 barrels of oil and gas per day.”
“KKR is bucking the trend among private-equity peers that have been unloading shale investments after back-to-back oil-market busts. After years of poor returns and swelling debtloads, shale drillers were already out of favor when the Covid-19 pandemic crushed energy demand,.” Bloomberg reported.
Oil & gas producers suffered an unusually high number of bankruptcies during the 2020 downturn in demand, dominated by private equity-backed companies hobbled by high debt.
Bloomberg, June 8, 2021: KKR’s Independence, Contango Nearing $5.5 Billion Merger Deal
KKR will hold 17% of the new Contango on its balance sheet with another 50% of the equity held in funds such as KKR Energy Income and Growth Fund I. KKR will be able to name nearly all of the new Contango’s board members, and will receive an annual management fee for running the company.
Independence shareholders will control about 76% of the company and Contango shareholders the rest. The combined business will be managed by KKR’s Energy Real Assets team and David Rockecharlie, head of KKR Energy Real Assets, will serve as the chief executive.
KKR will receive a special class of non-economic preferred stock that provides it with the authority to appoint all board members as well as some consent rights over actions such as debt incurrence, officer changes, mergers, acquisitions and divestitures, according to Reuters.
KKR’s Rockecharlie told Forbes that Independence will be contributing years’ worth of accumulated oil and gas assets to the new Contango, including stakes in oilfields that KKR has developed over the past six years in partnership with the likes of Venado Oil & Gas (in the Eagle Ford) and Fleur de Lis Energy (in Wyoming and the Permian).
Reuters, June 8, 2021: KKR’s Independence, Contango to merge in $5.7 bln oil and gas deal
KKR’s continuing interest in fracking underscores the firm’s troubled energy investments. KKR’s cofounding billionaire Henry Kravis is from oil town Tulsa, Oklahoma.
KKR’s extensive investment in producing fossil fuels and expanding fossil fuel infrastructure is contributing to climate change and has immediate negative impacts on some surrounding communities. Both the immediate and the longer-term social impacts are disproportionately shouldered by people of color.
KKR has faced allegations of harming Indigenous communities in Canada and Colorado, and has invested in fossil fuel companies in South Texas and New Mexico where communities of color are exposed to polluted air and water, as detailed in PESP’s report, KKR Energy Investments Troubled by Racial Injustice and Financial Losses
KKR-owned Venado Oil & Gas operates its wells in south Texas’ Eagle Ford shale area, a region of impacted by environmental and racial inequity. Venado’s Eagle Ford operations include counties, such as LaSalle, Dimmit, and Webb have populations that are more than 87 percent Latino. A 2016 study published in the American Journal of Public Health found that poor and minority neighborhoods bear a disproportionate exposure to fracking wastewater disposal wells in south Texas’ Eagle Ford region.
KKR is also accused of violating indigenous sovereignty with its construction of the Coastal Gaslink Pipeline in Canada, where the Wet’suwet’en hereditary chiefs’ opposition has resulted in protests, delays and blockades. Indigenous communities oppose the 400-mile pipeline construction through their territories. The pipeline is over budget and behind schedule.
Forbes, June 8, 2021: Fracker Consolidator: KKR Teams With Billionaire John Goff In $5.7B Contango Merger
KKR’s energy funds have underperformed, and several of its energy pursuits have resulted in bankruptcy.
In April 2020, KKR-owned Longview Power, with a coal power plant in West Virginia, filed for chapter 11 bankruptcy. KKR had acquired the company in 2015 after a previous bankruptcy, together with Centerbridge Capital and other partners. The plant had been touted by Trump’s US Department of Energy as a model for “clean coal.” But KKR’s attempts to refinance Longview’s debt were inadequate, resulting in the bankruptcy filing with a prepackaged restructuring plan, which was approved by the court in May 2020 wiping out KKR’s 40% stake.
Another bankruptcy was Tulsa’s Samson Resources, acquired by in 2011 as a stable family business with substantial cash on hand. But KKR overleveraged it, and four years after buying a controlling 60 percent stake, Samson fell into bankruptcy and KKR had to walk away.
Private Equity Stakeholder Project, April 13, 2021: KKR Energy Investments Troubled by Racial Injustice and Financial Losses
People of color live with 66% more air pollution from burning gasoline than white populations.28 In a March 2019 study published in the Proceedings of the National Academy of Sciences, researchers found that Black populations breathe in 56 percent more air pollution and Latinos are exposed to 63 percent more pollution than they cause by their consumption.
KKR’s fossil fuel investments continue to exacerbate these racial inequities, and some of its investments have already had clear negative impacts on communities of color, including Indigenous communities in British Columbia and Colorado, and Latino communities impacted by fossil fuel exploration and production in New Mexico and Texas.
While it may be “fun buying distressed assets, when you believe, like Goff does, in the long-term staying power of petroleum,” decisive action must be taken on the climate crisis and racial injustice, and asset managers like KKR need to reconfigure their risk analysis.