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A giant cache of private equity money is chasing a growing treasure chest of oil and gas assets ready to be harvested, and the result is a horde of deal-making that isn't likely to slow anytime soon, observers say.

"In total, there's about $25-$30 billion in private equity funds that exist today to invest in oil and gas companies, and we understand those same funds are out looking to raise another $20 billion," Scott Johnson, co-founder of mezzanine financier GasRock Capital.

"There's a lot more money flowing in than even five years ago, and dramatically more than 10 years ago," Johnson said.

He and others say that oil and gas investments have become especially alluring in recent years to private equity funds for their return rates, which for choice opportunities have yielded more than 25%. The chief draw is the large potential of unconventional plays--where the money is settling particularly on oil projects--that can be brought into relatively quick development with technologies of horizontal drilling and multi-stage fracturing, observers say.

In fact, two big private equity players that in recent months closed mammoth unconventional deals reflect the hot pursuit of private equity into these plays, experts said. Kohlberg Kravis Roberts & Company and Apollo Global Management, which have financed energy transactions for years, each separately poured billions to acquire existing US E&P independent companies with just such assets.

Apollo led a group of investors that included Riverstone Holdings and Korea National Oil Corporation to fund the buyout last month of EP Energy from its former parent El Paso for $7.15 billion.

And late in 2011, KKR led another investor group that acquired most of privately held Samson Investment, excluding the Gulf of Mexico and Gulf Coast assets, for $7.2 billion.

Observers say both deals likely fetched such showy prices due to the properties' liquids upside. For example, the Samson package included thousands of existing wells that now mostly produce gas in the US' midsection in such sought-after fields as the Bakken Shale, Granite Wash in western Oklahoma and the Texas Panhandle and Cana Woodford, also in western Oklahoma. But KKR said that going forward, it anticipates moving Samson's output mix to 50% liquids.

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Another large private equity firm, The Blackstone Group, has taken a "significant" position in both the Eagle Ford and western Canada's Duvernay Shales and other deals in recent years, Blackstone Senior Managing Director David Foley said.

"I think one of the reasons we have been successful is that we are very disciplined and selective--you can't swing at every pitch and expect to deliver superior performance to your investors," Foley said. "Also, we build in a margin of safety and look for value we can add to the investment independent of the commodity price."

Whereas private equity fund managers often have preferences for assets at an early stage of development, EnCap Investments comes in even earlier--it presides at the birth of E&P independents, Gary Petersen, CEO of EnCap Investments, said.

"The big buyout firms are doing big acquisitions, whereas we and other smaller private equity E&Ps are backing management teams and building assets from scratch--up to $500 million or $1 billion in size," Petersen said. Post-$1 billion, "that's where KKR...and others want to come in and back people to buy their assets or take [a company] from $1 billion to $5 billion. We start companies; they don't necessarily start companies."

Late in 2011, EnCap led an investor group to finance a $550 million private placement that got shale wizard Floyd Wilson's new upstream venture Halcon Resources on its feet. Wilson's former company Petrohawk Energy discovered the prolific Eagle Ford field, which is one of the most active plays in the US with upwards of 225 rigs running. Wilson sold Petrohawk last August to BHP Billiton for $15 billion, including $3 billion of debt.

In the last couple of months, funds have backed fledgling offshore ventures as well. In April, Apollo and Riverstone also anchored newly launched Talos Energy LLC with up to $600 million in equity commitments for oil and gas acquisitions in the shallow-water Gulf of Mexico and along the US Gulf Coast. Talos is managed by executives who built shallow-water independent Phoenix Exploration, sold in 2011 to Apache, and before that, Gryphon Exploration, sold in 2005 to Australia's Woodside Energy.

And last month, investors led by Warburg Pincus put $1.125 billion into Dallas-based startup Venari Exploration, a company with a mission to explore in Gulf of Mexico deep waters. Venari claimed the investment is one of the largest private financings for a startup company in the oil and gas sector.--Starr Spencer in Houston 

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