Exclusive: Buyout firm EnCap eyes first oil and gas production fund in five years - sources

Nov 22 (Reuters) - EnCap Investments is raising its first private equity fund in five years dedicated to oil and gas production, people familiar with the matter said, making it an exception among U.S. buyout firms that have fled the oil patch amid a scarcity of lucrative acreage and pressure from environmentalists.

Houston-based EnCap has approached investors in its previous funds to gauge their interest in participating in the new launch, the four sources said. It would be EnCap's 12th flagship fund and it could be officially marketed to investors early in 2023, the sources added.

A fundraising target has not yet been set, though the fund is expected to be smaller than Energy Capital Fund XI, its predecessor for which EnCap amassed $7 billion in 2017, according to the sources.

The sources spoke on condition of anonymity to discuss confidential information. Reuters was unable to identify investors that EnCap is courting for the new fund. EnCap declined to comment.

Many private equity investors have fallen out of love with the oil and gas sector as easy-to-drill acreage is becoming scarcer and more expensive for private equity firms. The popularity of investing based on environmental, social and corporate governance (ESG) principles that prioritizes the issue of climate change has also made raising funds dedicated to fossil fuels challenging.

What is more, some private equity firms suffered bruising losses in the oil patch in the late 2010s when energy prices were low, scaring some investors away for good.

Just $2.6 billion was raised last year for oil and gas-focused private equity funds, compared to $20.2 billion in 2017, when EnCap raised its last flagship fund, according to data provider PitchBook.

However, the energy supply crunch caused this year by Russia's war in Ukraine has buoyed the returns of investors that stuck with fossil fuels. EnCap's Energy Capital Fund XI was valued at 1.42 times its money, equivalent to an 18.8% internal rate of return, as of the end of June, according to the website of the Oregon Public Employees Retirement Fund, one of the investors.

EnCap has sought to attract ESG-minded investors through EnCap Energy Transition Fund II, its second fund dedicated to helping companies transition to clean energy for which it is currently seeking $2 billion, according to a separate source.

EnCap is also raising its fifth fund for its pipeline infrastructure affiliate, EnCap Flatrock Midstream, seeking $3 billion.

Reporting by David French in New York; Additional Reporting by Chibuike Oguh; Editing by Lincoln Feast

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