First Reserve Bets On Abbot

First Reserve, the largest private equity group focused on the energy industry, announced Wednesday its leveraged buyout of publicly listed U.K. oil drilling outfit Abbot Group for $1.8 billion. It's the biggest ever buyout of a drilling company, and a nice payday for Abbot Chief Executive Alisdair Locke, who owns nearly 13% of the company.

Locke will stick around, at the behest of First Reserve Chairman and Chief Executive William Macaulay. From Connecticut, Macaulay oversees a portfolio of some 20 energy companies: China Coal is the second biggest coal company in China; Deep Gulf Energy explores in the Gulf of Mexico; Blue Source trades carbon emissions credits; Dresser makes specialized equipment.

Will Honeybourne, a First Reserve managing director in Houston who helped spearhead the deal--and beat out rival buyout shop Candover--notes that Abbot's rig-building and operating subsidiaries Bentec and KCA Deutag are particularly strong in Russia, West Africa, the Middle East and Libya. Last year, Abbot bought Norwegian drilling company Songa.

As such, Abbot is well positioned to benefit from a huge uptick in oil and gas drilling. "Oil companies need to drill many more wells to replace production from aging, giant fields," says Honeybourne. "We see this as a company we want to hold on to and build."

The global credit crunch may have dried up interest for some private equity deals, but financing is not a problem for Macaulay, who has quietly built First Reserve, since 1982, into a powerhouse, controlling companies that generate $8 billion in annual sales and employ 50,000 people worldwide.

Over the past decade, the company has realized $10 billion in proceeds from asset sales--while generating average returns on investment in excess of 25% a year. Cash for the Abbot acquisition comes from a $7.8 billion war chest--the biggest energy-focused buyout fund in history.

If First Reserve's track record is any guide, in a few years it is likely to return Abbot to the public market or sell it to another oil services company. Take oilfield services giant National Oilwell: First Reserve led the group that bought the company in January 1996 from USX and took it public eight months later (while maintaining a controlling interest in the company).

During the oil-industry recession of the late 1990s, when tool makers and rig builders got cheap, National Oilwell bought 13 companies for a total of $1.3 billion. In 2001, First Reserve sold its last chunk of shares; by then, a dollar invested in the original buyout would have returned $27. Since then, National Oilwell has grown rapidly, with the acquisition of Varco in 2005 and this week's announcement of a $7.4 billion buy of Grant Prideco.

It's hard to predict another industry-wide recession, with oil prices still high and drilling activity ramping up worldwide. But rumors to the contrary, the energy industry remains cyclical; as busts follow booms, consolidation will keep happening--with First Reserve leading the way.