March 5, 2012

The U.S. is extracting oil and gas from previously inaccessible places, moving away from its dependency on foreign sources of fuel. That’s a trend that has led Insight Venture Partners to make its largest single-deal investment to date. The firm acquired a controlling stake in Drilling Info Inc., a company that provides data and analysis services to oil and gas exploration companies. The deal totaled $165 million, of which Insight provided the majority. The rest came from Battery Ventures and Eastern Advisors Private Fund.

“We’ve done a number of investments in data businesses,” said Deven Parekh, a managing director at Insight Venture Partners, which invested out of its seventh fund.

Another portfolio company, he said, eVestment Alliance, has a similar business model, offering data and analytics to subscribers, but to the financial rather than energy industry. The strategy that Insight used after investing in that company is similar to what it plans for Drilling Info, said Parekh: use the capital to grow geographically and in terms of product offers, by making acquisitions, as well as by investing internally.

The deal valued Austin, Texas-based Drilling Info at between $200 million and $300 million, according to Allen Gilmer, chairman and chief executive of the company.

“We really benefited greatly by this boom of unconventional resources here in the U.S.,” Gilmer said. Cheaper methods of extracting oil and gas from shale rock formations led to a rapid growth of such production in the U.S., with one trillion cubic feet of natural gas extracted from shale in 2006, growing to 4.8 trillion cubic feet or 23% of all natural gas production in 2010, according to the U.S. Energy Information Administration.

The company has been profitable for the past five to six years, said Gilmer. Its growing revenue is now in the tens of millions of dollars, he said, declining to be more specific.

Part of the $165 million went to buy out existing individual and small private equity investors including Delta-v Capital. Some investors had been in the company for more than a dozen years. Drilling Info was founded by oil and gas executives in 1999.

With the new funds, the company will make acquisitions, add new data to its database, and expand geographically. It already launched an international strategy. Drilling Info offers yearly subscriptions that range from $1,400 to $1 million to customers. It now has more than 2,700 accounts. Customers receive information about land titles, leases, well completion and production data, and other data that help customers make decisions about where to drill and which companies to acquire, according to Gilmer.

It has a vast data collection operation that in one case involves transcribing phone numbers from government agencies. “There’s a lot of typing going on, a lot of paper handling. We remove a lot of drudgery” from the customer’s hands, said Gilmer.

The company is also gleaning new information from statistics it gathers. Unlike with traditional extraction methods, where a well would produce basically the same amount of oil and gas no matter who drilled it, there is a big variation in unconventional or shale exploration, said Gilmer. “We have found that there’s a differential between the best operators and the worst that can be as high as 50% or 60%.”

Knowing that helps with two things. It allows the company to actually figure out what are the best practices of the best operators that allows them to extract more oil and gas from the same place. It also allows customers to go back to wells that were left by previous drillers and find that with a different approach and technology, these can become economic. “All of a sudden we are able to look for unrecognized jewels based off of areas where people went in early and didn’t know what they were doing,” said Gilmer.

Gilmer said Insight Venture has an internal business consulting group that’s available to portfolio companies and that helps them make decisions. Parekh, of Insight Venture, also mentioned that he brought in Battery Ventures because that firm has been looking at the oil and gas industry for a while and had interesting ideas about an acquisition strategy that Drilling Info may pursue. Eastern Advisors, meanwhile, is a smaller fund but it’s limited partners are oil and gas executives, which might also help Drilling Info, said Parekh.

The company is now changing its board, said the CEO. Insight will have two representatives, and Parekh and another executive of the company will be on the board. The company will look to fill another seat with someone from either the technology or energy fields, said the CEO.