By -Nissa Darbonne and Leslie Haines
Oil and Gas Investor Magazine, May 2002
It is not often that an independent producer
goes through a bankruptcy and comes out the other side successfully,
pays off his financiers in full-and obtains new capital to start
another com-pany. Glenn Hart, one upstream executive who has,
spoke frankly to the Houston Producers Forum recently about
his experiences.
Hart was chief executive officer of Michael
Petroleum, a private Houston company that focused on the gas-rich
Lobo Trend in South Texas, and which hoped to go public at some
point. Now he is president of Laredo Energy, a new independent
that he and other former Michael Petroleum owners formed this
year with investments by El Paso Corp. subsidiary EnCap Investments
LLC, the Houston private equity firm, and others.
Formed in 1982 with seven wells, Michael
was a fairly quiet company which sold producing assets from
time to time to finance continued exploration and devel-opment,
all in South Texas. In 1996, the company hit the radar screens
as it shifted strategy, be-ginning to bulk up through a se-ries
of acquisitions, in a plan to go public.
Michael still concentrated on the Lobo, but
stopped selling as-sets and began acquiring more properties,
such as a package from TransTexas Gas Corp. in a deal that was
financed with mezzanine debt. In 1995, the company had only
19.5 billion cubic feet of nat-ural gas equivalent (Bcfe) of
re-serves. By 1998, its reserves had reached 219 Bcfe and the
staff had doubled.
Unfortunately, the initial public offering market was deteriorating
in 1997, just when the company was ready to make a go of it.
The high-yield debt market was still strong, however. The company
sold $135 million of seven-year, 11.5% unsecured senior notes.
Proceeds were used to finance a $46-million acquisition of addi-tional
Lobo assets from Enron Oil & Gas Corp. (now EOG Re-sources
Inc.), as well as a $22- million purchase from Conoco Inc. and
a $ lo-million package from Mobil Corp.
"At that point in our career, 11.5%
was the cheapest money we ever had, so it didn't seem so onerous,
" Hart said. The situation soon changed. "By the first
quar-ter of 1999, gas prices plunged and we had all that high-yield
and bank debt. We started drilling on our credit facility. We
never turned our one bank [lender] into a group of banks, so
when the one bank balked, we were in trouble," Hart said
ruefully.
High-yield debt wasn't what really did the
company in, he added. Instead, it was the bank cutting off its
line of credit and capping it at $23 million, which was the
level to which it had been drawn down. Meanwhile, an interest
payment was coming due on the $135 mil-lion in notes. Besides
the $23 million of (secured) bank debt, the company had $8 million
of trade debt. Hart proposed converting the bond debt to 95%
equity in the company with "clawback" possi-bilities
for Hart and the other orig-inal owners, who held 100% of the
equity. Nothing became of that proposal or another. Chapter
11 was filed in December 1999. The plan was to sell Michael
Petroleum for a minimum bid of $120 million, but no bid of that
amount was ever made. In 2000, the late Fox Benton at EnCap
Investments, Houston, col-laborated with Cargill Inc., which
had become the largest bond-holder- buying notes from oth-e
r s -to provide $57 million of equity to Michael Petroleum.
"[Cargill was] the only group that took time enough to
learn about the company and what we had," Hart said.
A new $50 million credit facil-ity was arranged
with a four-bank group. EnCap placed the lone bid on the company
in bankruptcy in August 2000. It took a 50.2% po-sition and
Cargill took a 45.2% stake.
Then, gas prices began their meteoric rise,
and buyers in 2001 began paying high prices to ac-quire companies
with gas reserves. In August 2001, Calpine Corp. offered $370
million for Michael Petroleum. "We went from no-body willing
to pay $120 million in 2000, to somebody paying $371 million-in
one year," Hart said.
Of the sale proceeds, $147 mil-lion went
to EnCap on a $30-mil-lion investment; $135 million went to
Credit Suisse First Boston Corp. on a $42-million invest-ment;
$42 million went to Cargill on an estimated $27-million in-vestment;
and $25 million went to the original Michael Petroleum shareholders.
"What are the lessons? First of all,
I'm not going to do that again. No more high-yield bonds for
me. The other equity-holders and I would have gotten $200 million
instead of $25 million."
Hart also advised other up-stream independents
to "sell when the selling's good. When every-body thinks
'this time is different,' that's when you need to sell."
Former CEO tells the roller-coaster story of Michael Petroleum