Cycle-tested, high-profile executives in the public and private sectors are taking another chance at building new exploration and production companies. One can debate whether these thoroughbreds are making another run for the roses or taking a victory lap. In any event, they seem to have no trouble getting equity to underpin their start. All cite North American oil and gas fundamentals in their reasoning. A confluence of strong demand for hydrocarbons and vast sums of capital looking for an E&P deal-not to mention high commodity prices-makes for auspicious times. It's an interesting phenomenon but one wonders if it will ever be repeated. "When these guys finally sell and do retire in, say, another five to 10 years, they will be in their 60s. I doubt they will start another company again at that time," says one observer. But for now, these entrepreneurs see opportunity. Many are starting their first company. "I'm in my early 50s and too young to retire," says Rich Langdon, chief executive officer of newly minted Houston-based Matris Exploration, which focuses on low-risk exploration in California. It is his first start-up. "Plus, we see a tremendous opportunity now for companies that know how to explore the old-fashioned way, off good geology." Many executives are starting anew in hopes of repeating past successes. For example, Midland-based Concho Resources, which was the second start-up for CEO Tim Dove, just sold its assets for $420 million to Chesapeake. The package included assets in the Permian Basin where it is based, the Midcontinent, South Texas and onshore Gulf Coast. Sources say Dove is starting Concho version 3.0. "There are an awful lot of us guys who have 20 or 30 years of experience and we are ripe to apply that to a new company. It's either now or never for us," says Mark Doering, 54, who also just started his third company, Dallas-based Classic Petroleum Resources, with backing from Natural Gas Partners (NGP). The University of Texas graduate had seven years with Exxon and three with Netherland Sewell, among other career moves, before starting the first Classic in 1998. He sold it in January 2001 for about $55 million to 3-Tec (now part of Plains Exploration & Production). A month later he started a new Classic, which he sold to XTO Energy for over $100 million in January 2004. This time he didn't pause even a month before recapitalizing and starting the third company. Each time, Doering builds value through leasing, development drilling, a series of small production acquisitions, and farm-ins and joint ventures with majors in East Texas and northern Louisiana. At press time his new company was completing its seventh and eighth wells. He plans to keep two rigs running all year in the Cotton Valley gas play. "Who would have thought a start-up independent could farm into a major's deal?" he says. "But, there are some things a small independent can do so much better than a major or large independent that it makes sense for them, and for us." Doering likes to keep the company small, with only five employees besides himself. All share in the upside. "I am an acquisitions evaluation engineer, not a manager, so I hired people I don't need to manage and give them the responsibility. And I have a good financial partner in NGP." Doering says the current business cycle is excellent and that success will come to start-ups if founders do three things: avoid big mistakes such as being greedy, stay focused on areas and methods where they have expertise, and work hard. "We just work up the value chain. If you can move a barrel from the probable to proved undeveloped category, you've doubled the value. If you move it up to proved producing, you've doubled it again-and it's the same barrel. So you buy, aggregate, add value and then sell in the most efficient process, whether an auction or negotiated sale." He says the discounted rate of NGP's returns on investment in the first two Classics were in excess of 60% each time, so NGP and the Classic employees are happy, and happy to start over. Laredo's progress Glen Hart and Graham Whaling of Houston have seen this playbook too. They formed Laredo Energy with funding from EnCap Investments in 2001 to build a new company focused on the Lobo and Wilcox gas trends in South Texas. Less than two years later they sold those producing properties and some proved undeveloped prospects to Chesapeake Energy for $110 million. Chesapeake immediately drilled four wells on the land, all good gas wells. Barely hesitating a day, the partners liquidated Laredo Energy LP I to form Laredo II with fresh funding of $23 million from EnCap and they are at it again. Last December they acquired that amount of properties in the same general region from ChevronTexaco, and recapitalized to fund development and buy more acreage. "We are generally known as people who acquire and exploit, but I would really call what we do lease and exploit, because we can drill exploitation wells on acreage we've just leased," Hart told peers at an industry program in Houston recently. They imparted some of the lessons they learned during the start-up, funding phase and sale of the company and encore through Laredo II. First, said Hart, never rely solely on one bank for the funding. Second, pick a financial partner that will support you in a change in direction if an opportunity presents itself. Do not fear owning just a small percentage of your new company, because if it all works out, you are still ahead. Asset quality, operations and location are important and are better than owning nonoperated, scattered properties. Sell when the selling is good, but don't hang around a deal too long waiting for that last dollar of a higher price, because valuations fluctuate wildly with any changes in the macro factors of the industry. Finally, drilling is the key to success again and again. "Buying low and selling high without adding much to the properties is pretty much over," Hart said. Laredo I was started with a focus on the South Texas' Lobo Trend-"It's all that we know"-and with an exploitation plan, but Hart and Whaling were unable to find assets in the focus area at prices they liked. So, they put together 20,000 acres in Zapata County in and around Falcon Lake and called it the RMT (Ramirez Mineral Trust) Field. It drilled five good wells through June 2003. All flowed 5- to 7 million cubic feet per day; one tested 10.8 million a day and nine months later, it was still flowing in excess of 10 million. "EnCap let us buy all the 3-D seismic for Zapata County," Hart said. It was expensive, "but we didn't drill any dry holes." Whaling added, "It was amazing how little competition there was for the leasehold, plus the 3-D seismic wasn't proprietary." Laredo I's wells and acreage were sold to Chesapeake in October 2003 for $1.41 per thousand cubic feet equivalent of proved reserves. Production was 30 million a day, gross, and proved reserves totaled 73 billion cubic feet of gas. At the time Laredo had $16 million of equity and $5 million of debt invested. "We decided to sell because the market was good. Why take the risk of future development drilling? And, besides, we had met EnCap's return on investment hurdles," said Hart. The deal returned in excess of 100% to EnCap. Laredo's assets were sold while only 25% of its proved reserves were producing. "We thought the assets may be too immature to sell yet," Hart said, but Chesapeake Energy Corp. was offering Laredo and its partners $200 million for the assets as they were-and no "non-compete" agreement. This allowed Hart and Whaling to get right back to work in the Lobo Trend. There were higher bids but those required non-compete agreements. "The real stars of this deal are our G&G people and landmen who were able to put this land together and find the drilling locations," Hart said. At press time, the company had already made several discoveries and was drilling ahead on two more prospects. Latigo and Matris Randy Foutch formed Tulsa-based Latigo Petroleum 18 months ago and has already built the company to nearly $175 million in value. Even though this is the third start-up he has commanded in the past decade, he claims he is still learning lessons about how to run an E&P company. "The first thing is, it is so critical that you plan on being successful, in terms of building a complete management staff to handle growth right from the start," he says. "And you need to be very deliberate in the type of capital options you use. And third, we think exploration is going to absolutely drive the business every step of the way." Foutch says the latter while revealing that at press time, he had a purchase agreement in place to make another acquisition that will boost the new company's net present value to about $200 million. Unlike in previous years, when a company could pay for producing assets and have all the proved undeveloped locations left to drill, sellers today expect to be well paid for that exploitation upside, he notes. Meanwhile, Latigo has four rigs operating and is participating in about 15 other wells. E&P start-ups focused on growth through drilling, as opposed to acquiring, find it challenging to get funding, but they do manage. At press time, one-year-old Matris Exploration Co. was lining up its first outside financing, expected to be in the $5- to $8-million range, according to president and CEO Langdon. He was with Pennzoil for many years, and then served as CEO of EEX Corp. just before it was sold to Newfield Exploration. Since forming Matris last year, he has been buying and evaluating 3-D seismic data, buying leases, and getting prospects to a drill-ready stage so that when he approached institutional capital, he would have something to show-he has no producing properties. That's because Matris is a drillbit-oriented company, which makes it harder to acquire capital than if it were following an acquire-and-exploit model, Langdon says. "We bootstrapped this to start, investing our own capital...but based on the results of our drilling this year, we'll try to go for $25 million in institutional money next year. "We will spud our first well in June, in the Sacramento Basin, looking for gas. Then later this summer we'll spud a well looking for oil in the San Joaquin Basin." Because the acquisitions environment is so competitive now, Langdon thinks it is difficult to see a buyer getting the kind of returns necessary to succeed.