Several new firms are emerging in the energy space to help smaller producers fund drilling prospects. Some act as match-makers of prospect generators and capital providers; others are capital providers, looking to buy into drilling prospects alongside explorationists who don't have access to traditional financing sources.

They include Houston-based Patriot Exploration Co. Inc. and SouthView Energy LP, deep-pocket E&P partners; Access Exploration Corp. and PLS Inc., prospect screeners; and PetroInvest, a private-placement online exchange.

How do they operate and how are they different from traditional energy-financing sources?



Looking to partner

An E&P company itself with nonoperated interests, Patriot Exploration Co. Inc. seeks to work with small and midsize producers as a financing partner, or lender, on a variety of drilling and other upstream projects. The company specializes in drilling-project investments between $1- and $20 million, with projects in the $5- to $10-million range its investment "sweet spot."

Since its formation in 2001, Patriot has doubled its upstream investments each year. Currently, it has about $100 million invested in projects in the western and central U.S. and in the Gulf of Mexico. Within the next two years, the company plans to invest an additional $150- to $200 million in growth-oriented U.S.-based ventures.

Financed by investments from wealthy individuals and small institutions, it has an annual pool of about $50 million to fund drilling projects covering the entire spectrum of the risk-reward ratio, says Jonathan Feldman, Patriot chief executive.

The balance of the Patriot management team consists of managing director J. Carter Henson Jr., a former senior vice president of Netherland, Sewell & Associates, and vice president Jack Bayless, former vice president of land for Carrizo Oil & Gas Inc.

Three strategies distinguish the company, he says. First, it is interested in acquiring working interests in specific projects-not acquiring a percentage of ownership in a partnering company. Second, as an oil and gas company itself, it has a staff of experts in upstream disciplines, including engineering and drilling. Third, with a large pool of committed funds from investors, it isn't dependent on any one project.

"Our investments allow an operator to continue its success in development drilling and workover projects without the frustration of complicated financial arrangements or the worry of losing ownership of its company," Feldman says.

With respect to the nature of its participations, Patriot looks for high-quality drilling prospects with seasoned operators who have a substantial equity investment in their projects. "And, we participate in everything from land acquisitions and drilling to secondary-recovery projects-and everything in between," Feldman says.

Its financing terms? "We provide low-cost capital to drill proven undeveloped (PUD) reserves. Then, in return for all the tax benefits associated with drilling, we provide operators with a large back-in interest after payout, an opportunity to maintain 100% ownership [of the prospect] and balance-sheet leverage-all without the typical high cost of mezzanine financing." Also, Patriot will take second position to senior lenders until the preferred payout.

In August, Patriot entered a partnership with Bill Barrett Corp. in development of the Big Horn Basin in Wyoming in a mutual-interest agreement covering more than 160,000 net and 217,000 gross acres. In the deal, Patriot is to own a 25% working interest in all leases, drilling and development activity, and its initial commitment to the project is $14.5 million. It recently purchased an adjacent 18,000 acres from Anadarko Petroleum Corp., and the land has become part of the agreement with Bill Barrett.

In November, the company reached a participation agreement with Carrizo involving approximately 22,000 net and 26,000 gross acres in the Barnett Shale play in the Fort Worth Basin. In the deal, Patriot owns a 10% working interest in drilling and development on the acreage where Carrizo is the operator. Patriot's initial commitment is $2.5 million, with the potential to invest an additional $35 million or more as work progresses.

In addition, the company is providing drilling capital to a family-owned, third-generation, Oklahoma independent.



Well-financed

SouthView Energy LP was formed in 2005 as an E&P company to own and develop properties through participation in lower- and moderate-risk exploitation and development-drilling projects and property acquisitions.

"We are not in the finance business," says Jack Schanck, SouthView chief executive. "Rather, we participate for our own account in drilling and acquisition opportunities as both operator and nonoperator. Thus, we are basically a well-financed industry partner."

SouthView will partner in domestic, onshore drilling ventures in which the operator has a demonstrated record of drilling success in a targeted area and has committed its funds to a drilling program offering low to moderate drilling risks.

"We're looking for drilling investments in the $2- to $20-million range with growth potential where the operator has a well-developed technical premise that SouthView can review, and where there is a desire for a long-term relationship to develop opportunities together," stresses Schanck.

Formerly, he was co-chief executive of Samson Investment Co. and president of Spirit Energy 76, Unocal Corp.'s domestic E&P unit. David Bole, co-founder and president of SouthView, is a former managing director at Randall & Dewey, a division of Jefferies & Co.

SouthView has a broad portfolio of upstream opportunities, Schanck says, including equity ownership ranging from 20% to 75% in three private companies, a large interest in resource plays involving more than 125,000 acres, a focus on bypassed potential in established producing areas, several M&A opportunities it is evaluating, and participation in two prospect-generation shops.

With equity capitalization of more than $100 million, including initial investments from Jefferies Capital Partners and Quantum Energy Partners, SouthView is focused on onshore drilling and acquisition opportunities primarily on the Upper Texas/Louisiana Gulf Coast, and in East Texas, North Louisiana, the Midcontinent, Permian Basin and Rockies.



Open access

For approximately the price of one or two geoscientists' salaries, "program participants" in Access Exploration Corp. pay an annual fee and gain information about drilling-prospect opportunities developed by prospect generators, screened by Access, and have an option to obtain a working interest.

At no cost, drilling prospect generators provide Access with data on prospects for which they are seeking a partner. However, Access is very choosy. Less than a quarter of the prospects it reviews are recommended to program participants.

"Since our inception in 2004, we have screened more than 300 prospects, recommended 68 and closed on 38 of those," says Tom Morrow, Access president. The firm makes the preliminary offer to the prospect generator, but the contracts are signed directly by the investors taking the equity interest. Access has 13 program participants, including Patriot Exploration and SouthView Energy, that subscribe at various participation levels.

"Access Exploration is unique in that most prospect screeners/evaluators reserve a back-in interest, an ORRI (overriding royalty interest) or some kind of carried interest," says Morrow, former president of Challenger Minerals Inc., a prospect screener and participant in the Gulf of Mexico and North Sea.

"We normally charge only a yearly fee that remains constant no matter how active a program participant-a knowledgeable oil and gas company seeking working interests in drilling prospects-may be."

Typical agency issues are avoided in Access' business model in that it has no reason to make a prospect look better or worse. Many participants have been with the firm in one form or another for the past 14 years, including such E&P companies as Bright & Co., Cheyenne Petroleum and Continental Resources.

Access has specialized programs to satisfy program participants' needs, Morrow adds, such as the Rocky Mountain exploration program, of which Cheyenne Petroleum is the founding company. Prospect generators have included Bill Barrett Corp. and Newfield Exploration Co.

Access acts as a sophisticated intermediary in a knowledgeable market place, bringing together participants to make a single offer to simplify and accelerate the process for the prospect generators. "Most of the time the program participants take all available interest, with typically about three companies joining in any single prospect or project," says Alan Morgan, Access vice president of land.

"By recommending only deals that are economically robust, technically sound and adequately documented, we save our clients significant front-end costs," adds Jeffrey Lund, vice president of exploration. "Investors enter at the end of the prospect-generation supply chain, minimizing their kill costs-the costs of evaluating and rejecting undesirable prospects-and enabling them to more efficiently develop their prospect inventory."



A natural fit

PLS Inc. also matches prospects with money sources, typically E&P industry partners, but in an advisory or intermediary format. "We can put people in touch with the money folks because we know all of the banks, private-equity and mezzanine groups, and have been successful in referring people to such capital providers," says Ronyld Wise, PLS president.

"So while we don't provide capital, we can help find capital, a partner or a buyer. Intermediaries or agents, such as PLS, add value through such relationships."

Right now, the firm is working with a Permian Basin working-interest owner that has sourced two capital providers on its own. "We have provided that owner two complementary options, including an asset buyer and a merger candidate," says Wise. "In addition, we've introduced the company to a brand new capital provider."

The agent fee is typically 1% to 3% of the transaction cost. On another deal, PLS is working with an exploration company that has experienced trouble tapping the capital markets due to the risks inherent in exploration drilling. "In this case, we've been able to suggest that the operator enter a joint venture with a company looking to participate in drilling deals," says Wise. "Furthermore, that company was able to suggest a different term sheet that seemed more competitive and perhaps more flexible than the exploration company selling its future to a capital group."

Selling an asset, or a prospect, is the last chance to raise money on a project, he adds. "As such, sellers of assets owe it to themselves and their investors to make prudent decisions-and hiring an agent can be helpful."



Internet exchange

High-net-worth non-industry individuals have long been a capital source for the oil and gas industry. But all too often, the arrangement has not met investor expectations due to a lack of knowledge on the part of the investor-knowledge very much needed to conduct proper due diligence.

PetroInvest, which calls itself the "private-placement, drilling-partnership exchange," hopes to change that flaw while providing microcap oil and gas companies an alternative source of capital-often on better terms than an industry partner can provide.

The firm was developed to fill a vacuum that exists between the single-prospect petroleum industry deal and mezzanine-debt providers that balk at funding drilling without some associated existing production, says Steven D. King, founder and president. "The PetroInvest opportunity should have slightly higher risk and reward compared with the mezzanine deal structure."

The firm provides a platform in which non-petroleum investment advisors, representing high-net-worth individuals, can choose from multiple opportunities at one place. "These non-industry investors and their registered advisors never see the vast majority of microcap petroleum companies who, in turn, have no idea how to approach this potentially huge capital source."

In its strategy, PetroInvest uses the Internet to bridge the gap between small producers and private capital, focusing on microcap producers with a value of $20 million or less. During 2005, it spent most of its time organizing and evaluating scores of potential drilling prospects and in 2006, proved it could execute, closing one funding and nearly finishing another.

Looking ahead, more than 100 financial firms are registered at the PetroInvest website, ranging in size from the single-person financial advisor to larger broker/dealers and registered investment advisors. It has also developed relationships with some small institutional-fund managers looking at the E&P sector.

"Concurrently, we have 500-plus companies in our universe of microcap oil and gas producers that could use private partnerships as a source of drilling capital," says King, a former Tenneco executive and a founder of Newfield Exploration Co.

PetroInvest is similar to other oil and gas investment bankers in that its staff has actual oil industry operational experience, often on par with that of the oil and gas client, he adds. "We're thus able to put the potential sponsor-any E&P company looking for private-placement funding-through due diligence, looking at both management and the projects it wants to drill.

"Our goal is to [bypass] early on any programs that wouldn't pass later third-party review. As we see it, investors want to invest in petroleum-they just need some confidence that they're getting a fair deal."

What distinguishes PetroInvest is how it is compensated for its efforts. "Our profit comes from oil and gas production," King says. "If the investor loses, we don't profit. So it's in our best interest to select E&P companies that have superior drilling prospects."