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 company. 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 development, all in South Texas. In 1996, the company hit the radar screens as it shifted strategy, beginning to bulk up through a series of acquisitions, in a plan to go public. Michael still concentrated on the Lobo, but stopped selling assets 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 natural gas equivalent (Bcfe) of reserves. 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 additional Lobo assets from Enron Oil & Gas Corp. (now EOG Resources Inc.), as well as a $22-million purchase from Conoco Inc. and a $10-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 quarter 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 million 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" possibilities for Hart and the other original 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, collaborated with Cargill Inc., which had become the largest bondholder-buying notes from others-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 facility 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% position and Cargill took a 45.2% stake. Then, gas prices began their meteoric rise, and buyers in 2001 began paying high prices to acquire companies with gas reserves. In August 2001, Calpine Corp. offered $370 million for Michael Petroleum. "We went from nobody willing to pay $120 million in 2000, to somebody paying $371 million-in one year," Hart said. Of the sale proceeds, $147 million went to EnCap on a $30-million investment; $135 million went to Credit Suisse First Boston Corp. on a $42-million investment; $42 million went to Cargill on an estimated $27-million investment; 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 upstream independents to "sell when the selling's good. When everybody thinks 'this time is different,' that's when you need to sell." -Nissa Darbonne and Leslie Haines