When the idea of American creativity comes up in a business setting, most people likely conjure up a Bill Gates-type figure working on some disruptive new technology in a California garage, news of which goes viral and within weeks is followed by a cascade of deep-pocketed development offers.
Another idea of American ingenuity also persists: Let’s find a way to get new projects off the ground, even if they’re small—really small—using a financing package that is based on a straightforward deal structure; that is repeatable and expandable; and allows clients to retain control of the project and its eventual upside.
BlueRock Energy Capital fits the latter mold, but it is not one shared by many capital providers to the oil and gas sector. The company is headquartered about 25 miles outside the high-rent district of downtown Houston.
Its business is financing oil and gas projects ranging from $1 million up to $10 million, but “its bread and butter” consists of $1- to $3-million dollar projects.
“We’re providing capital to a niche in the market that no one else provides capital to,” says Cathy Sliva, who as a BlueRock partner has been working in Houston with “micro independents” since 1993, and whose prior career experience includes a management buyout of Tenneco Ventures.
What’s the background of these “niche” clients?
For the most part, E&Ps that are not yet ready for a bank, or are too small for a private-equity sponsor, or are not yet willing to cede control by selling a working interest to an industry partner.
Although deal size is small, multiple projects with the same E&P are not uncommon; Sliva says “quite a few” E&P clients have each had $15- to $20 million invested with them in multiple projects.
>Periodically BlueRock has faced competition in its niche, but that has faded as newcomers usually retreat from the skinny economics inherent in deals of this size. “Absolutely no one competes with them,” observes one Houston-based financial industry player.
“Since we are doing small transactions, we have to be very efficient,” says Sliva. “It’s a lot of blocking and tackling to do these little deals, and it’s not glamorous. But we are very efficient at it. We have a model that works, and we try not to change it too much because it works.”
Projects obviously have to offer upside, and BlueRock would prefer that clients bring in not just a single project, but rather a series of deals as part of a growing relationship.
“Once we have someone in the door as a partner, we can move very quickly to give them additional capital,” observes Sliva. “That’s typically what happens. We help someone start to grow, and they can end up growing exponentially with the boost we give them, because every time they increase production, we are able to give them more capital for the next project.”
To get started with BlueRock, one condition is to have at least some production, even if it is only 20 barrels per day. No third-party engineering reports or personal or corporate guarantees are required. (For more on BlueRock’s financing terms, see “Mezzanine Moves” in this issue.)
But what is the motivation for working on such small financing packages when capital intensity in the industry is on the rise?
And, given the purposely intermediate nature of the funding, won’t many of the projects be refinanced with cheaper bank debt at some point down the road if they are successful?
“I just love helping these little guys make a go of it,” says Sliva, who notes that many are not used to providing the audited financials, third-party engineering reports, etc., that are required by most banks. For a company of two to three people, this can represent a significant added cost.
After getting a start with BlueRock, more than a few clients have gone on to enjoy further success.
“We have clients who have graduated to the big time. If they make it to $10- to $15 million, and they can go to a bank and refinance with current rates so low, I tell them all the time they ought to do that. We are here to help them graduate to whatever next step they want to go to.”
And in the process of working with this varied group of small independents, Sliva indicates there have been plenty of characters that she has enjoyed getting to know—enough to fill a book.
And if published, the book would probably sell well!
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