Seminal poet William Blake's road of excess was said to have led to the palace of wisdom, "for we never know what is enough until we know what is more than enough." Private-equity recipients might concur with Blake's vision given a few scenarios: that excess capital in good times provides opportunity; a tighter credit environment in bad times provides wisdom; and what is more than enough might just prove to be a billion-dollar success story.

At the recent Independent Petroleum Association of America's private-capital conference in Houston, a panel comprising Chaparral Energy's Mark Fischer, Laredo Petroleum's Mark Womble and Tracker II's Jeff Vaughan shed light on their respective private-equity backed companies and lessons learned along the way.

The Long Haul

Chaparral Energy Inc.'s private-equity success story is relatively new. Operating since 1988, Chaparral recently completed its first institutional transaction of this kind in April 2010. "So, we’ve only really been at it for about nine or ten months," said Fischer, chairman, president and chief executive officer. Although Chaparral did have an investment by Chesapeake in the form of a non-controlling interest in 2006, they were for the most part a passive investor.

As the name suggests, Chaparral has been in the thick of things for 23 years, transforming from debt-heavy to a financially stable company over time. Fischer credits solid growth throughout the years, and, most recently, its private-equity transaction.

Historically, Chaparral has "essentially grown from a two-person company to about 800 people," Fischer reflected. The company also opened its doors with around $100,000 and has since improved its valuation to an impressive $2.5 billion as of 2010.

Chaparral is now the third-largest oil producer in Oklahoma and boasts 4,800 drilling locations in conventional-type reservoirs and owns 60,000 acres in unconventional and emerging plays.

"We grew the company mostly with debt, which was a good thing for the shareholders up until the 2008 period," Fischer said. As it did for many of its peers, 2008 posed a new set of challenges for the independent E&P.

Most affected by the price downturn was Chaparral's large inventory of carbon dioxide (CO2) tertiary recovery projects in the Midcontinent and Permian Basin, where the majority of its production is located. CO2 EOR is the growth driver of Chaparral’s future operations, according to Fischer. "Most of our EOR-type operations breakeven at $40 to $45 a barrel, so pricing at the end of 2008 hammered our reserves pretty hard at that time," he said.

To buffer itself, Chaparral built in safeguards through hedges, which ultimately allowed the company to weather the storm through 2009. Then, the Oklahoma City-based E&P was "faced with a situation" of whether to continue going forward with only an expected 2% growth per year or undertake a private-equity transaction in the hopes of stepping up annual growth by 15% to 20%, Fischer said.

In April 2010, Chaparral received its first institutional private-equity investment of $325 million from New York firm CCMP Capital Advisors LLC. "The equity helped us delever and provided us with the capital to move forward with our operational programs," Fischer said.

Chaparral followed the equity commitment in September 2010 with a $300-million high-yield bond transaction, which enabled the company to pay off all of its senior secured debt. It then completed another $400-million upsized high-yield bond transaction in February 2011, the net proceeds of which were used to pay off the company's 2015 bonds. As a result, the company's nearest debt is not due until 2017.

"Our debt maturity is well out into the future, and consequently I think we've become very stable from that standpoint," he said.

Meanwhile, Chaparral's current plans are to take on the public markets within the next two years, Fischer revealed.

The Road Map

"When you are talking to private-equity providers, you've got to know their background, their goals and their ideas upfront," underscored Mark Womble, senior vice president and chief financial officer at Tulsa, Okla.-based Laredo Petroleum Inc.

Laredo is led by veteran oil and gas industry entrepreneur Randy Foutch, who also started up Laredo's predecessors Colt Resources, Lariat Petroleum and Latigo Petroleum (which collectively sold for more than $1 billion) in partnership with private-equity providers First Reserve, Warburg Pincus and JP Morgan.

Womble mapped out a few guidelines for the private company looking to tap equity.

The advantages with dealing with private-equity firms, according to Womble, are access to "tremendous pools" of capital, the speed with which these firms operate and the credibility they add to the companies receiving the financial backing.

Most important from a business plan standpoint is that the company seeking capital must have a "unique" niche, or "something you're going after," Womble said. Before accessing equity as a means to that end, choosing a private-equity provider should ultimately coincide with this target.

And, for the privately held, certain private-equity names do carry weight, Womble indicated. "If you're with Warburg, you can get in to see people that you normally can't see," he noted.

Also equally important from a business perspective is to work with private-equity firms that understand the oil and gas business, its investment cycle and its risks and rewards, according to Womble.

"You need to get strong equity partner that knows it has to be there for the long term," he reiterated.

Warburg Pincus has proved to be just that for Laredo. The firm has "a strong track record" of supporting E&Ps and also backs independent heavyweight Kosmos Energy, which unveiled plans to go public in January. And, "they don't let you get overleveraged," Womble added.

Since its inception in 2007, Laredo has completed two $300-million financings with Warburg Pincus, the second of which took place in October 2008, "when things had really fallen apart."

According to Womble, this last transaction enabled Laredo to reload its equity structure at the right time and move the company forward during tough times in the market.

With $600 million of commitments and $290 million of net debt, Laredo management hopes to someday take the predominantly Midcontinent and Permian producer public.

On The Right Track

So how do you build a billion-dollar company? "In the oil and gas industry, you start with $10 billion," joked Jeff Vaughan, president and CEO of Denver-based Tracker Resource Development II.

Vaughan and the Tracker II team managed to do it with $50 million. The start-up capital "wasn't near enough, but that's part of our story," he confessed. But while the Tracker story has eventually led to riches, it was a tale of survival along the way, according to Vaughan.

When describing Tracker's last four years, the omniscient voice of British novelist Charles Dickens says it best. "It was the best of times, it was the worst of times; it was the age of wisdom, it was the age of foolishness; it was the epoch of belief, it was the epoch of incredulity; it was the season of Light, it was the season of Darkness; it was the spring of hope, it was the winter of despair; we had everything before us, we had nothing before us [...]

According to Vaughan, whose focus for more than 28 years as an oil and gas entrepreneur has been to monetize large-scale oil and gas plays, this is "a good metaphor" for a lot of the resource plays out there today.

Eyeing one oil shale-rich target in particular, the president and CEO of Denver-based Tracker Resource Development II founded the company in 2006 with a private-equity investment from EnCap Investments LP.

The Tracker II management team began assembling a Bakken position along with Houston partner Red Arrow Energy LLC, which had grown to more than 167,000 net acres in North Dakota's Williston Basin at the time of its sale to Hess Corp. in December 2010 for $1.05 billion in cash.

Tracker bided its time before drilling its first well. "One of our philosophies is 'it's a wise man who knows what he doesn't know,'" Vaughan said, "and there's a lot you had to know about this play.

"This was the 'age of disbelief' and a lot of people didn't think it was going to work," he continued. The Bakken then was considered a "risky, capital-intensive play." So Tracker watched, learned and locked up its acreage, and didn't spud its first well until 2007.

Shortly thereafter, the company sold down part of its acreage and completed a mezzanine debt deal with Guggenheim Partners to fund development of up to seven more wells. It followed with a farm out to test the eastern portion of the play. Things were "going good" through summer of 2008, when oil spiked to $145. In the fall, however, "things unraveled from there."

Some of the challenges faced in this "worst of times" included a curtailed oil production due to pipeline constraints, the financial meltdown, higher drilling and completion costs and low oil prices compounded by an increase in differentials relative to Nymex, Vaughan said. And, in a play with three- to five-year leases, "the clock was ticking."

Bad times gave way to wise choices. As the company was figuring out its geological model in the Bakken, "we really got confident in what we were doing and needed more capital to go forward," he said.

In July 2009, Tracker formed TRZ Energy with Ziff Ventures Investment Fund, which gave the company the capitalization needed to expand. And by year-end 2010, a billion-dollar deal in one of the hottest shale plays was done.

Contact the author, Nancy Miller, at nmiller@hartenergy.com.