Crimson and Cobalt Tap Equity

If there was any doubt that the equity markets are beginning to open for E&P issuers, it was dispelled this past December as two Houston-based explorers issued equity into a down market and came up victorious.

In 2009, most of the equity-market activity occurred in the second and fourth quarters. Early on, most of the proceeds were used to pay down debt and fund working-capital coffers. Later, equity raises were used to accelerate or fund capital expenditures or acquisitions. Near year-end, markets began to close, especially after November, as institutional investors tallied up their wins and losses.

Yet, in December, two relatively unknown names came into the market and were surprisingly well received.

Cobalt International Energy Inc. succeeded in floating 63 million common shares for $13.50 per share in an initial public offering (IPO), thus raising some $850 million. In January 2010, the E&P sold an additional 7.9 million shares, at the same price, with the underwriters exercising their over-allotment option. Including the over-allotment, gross proceeds from Cobalt’s IPO and a subsequent 3-million-share offer reached nearly $1 billion. The company’s shares began trading on NYSE under the ticker symbol, CIE.

Also in December, Crimson Exploration Inc. closed a public offering of 20 million shares of common stock for $5 each. Net proceeds topped $93 million after expenses.

Crimson Exploration

“We were trying to find the right catalyst to issue more shares into the market for a larger public float. We acquired some good Haynesville acreage and we wanted to get out there and develop it,” says Allan Keel, president and chief executive for Crimson Exploration Inc.

“We went out to the equity market in mid-December and it was not the best of times to do that,” admits Allan Keel, Crimson’s president and chief executive. “We and Cobalt found it to be a tough market.”

Tough, because many of the institutional buyers already had favorable earnings on the books and were pulling back from the market. Also, most firms had shut down their operations for the year so as not to diminish their 2009 returns.

“We were told at the time, in December, there were seven IPOs planned and two or three were cancelled. But we (Crimson and Cobalt) were successful in executing the deals. We were pleased with the results,” Keel says.

The E&P was named after the University of Alabama’s national-champion football team, Crimson Tide. The company has about 350 producing wells and acreage positions in Louisiana’s Haynesville shale and Bossier play; the James Lime plays in San Augustine, Sabine and Shelby counties in East Texas; and prospective acreage positions in South Texas and the Denver-Julesburg Basin of Colorado.

As of September 2009, the company had booked reserves of some 120 billion cubic feet equivalent (69% proved developed, 88% natural gas and liquids, 81% operated) and production of more than 38 million cubic feet equivalent per day.

The $154-million market cap ($447-million enterprise value) was publically formed in 2005, but always lacked trading volume.

“Crimson has historically been a public company, but we had limited public float,” Keel explains. “Even though we had a listing on the over-the-counter bulletin board, there was not much trading volume. We had one dominant shareholder, our private-equity sponsor, Oak Tree Capital.” Los Angeles-based Oaktree Capital Management LP, founded in April 1995, is a $4.4-billion private-equity firm.

Says Keel, “We were trying to find the right catalyst to issue more shares into the market for a larger public float. We acquired some good Haynesville acreage and we wanted to get out there and develop it. We want to get active.”

The catalyst turned out to be a barnburner: Crimson’s first and highly successful well, the #1H Kardell Gas Unit, drilled this past October in the Haynesville shale in San Augustine County, Texas. It was completed with a continuous 24-hour flow rate of some 30.7 million cubic feet equivalent per day through a 37/64-inch choke with flowing casing pressure of 6,824 pounds per square inch. Crimson has a 52% working interest and Devon Energy Corp. is operator with the remaining working interest. The well was drilled to 18,350 feet with a 4,500-foot lateral section.

“It was the highest test rate of any Haynesville well to date,” says Keel.

Fortunately, Gulf South Pipeline Co. LP’s system runs right down the middle of Crimson’s acreage. The wholly-owned subsidiary of Boardwalk Pipeline Partners LP gathers gas along its route from Nueces County, Texas, at its western end, to Conecuh County, Alabama, to the east, providing access to on- and off-system markets in the Northeast and Southeast.

“The Gulf South pipeline is right there, so we didn’t have to flare gas when the well came in. The gas goes directly to sales,” says Keel.

When the Haynesville well proved its worth, Crimson reached out to investment banks Barclays Capital Inc. and Credit Suisse to co-lead an equity offer to the market.

“They both have excellent teams and we felt confident in their ability to get the deal done despite a difficult market,” says Keel. “And they did.”

Greg Pipkin, Houston-based managing director for Barclays, was “book-runner and quarterback” for the Crimson deal.

“It was a tough market due to year-end portfolio management issues and the reluctance to take on a new name with two weeks to go in the year,” Pipkin says. “Now, the market is wide open for oil paper, is somewhat open for gas paper, and it is all about ‘use of proceeds.’ We are seeing a new round of corporate consolidation in the upstream sector.”

Chris Pikul, Denver-based analyst for investment bank Morgan Keegan & Co., believes that, although Crimson is a relative newcomer on investor radar, its recent “blockbuster” Haynesville well has “transformed a once-sleepy company into a supercharged gas-levered growth engine.”

As a result of the shelf sale, Crimson graduated from the OTC to Nasdaq, paid down debt and can fund its 2010 drilling plans.

A side benefit to the float is news flow. “We are happy with that,” says Keel. “As a public company, one of the critical needs is news flow. We are in the early stages of that as we begin our 2010 drilling program.”

Crimson’s other focus area for 2010 is its solid conventional asset base in southern Louisiana and southeast Texas. “We plan to drill some exploitation wells there, but the Haynesville will be our No. 1 priority,” says Keel.

Cobalt International

“The No. 1 priority for Cobalt is to drill these exploratory wells and convert through the drillbit the company’s prospective resources into discoveries,” says Joseph H. Bryant, chairman and chief executive, Cobalt International Energy Inc.

Cobalt International was making a big play of its own at year-end. The company launched an IPO, initially to raise up to $1.15 billion.

At the time, the company had no production, no proved reserves, no revenue, and no profit. What it did have was “a substantial and highly prospective acreage position” in the U.S. Gulf of Mexico, according to its business profile. The event marked the first Gulf-focused E&P IPO in three years.

In his recent coverage update, Michael Scialla, analyst for Thomas Weisel Partners, notes Cobalt’s start in 2005: “At a time when most E&P companies and energy investors were becoming infatuated with onshore natural gas resource plays, Cobalt assembled a hand-picked exploration and production team and secured $600 million in financing.”

Cobalt received private-equity funding from Goldman Sachs, Carlyle/Riverstone, Kern Partners and its management. First Reserve Corp. joined the private-equity partners in 2008.

Scialla believes it was this heavy-duty monetary strategy that allowed the company to effectively compete in lease turnovers in the deepwater Gulf. Since 2008, it has locked up 10-year controlling positions in deepwater, sub-salt exploration plays in the Gulf’s Miocene and Lower Tertiary trends and gained interests in more than 200 deepwater blocks in three highly focused trends that have as many as 47 prospects. In total, Cobalt’s assets have an unrisked net mean potential of 2.9 billion barrels of oil equivalent.

Cobalt’s management also leveraged industry relationships to gain an interest in three blocks in Gabon and Angola, West Africa, that have yielded 45 prospects in emerging pre-salt plays.

Yet, at press time, the explorer still had no cash flow.

So what gave this upstart the confidence to go to market at year-end 2009 with a $1-billion equity sale? And what convinced the market to bite? In a word—management.

Joseph H. Bryant, Cobalt’s chairman and chief executive, has some 32 years of experience in the oil and gas industry. Prior to joining Cobalt, he was president and chief operating officer of Unocal Corp., president of BP Exploration (Angola) Ltd., president of BP Canada Energy Co., president of a joint venture between Amoco Orient Petroleum Co. and China National Offshore Oil Corp., as well as having held other executive positions.

James Painter, executive vice president, Gulf of Mexico, has more than 25 years of experience. Prior to Cobalt, he was senior vice president of exploration and technology for Unocal, vice president of Gulf of Mexico and international exploration for Devon Energy Corp., and held other positions.

Van P. Whitfield, executive vice president, operations and development, has more than 34 years in the sector. He was senior vice president, western operations for CDX Gas LLC, production unit leader for the Angola Liquid Natural Gas Project for BP Exploration (Angola) Ltd. and vice president, power and water of ExxonMobil Saudi Arabia (Southern Ghawar) Ltd., among other positions.

However, despite careful strategy, the actual IPO issuance was slightly less than planned. Yet, $850 million is still exceptional, considering the period’s depressed market conditions and the company’s lack of production.

Bryant, Painter, Whitfield and the rest of the team plan to spend $430 million to further explore and drill their leaseholds offshore Angola and Gabon and in the deepwater Gulf. Recently, Cobalt’s Criollo well in the Gulf of Mexico hit 128 feet of net oil pay in a Miocene reservoir. Cobalt is the operator of Criollo and has a 60% working interest in the prospect. Total E&P USA Inc. owns the remaining 40%.

In a prepared statement, Bryant said, “Our IPO has given the company the funding to embark on a robust exploration program. The No. 1 priority for Cobalt is to drill these exploratory wells and convert through the drillbit the company’s prospective resources into discoveries.”

Book-running managers for the IPO were investment banks Credit Suisse Securities (USA) LLC, Goldman Sachs & Co. and J.P. Morgan Securities Inc. (For more on Cobalt’s start-up, see “Cobalt International Launched For Deepwater GOM Exploration” in Oil and Gas Investor’s December 2005 issue, or at OilandGasInvestor.com .

Other Equity

Altogether, investors bought more than $1.4 billion of upstream equity from independents in 2009. The mean average raise was $54 million, with a median of $35 million, according to Irvine, California-based investment bank C.K. Cooper & Co.

In October, Oklahoma City-based GMX Resources Inc. priced an offering of nearly 7 million shares of its common stock at $15 each. The original issuance was 5.7 million shares, but the increased issuance’s final sale raised some $105 million. The producer has moved to the Big Board from Nasdaq, listing its common stock and 9.25% Series B on the NYSE.

GMX has oil and gas assets in Texas, Louisiana and New Mexico, primarily focused on the Cotton Valley Sands in East Texas.

And, the equity deals continue.

In January, Midland, Texas-based Concho Resources Inc. issued more than 5 million shares of common stock into the equity market, including an overallotment. Net proceeds topped $219.2 million.

Bank of America, Merrill Lynch, J.P. Morgan and UBS Investment Bank were joint book-running managers for the offering. Concho’s production (65% crude oil and 35% natural gas) is primarily in the Permian Basin.

In the midstream space, in January, Houston-based Plains All American Pipeline LP (PAA) announced that its wholly owned subsidiary, PAA Natural Gas Storage LP, filed an S-1 registration for its proposed IPO of common units.

Barclays Capital and UBS Investment Bank will act as lead book-running managers.