new equity sources for private energy companies january 19, 2006 hedge funds
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New Equity Sources for Private Energy Companies
January 19, 2006
Hedge Funds
2
New Equity Sources for Private Energy CompaniesHedge Fund Overview
• Hedge funds are unregulated private investment funds that seek to profit from non-traditional opportunities using alternative investment strategies.
• Hedge funds have a variety of investment strategies, some of which use leverage and derivatives while others are more conservative and employ little or no leverage.
• This flexibility, which includes the use of hedging strategies, enables hedge funds the ability to best manage investment risks.
• Hedge fund investors include endowments, pension funds, mutual funds and wealthy individuals.
• While the number and size of hedge funds are small relative to mutual funds, their growth reflects the importance of this alternative investment category for institutional investors and wealthy individual investors.
Typical Characteristics of Hedge Funds
3
New Equity Sources for Private Energy Companies
• There are approximately 8,350 hedge funds that have an estimated $1.4 trillion under management worldwide and are growing at about 20% per year.
Source: Hedge Fund Association
Hedge Fund Capital Under Management - Worldwide ($MM)
$10 $50 $56$156
$256$356
$456 $500$600
$900
$1,350
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
($ in
mill
ion
s)
Hedge Fund Overview
4
New Equity Sources for Private Energy CompaniesPIPEs Overview
• Private Investments in Public Equity, or “PIPEs”, transactions have increasingly become a popular investment vehicle for hedge funds and a preferred financing strategy for small and mid cap companies over the last five years.
• PIPE transactions are privately issued equity or equity-linked securities that are sold to accredited investors by public companies.
• PIPE investors have traditionally included hedge funds, however they have broadened to include mutual funds, private equity funds, venture capital funds, buyout funds and wealthy individuals.
• PIPE issuers range in size from small OTC Bulletin Board companies to large-cap NYSE-traded companies.
• The PIPE investment structure is ideal for hedge funds because it allows them to establish substantial positions without having a big impact on the stock price.
• In 2005, approximately 1,585 PIPE transactions were completed for total proceeds raised of approximately $22.1 billion.
5
New Equity Sources for Private Energy Companies
Over the past five years, public companies have raised $98.1 billion in 6,889 transactions (representing an average of $19.6 billion annually in 1,378 transactions).
PIPEs Overview
PIPE Activity 2001-2005: Transactions vs. Volume
$22.5
$16.6$18.6
$22.1
$18.41,286
1,053
1,6421,585
1,323
$0.0
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
$35.0
2001 2002 2003 2004 2005
Vo
lum
e (
in b
illio
ns
)
600
800
1,000
1,200
1,400
1,600
1,800
Tra
ns
ac
tio
ns
Source: Private Raise
6
New Equity Sources for Private Energy Companies
Over the past two years, energy related companies have raised the most capital from investors in PIPE transactions.
Energy Resources and Related comprised 11.1% and 16.9% of total PIPE transactions completed in 2004 and 2005, respectively.
PIPEs Overview
Source: Private Raise
2005 PIPEs by Sector
$0.4
$0.4
$0.5
$0.6
$0.8
$0.8
$0.9
$0.9
$0.9
$1.3
$1.5
$1.5
$1.9
$2.0
$3.7
$0.0 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0 $3.5 $4.0 $4.5
Semiconductors
Products
Software
Computers
Metals, Minerals & Stones
Real Estate
Internet
Healthcare
Mining and Related
Electronics & Related
Financing Services
Biotechnology
Pharmaceuticals and Related
Telecommunications
Energy Resources & Related
2004 PIPEs by Sector
$0.5
$0.5
$0.5
$0.6
$0.6
$0.7
$0.8
$1.0
$1.0
$1.2
$1.3
$1.4
$1.6
$1.6
$2.1
$0.0 $0.5 $1.0 $1.5 $2.0 $2.5
Transportation
Retail
Commerical Services
Mining and Related
Software
Computers
Electronics & Related
Metals, Minerals & Stones
Financing Services
Healthcare
Internet
Pharmaceuticals and Related
Biotechnology
Telecommunications
Energy Resources & Related
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New Equity Sources for Private Energy Companies
• The substantial increase in the number of hedge funds over the past five years has increased competition for quality deal flow.
• Hedge funds find it necessary to consider alternative opportunities to deploy substantial amount of capital that they have under management.
• Numerous hedge funds are venturing outside of the traditional investments in public companies and looking towards more of what has traditionally been defined as private equity investments in private illiquid companies and other private equity funds.
– Hedge fund managers have participated in private equity transactions in the past and are increasingly doing so as competition for public transactions increases.
– It is important to note that most multi-strategy hedge funds typically have 5-10% of their total capital under management set aside to invest opportunistically.
Hedge Funds Focus on Private Equity
8
New Equity Sources for Private Energy Companies
• Hedge funds offer issuing companies quick execution and delivery of capital in a timely manner.
• Hedge funds typically do not require control positions in companies.
• Hedge funds are interested in private equity transactions for a couple of reasons:
– They have substantial discretionary capital that needs to be deployed and they need to find new investment arenas in which they can generate returns.
– As many traditional hedge fund strategies have become crowded in the last few years, managers are seeking to invest in less competitive areas and in areas where they can generate returns.
Source: Hedge.Funds World 12/15/05
Hedge Funds Focus on Private Equity
9
New Equity Sources for Private Energy Companies
The following is a list of selected hedge funds that consider, or have previously made, investments in private energy companies:
• Advisory Research
• Amaranth
• Angelo Gordon & Co.
• Centaurus
• Cerberus
• D.B. Zwirn
• Elliott Advisors
Hedge Funds Focus on Private Equity
• HBK
• Laminar Direct Capital (DE Shaw)
• Laurus Funds
• Reservoir Capital
• Ritchie Capital
• Touradji
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New Equity Sources for Private Energy Companies
• Fund Size – $38.3 million
• Oversubscribed Offering – The initial Fund size was targeted at $15-$20 million. After successful marketing in New York, Dallas and Houston, the Fund size was increased to $38.3 million (200% + oversubscribed).
• Investor Base:
– The investors in the Fund are energy, specifically oil and gas exploration and production, knowledgeable.
– The Fund’s largest investor is an $8.0 billion hedge fund based out of New York City that historically has not made investments in private companies.
June 2005
Hawk Energy Fund I, LP
The undersigned acted as Placement Agent.
$38,325,000
of equity capital has been committed by Limited Partners in conjunction with the
formation of
June 2005
Hawk Energy Fund I, LP
The undersigned acted as Placement Agent.
$38,325,000
of equity capital has been committed by Limited Partners in conjunction with the
formation of
Hawk Energy Fund I Case Study
11
New Equity Sources for Private Energy Companies
• ECS has raised $358 million of private equity in 24 transactions and $237 million of debt capital in 6 transactions over the past three years.
• ECS has advised on 8 M&A transactions totaling over $1 billion since inception.
• ECS knows the private equity and debt markets very well and has worked with virtually every capital provider over the last few years.
• As a result of the significant experience of ECS with energy capital providers, we believe that we are well positioned to continue to assist energy companies in arranging private equity.
Overview of Energy Capital Solutions
Energy Capital Solutions (“ECS”) is a Dallas-based energy focused investment banking firm founded in 2001 that raises equity and debt capital and provides M&A advisory services for public and private energy companies.
12
New Equity Sources for Private Energy Companies
ECS has completed thirty private capital transactions since May 2002
October 2005
has sold
2,960,714
Shares of Common Stock
$20,725,000
The undersigned acted as Placement Agent.
ENGlobalCorporation
October 2005
has sold
2,960,714
Shares of Common Stock
$20,725,000
The undersigned acted as Placement Agent.
ENGlobalCorporation
The undersigned acted as Placement Agent.
November 2005
5,200,000
has sold
Shares ofCommon Stock
$5,200,000
Petro ResourcesCorporation
Horizon Offshore, Inc.
December 2005
has sold
52,650,000
Shares of Common Stock
$20,007,000
The undersigned acted as Placement Agent.
The undersigned acted as Placement Agent.
FlotekIndustries, Inc.
August 2005
1,300,000
has sold
Shares ofCommon Stock
$21,190,000
Class A Convertible Preferred Stock
$7,250,000
Canary Resources Inc
The undersigned acted as Placement Agent.
August 2005
Pacific Energy Resources, Ltd.
December 2005
Convertible Term Note
$5,000,000
Secured Term Note
$8,000,000
The undersigned acted as Placement Agent.
PACIFIC ENERGYPACIFIC ENERGY
July 2005
The undersigned acted as Placement Agent.
has sold
4,000,000
$12,000,000
Abraxas Petroleum
Shares of Common Stock
Corporation
July 2005
The undersigned acted as Placement Agent.
has sold
4,000,000
$12,000,000
Abraxas Petroleum
Shares of Common Stock
Corporation Contango Oil & GasCompany
Series D Perpetual CumulativeConvertible Preferred Stock
$10,000,000
July 2005
The undersigned acted as Placement Agent.
Contango Oil & GasCompany
Series D Perpetual CumulativeConvertible Preferred Stock
$10,000,000
July 2005
The undersigned acted as Placement Agent.
September 2005
The undersigned acted as Placement Agent.
Secured Term Note
$9,500,000
New Century EnergyCorporation
NewCenturyEnergy Corporation
NewCenturyEnergy Corporation
September 2005
Senior Secured Credit Facilities
$19,500,000
The undersigned acted as Exclusive Placement Agent and Financial Advisor.
OGP Operating, Inc.
In connection with the acquisition of Arkoma Basin properties
13
New Equity Sources for Private Energy Companies
November 2004
Series A Cumulative Convertible Preferred Stock
$25,000,000
The undersigned acted as Placement Agent.
TransMeridian Exploration Corporation
November 2004
Series A Cumulative Convertible Preferred Stock
$25,000,000
The undersigned acted as Placement Agent.
TransMeridian Exploration Corporation 5,633,333
The undersigned acted as Placement Agent.
Petrol Oil And Gas, Inc.
September 2004
has sold
Units ofPetrol Oil And Gas, Inc.
at $1.20 per Unit
$6,760,000
May 2005
$10,000,000
The undersigned acted as financial advisor to the Company
with respect to the debt financing
Participating Preferred Equity
Coastal Drilling Company, LLC
May 2005
$10,000,000
The undersigned acted as financial advisor to the Company
with respect to the debt financing
Participating Preferred Equity
Coastal Drilling Company, LLC
The undersigned acted as financial advisor to the Company
with respect to the debt financing
Participating Preferred Equity
Coastal Drilling Company, LLC
635,500
A Morgan Stanley Private Equity Portfolio Company
The undersigned acted as Placement Agent.
Concert Capital Resources, LP
April 2004
has sold
Shares ofContangoOil & Gas Company
Common Stock
635,500
A Morgan Stanley Private Equity Portfolio Company
The undersigned acted as Placement Agent.
Concert Capital Resources, LP
April 2004
has sold
Shares ofContangoOil & Gas Company
Common Stock
635,500
A Morgan Stanley Private Equity Portfolio Company
The undersigned acted as Placement Agent.
Concert Capital Resources, LP
April 2004
has sold
Shares ofContangoOil & Gas Company
Common Stock
January 2004
Redeemable Preferred Equity with Common
$27,000,000
The undersigned acted as Placement Agent.
Stroud Energy, Ltd.
January 2004
Redeemable Preferred Equity with Common
$27,000,000
The undersigned acted as Placement Agent.
Stroud Energy, Ltd.
January 2004
Redeemable Preferred Equity with Common
$27,000,000
The undersigned acted as Placement Agent.
Stroud Energy, Ltd.
January 2004
Redeemable Preferred Equity with Common
$27,000,000
The undersigned acted as Placement Agent.
Stroud Energy, Ltd.
April 2004
Output Exploration, LLChas acquired
White Oak Energy, LLC
The undersigned acted as Placement Agent in raising private equity to finance the Transaction
Output Exploration, LLC.
April 2004
Output Exploration, LLChas acquired
White Oak Energy, LLC
The undersigned acted as Placement Agent in raising private equity to finance the Transaction
Output Exploration, LLC.
ECS has completed thirty private capital transactions since May 2002
June 2005
Hawk Energy Fund I, LP
The undersigned acted as Placement Agent.
$38,325,000
of equity capital has been committed by Limited Partners in conjunction with the
formation of
June 2005
Hawk Energy Fund I, LP
The undersigned acted as Placement Agent.
$38,325,000
of equity capital has been committed by Limited Partners in conjunction with the
formation of
July 2005
Fixed Price Convertible Debenture
$15,000,000
The undersigned acted as Placement Agent.
New Century EnergyCorporation
NewCenturyEnergy Corporation
NewCenturyEnergy Corporation
July 2005
Fixed Price Convertible Debenture
$15,000,000
The undersigned acted as Placement Agent.
New Century EnergyCorporation
NewCenturyEnergy Corporation
NewCenturyEnergy Corporation
February 2005
$17,000,000Senior Secured Notes
The undersigned acted as exclusive financial advisor to the Company.
Coastal Drilling Co., LLC
March 2005
$50,000,000Revolving Credit Facility
In connection with two acquisitions and the recapitalization of the Company
The undersigned acted as financial advisor to the Companywith respect to the debt financing.
14
New Equity Sources for Private Energy Companies
$4,800,000
Convertible Preferred Equity
The undersigned acted as Placement Agent.
February 2003
$4,800,000
Convertible Preferred Equity
The undersigned acted as Placement Agent.
February 2003
Convertible Preferred Investment by Largest Shareholder in the Company.
The undersigned assisted in structuring the transaction and rendered a fairness opinion.
November 2002
Trek Resources, Inc.Convertible Preferred Investment by Largest
Shareholder in the Company.
The undersigned assisted in structuring the transaction and rendered a fairness opinion.
November 2002
Trek Resources, Inc. Common Stock
6,500,000 shares at $1.00 per share
$6,500,000 The undersigned acted as
Placement Agent.
August 2002
Common Stock
6,500,000 shares at $1.00 per share
$6,500,000 The undersigned acted as
Placement Agent.
August 2002
Common Stock
2,499,667 shares at $6.00 per share
$14,998,004
The undersigned acted as Placement Agent.
The Exploration Company
May 2002
Common Stock
2,499,667 shares at $6.00 per share
$14,998,004
The undersigned acted as Placement Agent.
The Exploration Company
May 2002 June 2003
$36,000,000
Senior and Subordinated Debt
Financed the redemption of a Note and Other Interests formerly held by Mirant
Energy Capital Solutions acted as placement agent to Stroud Investments 2001, Ltd.
has obtained
$51,000,000 of Junior Subordinated Notes from ArcLight Capital Partners, LLC
The undersigned arranged the financing and acted as exclusive financial advisor.
Quest Resource Corporation
December 2003
$70,000,000 of Senior Bank Debt from Bank One NA
$35,000,000 of Mezzanine Debt from Bank One NA
In connection with its acquisition of Devon Energy Corporation’sCherokee Basin assets
ECS has completed thirty private capital transactions since May 2002
August 2003
Redeemable Preferred Equity with Common
$16,000,000
The undersigned acted as Placement Agent.
The Exploration Company
August 2003
Redeemable Preferred Equity with Common
$16,000,000
The undersigned acted as Placement Agent.
The Exploration Company
Series C Perpetual CumulativeConvertible Preferred Stock
$8,000,000
The undersigned acted as Placement Agent.
Contango Oil & Gas Company
December 2003
Series C Perpetual CumulativeConvertible Preferred Stock
$8,000,000
The undersigned acted as Placement Agent.
Contango Oil & Gas Company
December 2003
has obtained
$51,000,000 of Junior Subordinated Notes from ArcLight Capital Partners, LLC
The undersigned arranged the financing and acted as exclusive financial advisor.
Quest Resource Corporation
December 2003
$70,000,000 of Senior Bank Debt from Bank One NA
$35,000,000 of Mezzanine Debt from Bank One NA
In connection with its acquisition of Devon Energy Corporation’sCherokee Basin assets
has obtained
$51,000,000 of Junior Subordinated Notes from ArcLight Capital Partners, LLC
The undersigned arranged the financing and acted as exclusive financial advisor.
Quest Resource Corporation
December 2003
$70,000,000 of Senior Bank Debt from Bank One NA
$35,000,000 of Mezzanine Debt from Bank One NA
In connection with its acquisition of Devon Energy Corporation’sCherokee Basin assets
$8,000,000
Redeemable Preferred Equity
The undersigned acted as Exclusive Financial Advisor.
WG Energy, LTD$8,000,000
Redeemable Preferred Equity
The undersigned acted as Exclusive Financial Advisor.
WG Energy, LTD