Jim Wicklund, manager of Dallas-based Carlson Capital LLC's Energy Value Fund.

?From angels with strings attached to institutional funding, IPO funding and the public SPAC (special purpose acquisition company), money is widely available. What are the pros and cons of each?

“There is a constant flow of opportunities to invest in oil and gas exploration and development plays,” Jim Wicklund, manager of Dallas-based Carlson Capital LLC’s roughly $1-billion Energy Value Fund, said at Oil and Gas Investor’s Energy Capital Forum in Houston. “There are no shortages of opportunities.”

Nor ways to spend capital. He recently saw a Haynesville shale lease for sale on the Internet for $15,000, he said. More recent reports are that leases are going for $25,000 an acre there.

The market for E&P companies is very large and growing, he added. Connecticut-based energy-research firm John S. Herold Inc. lists 6,157 private E&P companies in the U.S. and Canada “and that doesn’t even count the large number of like companies found in Europe and South America.”

Just how hot the market is can be judged, he said, by looking at the number of transactions in the $5- to $20-million range. Since 2005, there have been 960 and most E&P stock prices have doubled this year.

Driving this engine now is a positive outlook for both oil and gas by virtually all investors. Futures markets mirror that belief and returns are very strong even in a lower commodity-price range.

The search for capital can take many different routes, said John Schaeffer, managing director of diversified energy with GE Energy Financial Services, and can include bank debt or private equity or institutional financing.

GE’s investment guidelines include making sure it has the right general partner, the proved reserves are in the “shallower end of the risk pool,” no “cap” on capital spending and a “heads up, side-by-side investment going in.” It’s a strategy that works, he said.
Since 1981, GE has placed $3 billion in partnership equity that includes 8,200 wells and a production rate of 21,350 barrels of oil equivalent per day. The company’s gas portfolio includes $1.5 billion of reserve-based equity, 46% oil.

SPACs get noticed

One method of financing that is getting attention is the SPAC. “The SPAC offers a viable alternative to the more traditional initial public offering,” said Ron Ormand, chief executive of Tremisis Energy Acquisition Corp. II, a company that completed its $76-million IPO and is now trading on the American Stock Exchange.

A SPAC is an investment vehicle that allows public investors to put their money in areas sought by private-equity firms. SPACs are shell or blank-check companies that have no operations but go public with the intention of merging with or acquiring a company with the proceeds of the SPAC’s IPO.

In 2005, SPACs accounted for $2.1 billion in market deals, $3.2 billion in 2006 and $11 billion in 2007. “A SPAC provides near-time capital to companies,” Ormand said.

There are advantages and disadvantages to becoming involved with a SPAC. An advantage is that they are more transparent than private equity as they are regulated by certain SEC rules, including filing financial statements.

Also, “since SPACs are publicly traded, they provide liquidity to an investor,” he said. And, shareholders vote for or against an acquisition and can regain most of their investment if the SPAC is unsuccessful.

In addition, it is an opportunity for unqualified individuals to buy into hedge or private-equity funds to participate in the takeovers of private operating companies. Additionally, the SPAC vehicle is an opportunity for a private-company target to do a reverse merger.

There are some drawbacks, though. Other than the risks normally associated with IPOs, SPACs’ public-shareholder risks include a loss of up to 15% of their investment if no acquisition is made, a lack of investment diversification, and management time devoted to involvement in other ventures.

“With SPACs, investors are betting on management’s ability to succeed,” Ormand said. “SPACs compete directly with the private-equity groups and strategic buyers for acquisition candidates.”

Capital angels

Angel funding sounds heavenly, but be careful of strings attached, said James C. Row, chief financial officer for E&P company Extex Operating Co. Inc., Houston. These investments are characterized by high levels of risk and a potentially large return on the investment.

Angels investors are individuals who seek a higher return than they would see from more traditional investments.

“Many are successful entrepreneurs who want to help other entrepreneurs get their business off the ground.” They are a bridge from the self-funded stage to the point of needing the level of funding a venture capitalist would offer.

Funding estimates vary, but usually range from $150,000 to $1.5 million, according to the Center for Venture Research at the University of New Hampshire. According to the center, the average angel investor is 47 years old with an annual income of $90,000, a net worth of $750,000, a college education, has been self employed, invests $37,000 per venture and will invest close to home.

Row said informal investors are older, have higher incomes, and are better educated than the average citizen, yet they are not often millionaires. They are a diverse group, displaying a wide range of personal characteristics and investment behavior. Seven of 10 investments are made within 50 miles of the investor’s home or office.

According to the U.S. Small Business Administration, angel investors typically offer expertise, experience and contacts in addition to money. Less is known about angel investing than venture capital because of the individuality and privacy of the investments, but the agency estimates angel investors are involved with about 30,000 small companies a year.

The potential pool of angel investors is rather larger with more than 2 million people in the U.S. with the discretionary net worth to make angel investments, the SBA estimates.

For the producer seeking funding, the right angel investor can be the perfect first step, Row said. It usually takes less time to meet with an angel and to receive funds, there is less due diligence and angels usually expect a lower rate of return than a venture capitalist.
“The downside is finding the right balance of expert help without the angel totally taking charge of the business,” he said. “Structuring the relationship carefully is an important step in the process.”

To prepare to solicit an angel, Row said several critical factors will aid in making the approach work. First, assemble an advisory board that includes a securities accountant and an attorney. Two important functions of the board are to recommend angels to contact and to work with the management team to develop a business plan to present to the angel.

“The business plan itself should define the reason for financing, how the capital will be spent and the timetable for going public or seeking venture capital funding,” he said. “Most of all, take your time in forming a relationship.”

Ormand said the search for capital for the E&P industry “isn’t as hard as it sounds. There is capital out there; you just have to go and find it.”

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