Someone may have told Mark Fischer to just take the hand that Chaparral Energy Inc. had been dealt, but he didn't. While many E&Ps were treading water in 2009, the chairman, president and chief executive of the privately held, Oklahoma City-based producer was still determined to grow the company.

This was in the midst of public-market perception that the company was nearly upside down, some bankers wanting out of its credit facility in the midst of their own financial turmoil, collapsing oil and gas prices, one failed reverse merger and a second one under way.

Chaparral Energy chairman, president and CEO Mark Fischer’s long-term vision for the company is undeterred. Having refinanced and restructured, he expects Chaparral will be ready to IPO in 2013.

Fischer saw the bright side—and it was, actually, quite easy to be optimistic about Chaparral's balance sheet at the time. In early 2009, the company had some $50 million of cash on hand and, while oil prices had fallen to some $44 a barrel and gas to $5.60 a million Btu—the latter of which Fischer quips "actually would look pretty good right now"—it had hedges on some of its oil at more than $110 a barrel. And it had a lot of hedges: In terms of percent of producing reserves, Chaparral was one of the most heavily hedged E&Ps out there.

Meanwhile, because it cut its drilling program to just one rig, the company was practically just throwing off cash. "From a balance-sheet standpoint, we were in pretty good shape, but we were perceived by the market as being in very difficult shape. We were never at risk of not being able to pay our bills," Fischer says.

The source of that perception largely was Chaparral's very public embroilment in the financial-markets collapse of September 2008. It had commenced a reverse-merger arrangement in July with now-defunct Edge Petroleum Corp. while oil was still more than $140 a barrel. Fischer's plan was to use Houston-based Edge's publicly held platform to take Chaparral public, thus accessing the larger pool of capital to grow Chaparral's assets, particularly its Midcontinent and Permian Basin enhanced oil recovery (EOR) projects.

"We had been wanting to move toward the public markets for some time. Chaparral had always had a very high net asset value, but the public markets tend to value you based on EBITDA—or earnings—and we had a pretty large spread between the two numbers."

An IPO didn't seem to be the solution, so the team took the reverse-merger tack, picking Edge as its candidate because its Gulf Coast high-decline-rate reserve profile was distinctly different from Chaparral's. Edge's reserve life was some five years, throwing off high, near-term earnings.

In contrast, Chaparral's onshore portfolio consisted primarily of long-lived mature, Midcontinent and Permian assets, including CO2- injection EOR projects and other held-by-production conventional properties. It had an average reserve life of some 24 years.

"So our thought was to put the two together and end up with a mainstream reserves/production ratio of 12 or 14 years and a company with higher near-term EBITDA to help narrow the gap between that and net asset valuation. It seemed to be the right approach at that time."

But the deal unraveled with Wall Street in the fall of 2008. A $150-million preferred-stock purchase was not able to be consumated. Without that, a much-needed, $1-billion senior, secured credit facility fell through.

"Within the first two weeks of December, the whole deal began to come undone." An Edge shareholders' meeting was pushed to as late as December 17, while another buyer of the preferred stock was sought. "We continued to do everything we could to make the transaction happen. It became a long shot, but we were still trying. Ultimately, it didn't work out."

And, then came the darkest days—the first quarter of 2009 that was a test of balance-sheet strength for most oil and gas producers. "It was a very difficult time. We had a $44 oil price that was continuing to move downward and no encouragement that it would turn around. We were watching the gas price tumble even more. It was looking very dire out there."

Chaparral's public bonds—$650 million worth—had come to trade at as little as 22 cents on the dollar. "The public markets had a perception of Chaparral that we were heavily leveraged and additionally thinking we were about to go under. They failed to consider the amount of quality hedges that we had in place to support the bank debt. Those were tough times." Bondholders were betting against its survival.

Chaparral cut its capex budget for 2009 by more than 50% and began an austerity program to reduce costs. "There was no good prediction that oil and gas prices were going to go up dramatically within the next couple of years. It looked pretty bleak out there—not only for us but for a lot of companies."

Chaparral’s CO2 tank battery just north of Booker, Texas, processes oil, gas and water from Upper Morrow enhanced-recovery operations at the Albert Spicer, Booker Trosper and Gramstorff units. Increased oil production from CO2 injection is Chaparral’s long-term growth driver.

The road to private equity

Fischer and his brother, Chuck Fischer, founded Chaparral in 1988 after years of working for other companies. With $100,000 of their own, they bought a first asset, used that as collateral for a bank loan, bought another property and continued to repeat the formula, growing Chaparral into an enterprise value of $1.5 billion by 2005. "We grew the company with debt."

Its next big deal—the roughly $500-million cash purchase of privately held, longtime Midcontinent operator Calumet Oil Co., which had a hefty portfolio of EOR targets, including operating Oklahoma's largest oil field, North Burbank Unit—brought capital-structure change. To finance the 2006 deal, Fischer brought Chesapeake Energy Corp. in as an equity owner, issued public debt, leaned on its bank facility to $750 million, and took up hedges to secure the revenue stream. The lattermost proved quite fortunate for Chaparral when 2009 arrived.

"When we bought Calumet, we hedged out five years of the production, starting at about $68. We continued to hedge, while prices started moving upward in 2007 and early 2008. We put in place some hedges as high as $125 a barrel."

The hedges assured cash flow in 2009, but reserve value stood in the way of growth. "As we calculated our reserve value at the end of 2008, we saw it falling because a lot of our EOR-type reserves break even at between $40 and $45 a barrel. So, if you run your reserves at (the SEC-required, year-end) $44 a barrel, generally the properties had no reserve life. The economics would not run.

"And, when you don't have the reserve value, you have trouble with trying to support a senior, secured, credit facility and things of this nature."

Its longtime lead banker, JPMorgan Chase, was still in. "They've stayed with us since 1988 and we've stayed with them. They've been a very good banker, and they're good people. They weren't the ones we were having issues with; it was with a few of the others."

Several small banks in the 17-bank syndicate wanted out of oil and gas lending at the time; larger banks were sticking with their commitments but weren't adding to their exposure, so they weren't stepping up to take out others' positions. Chaparral's $513-million credit facility at this time, of which $507 million was drawn, would mature in October 2010, and while that was still some way off, "that was our biggest concern."

Meanwhile, those hedges it had from the days of $100-plus oil provided some hope. In early 2009, they were worth $300 million. "We monetized some," says Joe Evans, Chaparral chief financial officer. "It helped provide the cash we needed to move the whole story forward through that 2009 period and provided a lot of comfort to the banks."

Perception persisted, however. Fischer says, "From a pure, corporate standpoint, we knew the company was not in as bad a shape as some of the people who were on the outside looking in thought it was."

He continued to pursue tapping public-equity markets to raise cash to pay down debt and fund an expanded capex budget. Oil prices had yet to rebound meaningfully, and natural gas prices continued to sink. In October 2009, it entered a reverse-merger arrangement with a public shell entity, United Refining Energy Corp. (URX).

"That was a situation where you had to, basically, change out the shareholders of the shell corporation for energy shareholders. Once again, working to our detriment was that oil prices started falling again when we were trying to close the transaction. We ultimately didn't get the deal done."

It unraveled in December 2009. Yet, good fortune came from this, too. It led Chaparral to private-equity firm CCMP Capital Advisors LLC.

"The URX transaction put us in front of a number of institutions, with both private- and public-equity opportunities. We came into contact with CCMP and four or five others that were very interested in the Chaparral story in a private-equity-type transaction."

CCMP was found to be an ideal fit and surfaced as Fischer's partner of choice due to its oil and gas knowledge and leadership. Influencing the decision was managing director Karl Kurz's longtime E&P experience, lastly as chief operating officer of Anadarko Petroleum Corp., and managing director Chris Behrens' longtime work in energy investing, beginning in 1994, and including energy-investment successes Bill Barrett Corp., Carrizo Oil & Gas Inc., Encore Acquisition Co. and Patina Oil & Gas Corp.

"Both of them are very knowledgeable of the company and our goals. Their understanding of our assets was very good. Both Karl and Chris are on our board now, and they were instrumental in being able to tell Chaparral's story to CCMP—that we were a pretty good investment."

Re-sighting the IPO

In April 2010, CCMP invested $345 million in Chaparral, taking a 36% stake in the company. The proceeds were used to further reduce its bank debt to some $175 million, and a new, three-year facility was arranged. In September, proceeds from a $300-million, 10-year, 9.875% bond issuance were used to zero the bank debt and provide additional working capital.

This February, it refinanced its $325-million, 8.5% bonds, pushing the maturity out to 2021. "The net result is more cash on the balance sheet and no bond maturities until 2017."

Its new $375-million bank facility is undrawn. Cash on hand is some $80 million. Oil is better than $100 a barrel. And, Chaparral's production is roughly 50% oil.

With the private-equity injection and increased liquidity, Chapparal “has gone from worrying about the right-hand side of the balance sheet to being able to focus on the left-hand side, which is obviously a more productive and exciting way for them to go,” says Chris Behrens, managing director, CCMP Capital Advisors LLC.

"The assets have not changed dramatically since 2008. Our long-term growth driver was EOR then and it still is. The production mix has pretty much been 50/50 oil/gas throughout that time. Obviously, right now our revenue mix is dramatically different—80% oil and 20% gas."

Plans are to further prove up its EOR projects, drill into emerging plays, monetize some noncore holdings across its 533,000-net-developed-acre portfolio, such as in the Rockies and South Louisiana, thus narrowing its attention from 11 states—and to seek again to go public. Fischer's vision for Chaparral is undeterred.

"Generally our short-term-growth driver is drilling in some of the major play areas. Our long-term-growth driver continues to be our EOR program." The company owns 82 old oil fields that are targets for EOR via CO2 flooding. "In the long term, this is going to be our story that helps market Chaparral from a public-company standpoint.'"

Also compelling is its meaningful position in some red-hot plays—50,000-plus acres in northern Oklahoma over the new Mississippi Lime oil target; some 22,000 in the Woodford play in the Anadarko Basin; and roughly 14,000 over the oily Bone Spring/Avalon shale in the Permian Basin.

"Drilling in those plays offers a fair amount of upside that we intend to exploit to grow EBITDA as we move into a public-market position down the road." He expects Chaparral will be ready to IPO in 2013. "The 2013 timeframe gives us time to put to work most of the money we brought in through the CCMP transaction, do the drilling that should generate significant EBITDA and give us a better story."

Since the capital injection from CCMP, the company's debt/EBITDA ratio has improved significantly. Evans says, "In 2006, we were 8.0 times levered. We were about 5.0 times levered at the end of 2008 and we are at 3.3 now. We have $430 million of total available liquidity today. At year-end 2008, it was roughly $50 million—just cash on hand."

The capital restructuring, plus higher oil prices, injected oxygen into Chaparral's capex-acceleration endeavor. Fischer says, "We were looking at a 2011 growth rate of 2% prior to the CCMP transaction, but now we're looking at between 8% and 10%. The choices were: Don't do it and stay at a small growth rate, or do it and seek much higher growth.

"When you look at the numbers, it made a lot of sense to do the CCMP transaction to achieve our objectives."

If high oil prices persist, Fischer would consider an IPO sooner than 2013, but he is considering bringing in a joint-venture partner to accelerate work on the EOR programs first.

"We aren't in any kind of bind to rush into an IPO. We want to be sure that we are ready."

Chaparral’s headquarters are in a picturesque setting.

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