While it’s important for a new E&P to stick to its strategy, the recent market turmoil “makes you question your strategy sometimes,” says Doug Krenek, president of Chalker Energy Partners III.

“Times like now can make you question your strategy and cause you to do things you wouldn’t normally do and put you in places you may not be as good as you need to be. Stick to the strategy, have patience, and have a good team to back up what you say.”

Krenek spoke in June at Oil and Gas Investor’s The Workshop: Starting and Building an E&P Company, during Energy Capital Week.

He says Chalker III’s strategy of acquiring East Texas acreage targeting the Cotton Valley and Travis Peak formations was upended when the Haynesville shale hysteria kicked in, sharply raising acreage costs just when the company was beginning a new iteration. “We don’t have the capital to play that game, so we were questioning whether we still wanted to be in East Texas.”

But with the severe constraints on capital availability and industry cash flows experienced since then, that bubble has burst, he said. “Acreage costs have definitely gone down and we’re looking there again. We’re still trying to lease Cotton Valley and Travis Peak-type acreage, but we don’t want to pay a Haynesville premium to get it.”

David Marcell, managing director of Houston asset-advisory firm Aim Energy Advisors, says many would-be acquirers have their eyes on banks, expecting to see a flow of distressed properties resulting from the financial meltdown, but “I don’t think that’s going to happen.” Instead, deals will evolve from companies looking to solve an immediate problem such as a need for liquidity or the desire to sell a property to raise cash for an acquisition.

“Those are the types of property we’ll see come to the marketplace,” he said. And many of them will not go through data rooms, but will be “one-off” deals through existing relationships. “Those are really hard,” he says.

Krenek says for that reason he keeps in tune with other companies, especially if they seem to be changing strategies. “Approach them now. Maybe you can get first knock at a deal before anyone else does.”

Flexibility is also important in getting deals done, Krenek advises. “Times like now, when people think the prices are at a bottom, they don’t want to sell and leave the upside.” He recently appeased one seller by paying cash for a portion of the assets, then contributing the remainder of the assets into a newly created company in which the seller held a one-third interest.

“He’s letting the other portion of his assets ride for the upside, and we got a deal done that otherwise wouldn’t have gotten done.”

Marcell emphasizes the importance of networking, especially for new entrepreneurial leaders. “If you are new or coming from a big company, it can be daunting to get out and hustle against the rest of the world and people who are very good at it. Connect with the right people and give yourself as much exposure as possible.”

Potential deals can be found from unexpected sources. Private-equity providers, bankers, attorneys, third-party engineers and service providers all can be valuable sources of information on unannounced opportunities. “Pumpers will tell you anything,” he said.

Be certain people know who you are, “so when a special situation comes along, they’re going to have you on their list.”

Before doing that, however, know your objective. “Sit down with your equity provider and know you’re in sync. If you can get that done right, then you can tell other people what you’re trying to accomplish.”

It is key to have committed funding before pursuing deals so that when you are in a data room, the transaction advisors and sellers know you have the ability to close, he says.

“The last thing they want to have happen is to go down the road with you and you don’t have the ability to close. That can put you in places you don’t want to be in the future.”

The first two iterations of Chalker exited with an average of 3.5-to-1 returns on investment, but the playing field has changed, says Krenek. “We’re not thinking it’s possible” to achieve those returns in the near term, he says. The new company is targeting a factor of 1.5-to-2 times return.

Chalker completed its first two start-ups in 18 months to two years, but “a four- to six-year window is more reasonable now.”

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