About a year ago, First Permian LLC was formed in Midland to acquire the Permian Basin assets of Fina Oil & Chemical Co. How did a startup with no money and no assets manage to acquire nearly $100 million worth of assets? Like all good oil deals it took guts, backed by a solid business plan with clear goals and tasks, the right connections, and the right confluence of several industry events. At the time, the oil and gas industry was all but broke. Drilling and exploration had slowed to a crawl, stripper wells were being shut-in, seismic crews sat idle-and most important for this story, major oil companies were shedding their domestic assets. In this environment, Total Petroleum acquired Fina in December 1998, and as is often the case, it set about identifying the nonessential assets it would sell. Fina's predominantly oil producing Permian Basin properties were put up for sale. A few years earlier, Fina had already begun de-emphasizing the Permian Basin, so it had not spent a significant amount of money developing additional reserves on these properties. For any potential new owner, there was a lot more upside to pursue. What's more, waterflood and CO2 facilities so often needed in Permian Basin fields were in place and already paid for. Against that backdrop, in early 1999 Baytech Inc., a private Midland producer, learned that the assets were for sale. It was headed by Ben Strickling III and Tom Kelly. In their view, the opportunity to acquire assets from a major in their backyard was perhaps the only hope for growth. The idea of adding reserves with the drill bit-or thanks to an oil price rebound-seemed very unrealistic at that time. It turns out Midland's Parallel Petroleum Corp. also was interested in the package. Collaboration in negotiations, due diligence and funding seemed to be the order of the day. "We didn't want to compete with each other, so we decided to join forces," says Parallel president Larry Oldham. "We actually found out about our mutual interest in the Fina package when John Rutherford, our land manager, was coaching a little-league game with Baytech's president, Ben Strickling." Baytech and Parallel forged an alliance and decided to pursue the lofty goal of buying the assets-the transaction would cost $96 million and include 709 wells that were producing about 5,200 barrels of oil equivalent per day, net. The package also had 70,000 net (485,000 gross) lease acres, along with some mineral and royalty assets. Estimated proved reserves at June 30, 1999, totaled 34 million BOE, based on $17 oil and $1.35 gas, for a present value discounted at 10% (PV-10) of $150 million. Most of the wells produce from shallow formations such as the San Andres, Glorieta and Clearfork, so they can be profitable at $12 per barrel. In 1997, they generated about $20 million in cash flow. First Permian LLC was formed in June 1999 to acquire the assets effective March 31. Its owners were Parallel and Baytech, each with 35%, and two private investors, each with 15%. (Subsequently, Houston-based EnCap Investments LLC invested $16 million in corporate equity in June 2000.) A five-person board represents all five companies. There's a story behind why the company was named First Permian. While Strickling was looking through Fina's annual report, he noticed that the first commercial discovery in the Permian Basin was, contrary to popular belief, the #1 W.H. Abrams, which was drilled in 1920. That well is part of the Fina package now included in First Permian. It predates the more famous Santa Rita #1 by 18 months. Neither company was big enough to make such a deal on its own. Parallel, formed in 1980, trades on the Nasdaq as PLLL. Its core operating areas are the Permian Basin and the Frio, Yegua and Wilcox gas trends about 100 miles southwest of Houston, onshore the Texas Gulf Coast. It has seven employees. Privately held Baytech, founded in 1981 in Midland, has six employees. Its core operating areas are the Permian Basin also. "When the Fina deal came along, we realized we had been in training for this for 20 years, waiting for the right opportunity. The challenge was we had to do the deal in 45 days, or else Fina said we would lose it. We asked them for an extension at one point and they said no, we had to close by June 30," recalls Oldham. Under pressure to move quickly, Baytech and Parallel assembled a team in Midland and Houston. Altogether, five law firms, 16 landmen, four environmental professionals and various engineering consultants tackled the project. "It was a formidable challenge, a disproportionately large deal, considering the high hurdle of capital access and the number of properties involved," says Tucker Bridwell, newly elected chairman of First Permian's board. "Negotiations between the parties, begun between Baytech and Fina in March 1999 when crude hovered at about $12, traversed a veritable minefield of sensitive issues, which placed a premium on teamwork and tact," he says. Also key to the entire process was the cooperation of the Fina staff in Midland. This staff received a severance package from Fina, yet most of the office and field employees now work for First Permian, which assumed the Fina office space. "There was little change in job responsibilities," Oldham says, "though we had to keep up staff morale and be sensitive to their feelings about the change. We had to assure them that while we are not a major like Fina, we can operate a group of assets well with their help and knowledge." The financing The weeks leading to the June 30 closing were fraught with the usual nerve-wracking vicissitudes found in such a transaction. "There were a lot of emotional ups and downs, so we had to stay focused. We could not afford to lose the transaction because something was overlooked," notes Oldham. "But we had fun too. Strickling could be a standup comedian. He would come in each day and say, 'This deal is dead. We are dead, dead, dead.' Then one day we had a tax question, so I dialed our advisors, KPMG, from memory. By accident, I misdialed and the people who answered were at a funeral home! Ben said, 'See, we are dead.'" When Baytech and Parallel began discussing this deal, oil was $12.50 a barrel and the industry was at an all-time low. "Talk was that it was impossible to do a deal then. Our first reaction was-well, all we could hear was the theme from 'Mission Impossible,'" says Oldham. First on the to-do list, First Permian went to Bank One and obtained a $74-million senior loan facility. With less than a 5% decline rate, the properties in the deal would be accretive, with a 20-year half-life, which is long-just the kind of reserves bankers love to finance. Next, Parallel and Baytech obtained $16 million in bridge financing from the two private investors through subordinated debt, which as of July 1, was completely paid off. It also gained $5 million from the sale of some noncore assets concurrent with the closing. There was also a $2-million closing adjustment. In the third quarter, bolstered by a $20-million capital infusion, First Permian plans to start spending about $1 million a month, with 75% of that for infill wells. It will spend $11 million through the rest of 2000. The partners realize the serendipity involved in this deal. By the time it closed, oil had risen from $12 to $17, and today, is about $30. Moreover, in December 1999 the company sold more noncore assets to reduce the subordinated debt, and swapped some assets with Santa Fe Snyder in early 2000 to further enhance its volumes and reserves. Finally, EnCap came in recently, to bring further financial resources and expertise to First Permian. A bond between Bridwell and EnCap managing director David Miller, going back to their Southern Methodist University days 30 years ago, provided the underpinning for that deal. Sums up Oldham, "This is, for us, the deal of a lifetime. We could drill and drill in this mature basin and probably still not find the 34 million barrels that we bought through this deal." This article is adapted and expanded from remarks made by Larry Oldham, president of Parallel Petroleum, at the 2000 Executive Oil Conference held in Midland in April.