A year ago, Floyd Wilson had his Petrohawk Energy LLC team together and capitalized, forming the latest in his series of start-up E&P companies. Based on the success of his earlier build-and-sell ventures-Kansas Oil, Reach Oil, Hugoton Energy and most recently, 3Tec Energy-the smart money was betting that Wilson would find success again.

EnCap Investments and Liberty Mutual were among investors taking private-equity positions in Petrohawk, plus members of management.

The nascent firm put together some assets and was looking for bulk and access to the public-equity market. Wilson first solved the latter concern: he would reverse-merge Houston-based Petrohawk and its 3 billion cubic feet equivalent (Bcfe) of proved reserves with publicly held small-cap Beta Oil & Gas and its 30 Bcfe of proved, forming Petrohawk Energy Corp. (Nasdaq: HAWK).

That deal was done in the summer of 2004. Much earlier than that, however, he came upon a solution to the need for bulk. While Beta brought Petrohawk to a total 33 Bcfe of proved reserves, or an enterprise value of about $100 million, the acquisition of Dallas-based, privately held Wynn-Crosby Energy Inc. would take it to 233 Bcfe and nearly $600 million in enterprise value. Equity value has grown from $3.30 per share at the time of the Beta deal to $9.70 at press time.

Wilson had heard that W-C founder Ronald Wynn Crosby might be interested in selling, so he contacted Dallas-based Mitchell Energy Advisors' principal Mike Mitchell to organize a meeting with Crosby. In June, while Wilson was about to close the Beta deal, which had been under way for several months, he met Crosby in Dallas.

Crosby was, in fact, looking to exit W-C, which was the operator of eight partnerships formed between 1995 and 2002 with roughly 60 investors, mostly from the Dallas area. A native of Wyoming, Crosby's career began with Exxon in 1976. He joined reservoir-analysis firm Netherland Sewell & Associates in 1981 and then Headington Oil Co. in the early 1990s.

He launched Wynn-Crosby Energy in 1995 with a $32-million purchase of assets from Cherokee Resources, a subsidiary of Santa Fe Energy. The Cherokee assets included a large number of term-royalty properties previously owned by Arco. Ironically, some of the Cherokee properties produce from fields pumped by Crosby's grandfather during his childhood near his hometown of Cody, Wyoming.

The W-C business plan focused on cash distributions rather than growth, and by 2004 the partnerships had all paid out. Otherwise, W-C carried only a small amount of bank debt.

There were no hurdles for W-C. It was an asset-seller's market. It was a good time to exit. Crosby agreed to talk more with Wilson.

"We used those meetings to come to an understanding of the range of value that would lead to a deal, until we could get into the technical data," Wilson says.

The deal proceeded with a handshake.

"We don't go to data rooms much," Wilson says. "We haven't done a significant transaction in this company or in prior companies through data rooms. We try to source opportunities and speak with owners privately and work to convince them we can pay fair value, execute quickly and have a cooperative process during due diligence.

"Oftentimes, in a privately negotiated process, the seller's data is not prepared. We help to get the data in shape and analyze it. It becomes an interactive process rather than an adversarial one. We work through all the issues. We discover them as we go."

A price was agreed to: $425 million. "We established a range of value early on and agreed that there would be a deal within that range. Lots of things can happen-hitting a well or drilling a dry hole, for example-during the few months when you're working on a transaction. At the end of the day, we were right in the middle of that range."

While Crosby had been asked often to sell W-C's assets, the offers didn't reflect the value Crosby believed the property set to contain. However, W-C's assets were exactly the type of quality property group Petrohawk needed-a mix of operated and nonoperated, producing and undeveloped, and in several basins.

The good fit made Wilson's offer different. Crosby says, "Floyd really understood the value of our assets, and he insisted on buying everything, including the nonoperated interests and royalties. If I were starting a company and trying to build a public entity, our property base would be a great one to start with."

The purchase-and-sale agreement was signed October 13. The next step was financing. Petrohawk needed to raise $425 million to close, and by late November.

Because it was fresh from the reverse merger with Beta, Petrohawk was unable to simply make a common-stock offering at the time. Instead, investment-banking firm Friedman Billings Ramsey proposed a $200-million convertible preferred stock deal that was placed with 73 institutions.

Wilson says, "We talked to quite a few bankers and FBR was the one that came up with the structure." Key to moving forward with the financing proposal was FBR's commitment. "The principals said, 'We will get this done.' That was important. We had only a few weeks to get the paperwork ready, the road show lasted 10 days, and then we closed."

Nearly 100 meetings were held with potential investors in 20 cities. Petrohawk management set out in two teams to cover the country. Wilson says, "We were advantaged in that almost everyone we saw on the road show knew us from prior endeavors or had heard of us, so we weren't strangers and they knew we had had success in the past."

Steve Herod, vice president of corporate development, and a co-founder, says, "We wanted to offer the stock to a broad institutional market. We didn't want just a few people buying."

Meanwhile, additional Petrohawk staff members were further finishing the multitude of details on the acquisition. Herod says, "For a company our size to pull this off required a total team effort on the technical, land and legal side, and then with the financial group, including hedging and raising capital. Title checks were done in 77 counties in 10 states. Our team worked around the clock and did a fantastic job."

To raise the balance of the additional funds, Petrohawk entered two debt deals: a $200-million conventional bank facility and a $50-million, five-year, second-lien loan, both led by BNP Paribas.

Prior to closing, Crosby agreed to place hedges on more than half of W-C's production, so Petrohawk could assure the deal economics when seeking financing. The hedges were crucial to Petrohawk and required Wynn-Crosby's cooperation.

"These were hedges Ron would have to live with if the deal didn't work out," Wilson says. "It shows how cooperative a relationship we had. Something like that isn't done without a great deal of mutual trust."

The acquisition closed November 23 and was effective retroactively to July 1. Upon conversion of the convertible preferred into common stock at year-end 2004, Petrohawk's debt-to-equity capitalization ratio became 50%.

With the Beta merger, Petrohawk had approximately 11 million cubic feet equivalent per day of production and estimated 2004 earnings before interest, taxes, depreciation and amortization (EBITDA) of $10 million; with the Wynn-Crosby properties, pro forma production rose to 57 million equivalent per day and an estimated $70 million of EBITDA.

The 200 Bcfe of proved reserves it gained from W-C were 75% proved developed and 74% gas. Because the W-C assets were managed for cash distributions to partnership investors, much upside potential remains for exploitation: the transaction included more than 100 Bcfe of probable and possible reserves plus 80,000 net undeveloped acres. Petrohawk has allocated $46 million of its $60-million 2005 capital expenditure budget to the W-C properties.

Petrohawk now has an office in Dallas. Since closing, it sold a package of royalty interests that didn't fit the Petrohawk plan for a cool $80 million to Dallas-based Noble Royalties Inc., and it plans to offer some other assets through auction.

Petrohawk is now focusing on five core basins: the Anadarko, Arkoma, East Texas, Gulf Coast and South Texas. It owns some assets in the Permian Basin but may divest those, which include 35 Bcfe of proved reserves. "It's a great area but it's not an area where we've found a lot of upside within our property group," Wilson says. Petrohawk has devoted only 5% of 2005 capex to the area.

As for the balance, "the property set we're developing here at Petrohawk looks just like the map we had at 3Tec. It's the same basins. We've always been there. To the extent we can, we're sticking to tested areas we're comfortable in and looking for areas that are in the path of new developments."

The W-C assets include shale-gas opportunities in the Arkoma and Anadarko basins. Beta's assets included some coalbed methane in the Arkoma, mainly. W-C had a deep-drilling play under way in South Texas.

"We're really interested in this shale-gas play," Wilson says. "We think it has a lot of potential. It's a Barnett Shale-like play."

The shale is the Caney-Woodford in Pittsburg County, Oklahoma, and Petrohawk has operated and nonoperated interests there. "In time we'll build this into a more highly operated property base. We have good partners there, such as Newfield Exploration."

Petrohawk's 233 Bcfe of proved reserves (pro forma July 1, 2004) are 68% proved developed producing, 8% proved developed nonproducing and 24% proved undeveloped; 74% gas, 60% operated; and have an 11-year reserve life. It also now has more than 130 Bcfe of probable and possible reserves.

Meanwhile, Crosby says he will start over with some drilling, possibly in Wyoming, and begin looking for a large group of nonoperated interests for purchase, setting up Wynn-Crosby Energy, Part II.

Petrohawk is not slowing down. At press time, the company arranged yet another significant deal-again on a quietly negotiated basis-picking up 28 Bcfe of proved reserves plus more than 100 Bcfe of upside for $53 million.

The properties are in South Louisiana and South Texas and are underdeveloped with multipay targets at moderate depths and costs. "The seller is a private company we've known for years and when they were ready to sell, we utilized our relationship to make the deal," Wilson says.

Eventually, Wilson and colleagues will exit again, and be on the seller's side of the table. For now, the W-C transaction is among his favorite experiences in the buyer's side seat.

"You don't find too many deals like this. Both sides came out well. Ron achieved his goal, and we achieved ours. It all fit together nicely."