The capital-raising playing field for small independent producers has changed dramatically in the past few years. During that time, the pools of private capital available to upstream start-ups have steadily swollen in size. Put simply, institutional investors have become increasingly aware that private funds aimed at the energy sector offer superior returns versus the public market. That investment trend can largely be traced back to 2002, when virtually every source of energy-focused private equity in the U.S. went back to the market to raise a new fund typically larger than the previous one. In aggregate, the equity dollars raised then for the sector tallied in the billions. The same holds true for 2004, but more so. This robust availability of private equity is equaled only by the demand for it among newly formed private independents seeking fast-track growth. Says the head of one start-up: "We chose private equity because that kind of capital gives you the chance to achieve size very quickly." Echoes another: "Private equity has allowed us to make great strides-quickly-in our mission to create value for shareholders." A close look at the experience of three 2002 start-ups based in Colorado bears out these claims. It also sheds light on the type of plays new operators are zeroing in on to achieve rapid reserve and production growth. The Peak leap Formed in November 2002, Durango, Colorado-based Peak Energy Resources Inc. wasted no time climbing the private-capital mountain. That same month, the privately held start-up obtained an initial $10 million in private-equity funding from Yorktown Energy Partners in New York. Using $4 million of that backing, Peak chairman Bill Pritchard and president Jack Vaughn-both former managers of large GE Capital oil and gas partnerships-quickly snapped up producing properties in the East Riverton Field in Wyoming's Wind River Basin, acquiring a net 1 million cubic feet of daily gas output there. The big leap in growth for Peak didn't occur until the following April, however. That's when Pritchard and Vaughn tapped into another $45 million in equity funding from Yorktown to acquire gas-producing properties in Hemphill and Wheeler counties in the Texas Panhandle, New Mexico's San Juan Basin and the Fort Worth Basin in Hood County, Texas. At year-end 2003, two-thirds of Peak's 30 billion cubic feet (Bcf) of proved developed producing (PDP) reserves and 45 Bcf of proved undeveloped (PUD) reserves were centered in the Texas Panhandle. There, it is currently producing about 11 million cubic feet of net gas per day from 95 operated wells. Meanwhile, the company's New Mexico nonoperated well interests have been garnering it another net 4 million cubic feet of daily gas output. In the Forth Worth Basin, the operator is in the process of evaluating the region's much talked-about Barnett Shale potential. Evaluation with 3-D seismic is also under way in the Wind River Basin on a structural play that has already produced 70 Bcf of gas. "We chose private equity because that kind of capital gives you the chance to achieve size very quickly," says Pritchard. "With it, the day you make an acquisition, you're able to put your cash flow to use at growing your operations-without being concerned about having to make an interest payment or worrying about commodity prices dropping." In the case of bank debt, a start-up seeking to make an acquisition typically can expect a loan based on only 60% of the value of a property's PDP reserves-the producer has to come up with the other 40% of funding, he explains. "And even with mezzanine capital, an operator still needs to put up some sliver of equity, usually 10% to 20%. To get quickly to the size of organization that would fit our skill set-and having no people, no assets, no real money to contribute-we felt that private-equity sponsorship made the most sense." Also, the deep pockets behind major private-equity funds give a start-up instant credibility with the sellers of producing properties, banks and hedge counterparties "because they know you can complete a transaction." Yorktown Energy Partners was seen by Peak as a good fit. "Like us, they favor long-lived gas reserves, low leverage levels, floors on hedges versus swaps since they protect against commodity-price downside while keeping the upside wide open-and very importantly, Yorktown believes in growth through the drillbit," says Pritchard. This year, the operator has a capex budget of $28 million, up from only $5 million in 2003. Notably, the company expects to fund this spending from free cash flow. Peak's primary focus will be tight-sand gas wells, multi-stage fracturing with high frac rates and underbalanced drilling, particularly in the Granite Wash and Atoka formations in the Texas Panhandle. "These are 11,000- to 13,000-foot, low-pressure formations where drilling with air versus conventional mud prevents circulation loss and damage to the underpressured formations," says Vaughn. Use of these technologies has greatly increased the production rate of Peak's Panhandle wells relative to the wells of other operators around them, he says. "Our wells come on at about 2.5- to 3.5 million cubic feet of gas per day; those offsetting them initially produce only about 1- to 1.5 million cubic feet daily." By mid-2004, Pritchard expects the company's reserves to be 50% higher than at year-end 2003-with at least 50% of those reserves PDP. "We also expect to keep our Pandhandle finding and development costs below 60 cents per Mcfe." Shoring up the operator's ability to grow is a $150-million revolving credit facility Peak recently secured from Fleet Securities which was merged this April into Bank of America. "We have this stand-by facility, not drawn down upon yet, so that we're positioned to make a meaningful acquisition in the Midcontinent or the Rockies," says Vaughn. "We'd love to acquire a coalbed-methane (CBM) opportunity in the San Juan or the Rockies." Adds Pritchard, "Between our ability to turn to Yorktown for additional equity and our new revolving credit facility, we could conceivably do a $200-million acquisition." Leading with clout For Medicine Bow Energy Corp., a private Denver-based producer, the last two years has also meant fast-track growth. In January 2002, the start-up had zero oil and gas assets and production. Today, the gas-focused independent operates 550 wells and participates in another 150 nonoperated well interests in Wyoming's Powder River and Greater Green River basins, the gas-rich Hugoton Embayment in Kansas, the shelf of the Anadarko Basin in Oklahoma, the Cotton Valley Lime play in East Texas and New Mexico's San Juan Basin. Current daily output from these core areas: 100 million cubic feet equivalent. "From the beginning, our strategy has been to lead with strong private-equity funding that would allow us to write a big check [for acquisitions] in a very short period of time," says Mitch Solich, Medicine Bow chairman, president and chief executive officer. Previously, Solich headed up Shenandoah Energy Inc., another privately held Denver-based producer that was sold to Questar Market Resources Inc. in mid-2001. With the help of Chris Wagner, a partner at Rivington Capital Advisors LLC, a Denver boutique investment-banking firm focused on the small- to midcap E&P sector, Medicine Bow was capitalized in early 2002 with an initial $6.6 million of "friends and family" equity. Says Wagner understatedly, "We then went to the institutional market for additional private equity capital." That additional equity capital-amounting to $183 million of funding to date-came from some very deep pockets: EnCap Investments LLC, Credit Suisse First Boston Private Equity Inc., Liberty Energy Holdings and Kayne Anderson. Solich says, "These are people we've known a long time, who understand all aspects of the E&P business and who gave us the ability to move quickly on big transactions that were 'win-win' for both the buyer and seller." Indeed, with such a scale of private-equity backing-plus debt funding from BNP Paribas, US Bank and Union Bank of California-Medicine Bow was able to close on three major acquisitions within a nine-month period in 2003. These transactions included the purchase of East Texas properties from a private seller; all the common stock of Ensign Oil & Gas, a private Denver-based operator; and a one-third interest in Four Star Oil & Gas Co., a private San Juan Basin, Hugoton Field and West Texas-focused company two-thirds owned by ChevronTexaco. In the latter two transactions, Rivington Capital acted as buyside advisor to Medicine Bow. "We worked with management to formulate not only the purchase price, but also assisted it through the due diligence process and in arranging each deal's capital structure," says Wagner. "This is something we've done in half of the 15 E&P deals we've worked on during the past two years, mainly for Denver independents; the balance of the assignments have involved bringing capital providers to the table." Solich adds, "In each of these three acquisitions, we were able to lead with significant financial resources such that the seller didn't have to worry about whether we could fund the deal. So private equity has allowed us to make great strides-quickly-in our mission to create value for shareholders." In addition to its planned 2004 capital spending on Four Star, Medicine Bow this year has a capex budget of $50 million that will be focused on 85 drilling projects, mainly in East Texas, the Rockies and the Midcontinent. Comparatively, the company was involved in just 42 drilling projects last year. "From an acquisition perspective, we'll continue to craft deals with sellers of assets or with corporations, whether that involves oil or gas," says Solich. "We're not biased about the commodity-as long as the acquisition and development of it creates value." Clearly, the company has plenty of financial elbow room to make good on that aim. After all, the $183 million in private-equity backing and the $38 million of bank debt it has tapped so far simply represent funding-not commitments. "With the group of capital providers we have, we could easily look at a $200- to $300-million acquisition," says Solich. Barnett Shale build-up Paul M. Rady, chairman and chief executive officer of Antero Resources Corp., another privately held Denver-based operator that debuted in 2002, knows a thing or two about replicating success. In 1998, after exiting Barrett Resources as president and chief executive officer, he grew a Powder River Basin-focused start-up, Pennaco Energy Inc., from zero assets to about 200 Bcf of proved and 800 Bcf of probable CBM gas reserves before the Amex-traded company was sold in early 2001 to Marathon Oil for more than $500 million. By the summer of 2002, Rady, seeing there was plenty of private-capital firepower then available for upstream start-ups, returned to the sector with his new E&P entrant, Antero-a name that derives from Mount Antero, one of the many 14,000-foot peaks in Colorado. "Our strategy is to pursue opportunities in areas we know well such as the Midcontinent and the Rockies, to focus on repeatable-type plays where we can build a large drilling inventory, and to focus on unconventional plays such as tight-sands gas, coalbed methane, fractured shales and broad-based refrac programs," he explains. Given this strategy and risk profile, Rady turned that summer to three major private-equity providers-Warburg Pincus, Yorktown Energy Partners and Lehman Brothers Merchant Banking. The funding arrangement between these deep pockets and Antero totals $260 million, with equity to be drawn down by the operator as opportunities arise. The first big opportunity that Antero seized upon: a $50-million purchase in February 2003 of gas-producing properties and leasehold rights in the Barnett Shale play on Vinson Ranch just outside of Newark, Texas-in the heart of Newark East Field. Later that year, the company continued building its lease position in the region, drawing around another $10 million in equity. "We've now amassed more than 27,000 net acres in the Barnett Shale play, have 90 wells there that are producing an aggregate 60 million cubic feet of gas per day, five rigs running and several hundred more well sites yet to drill," says Rady. "It's our intention to continue developing our current leasehold and to add new leasehold in the region until we become one of the largest producers in the Barnett Shale." The East Newark Field is the sweetest spot in the entire play and is considered to be the largest producing gas field in Texas, with daily output of some 750 million cubic feet, Rady says. This aside, Rady recognizes the Barnett Shale gives the company exposure to only two of the unconventional opportunity sets it seeks: fractured shales and broad-based refracs. "What's still missing within our holdings are tight-sand gas and CBM plays," he concedes. "To address this issue, we're pursuing the acquisition of producing properties and acreage in the Uinta, Piceance and San Juan basins in the Rockies, as well as other basins within the Midcontinent." While it still has another $200 million of private equity to call upon, Rady says the company's current growth is being funded one-third with private equity, one-third with bank debt from US Bank's energy team in Denver and one-third with operating cash flow, now around $40 million annually. Antero's ultimate exit strategy? "Both Glen C. Warren Jr., our president and chief financial officer, and I have demonstrated that we're capable of running public companies, so we could easily go the IPO route or, as we did with Pennaco, sell to a third party," says Rady. "Having said that, there's plenty of opportunity to raise capital today in the private market, such that an operator doesn't necessarily have to go public anymore to raise funds through secondary offerings," he observes. "Also, the private market for buying and selling companies has become very robust-not like it was five or 10 years ago. "All this suggests that private operators have a lot more options open to them than ever before when it comes to exit strategies or funding further growth."