Any investor on Wall Street who has gone bottom-fishing upstream during the past 18 months knows a simple fact: bigger returns are netted by riding a $1 stock to $5 than staying with an issue from $10 to $30. In many respects, Camcor Capital Inc., a Calgary-based venture capital firm, has applied that principle to its private equity investments in emerging Canadian oil and gas companies. Founder Cameron McVeigh says that in his 13 years of oil and gas transaction experience with two Big Five accounting firms in Calgary, it became clear that higher rates of growth occur in small, start-up junior oils than in larger entities. And on a portfolio basis, investors in such companies could reasonably expect to achieve 25%-plus annual rates of return. Having identified other investors who shared this vision, McVeigh left Coopers & Lybrand at year-end 1996 as managing director of corporate finance. Days later, in January 1997, he established Camcor Capital, and that spring, the private Camcor 1997 Energy Fund LP, with a commitment of C$10 million. The private equity fund's strategy? Invest in emerging Calgary oil and gas companies, private or public, with daily production of less than 1,000 barrels of oil equivalent, primarily from Canada's Western Sedimentary Basin. Second, make sure those companies have the right management and technical teams to grow output. Third, allow three to five years for those teams to grow daily production to 2,500 to 5,000 equivalent barrels. Fourth, exit at that stage through the sale of the companies to third parties. Fifth, take the management and technical teams from the sold companies and begin new, similar-type, start-up vehicles. Camcor only wants to stay with an operator with less than 5,000 equivalent barrels of daily production. "Beyond that size of output in western Canada-where you're looking at a company with an enterprise value of C$50- to $100 million-annual rates of return for investors tend to drop off our targeted 25%-plus level," says McVeigh. "Also, it's in the best interest of the management team to maximize its profitability at that point, given that they, too, have a large personal stake in the company. It can then move on, repeat the process and achieve further optimum profits." The fund has done well in its nearly four years. To date, it has raised C$50 million in commitments from institutions and high-net-worth individuals, and has invested half of that in 15 emerging Canadian oil and gas companies, according to Ian Fergusson, a principal at Camcor Capital and another Coopers & Lybrand alumnus. In addition, through strategic relationships with institutional groups, another C$15 million has been put into the start-ups, bringing the total investment in Camcor companies to C$40 million. The results? "Through this past August, our absolute return [since inception] and our annual internal rate of return were 86% and 38%, respectively," says Fergusson. "During the same 1997-2000 period, the Toronto Stock Exchange (TSE) Producers Index has declined by 7%." Besides the premium Camcor places on targeting strong management and deft technical teams, the fund's success stems from a focus on portfolio diversification and active participation on the boards of the companies involved. "To mitigate investor risk, we typically have six or seven core teams working at any given time, taking advantage of a wide variety of oil and gas acquisition or drilling opportunities from southeastern Saskatchewan to Northeast British Columbia," says Fergusson. "Right now, in today's high commodity-price environment, it makes sense to be about 75% weighted toward drilling. Also, by being on the board, we're able to have a voice in capital expenditures. The whole idea is to target, on a risk basis, finding costs of C$6 per equivalent barrel or less." Of all the Calgary-based producers Camcor has backed since 1997, privately held Midnight Oil & Gas Ltd.-a July 2000 startup-is the latest. The seasoned management team of Ulster Petroleums, a producer bought in May by Anderson Exploration, wanted to restart in a smaller entity-Midnight-targeting shallow gas in central Alberta. Camcor put together C$15-million of financing-$6 million from Camcor principals, $1.5 million from the former Ulster management and $7.5 million from institutional and individual investors. "This sort of investment opportunity ties in directly with the wave of consolidation going on in the Canadian upstream right now, from which a lot of solid management teams are falling out. They are looking to replicate their prior successes through start-up vehicles," says McVeigh. "In addition, a lot of properties are coming onto the market as the result of the rationalization that follows consolidation-and there are few juniors sufficiently financed to take advantage of that opportunity." Camcor expects the Midnight team to grow production from zero currently to 5,000 equivalent barrels during the next few years. The fund will likely exit then, through a sale to a third party, then restart the Midnight management team in another new entity, McVeigh says. In mid-1997, Camcor invested C$600,000 of equity in Catalina Energy, another private Calgary producer that needed capital after acquiring an asset that was producing 90 equivalent barrels per day. A year later, the venture capitalist helped Catalina merge with Causeway Energy Corp., a neighboring operator that trades on the Toronto exchange as CUW. In 1999, the fund invested C$1 million in Causeway, which allowed that producer to more aggressively pursue shallow gas in southern Alberta and Montana, where it now holds 135,000 net acres. Camcor also supported Causeway via subsequent purchases of its stock. "Our average cost in Causeway is C66 cents per share and the stock has been recently trading around C$1.30," says Fergusson. "So during the past three years, we've more than achieved our targeted 25%-plus annual rate of return-plus there's a lot of upside left. In recent months, the company has hit a couple of new gas pools in Montana that will allow us to do more development drilling and increase the company's overall daily output from a current level of 1,100 equivalent barrels." In 1998, Camcor invested C$750,000 in Caravan Oil & Gas Ltd., another Calgary producer that now trades on the new Canadian Venture Exchange (the amalgam of the Alberta and Vancouver exchanges) as CVO. A year later, it invested an additional $520,000 in the company. Caravan has a balanced 50-50 oil and gas reserve mix, with a diverse portfolio in southeastern Saskatchewan, southern Alberta, east-central Alberta and the Peace River Arch in northern Alberta. Says McVeigh, "When we first invested in the company, it was producing 300 equivalent barrels per day; currently, that has grown to around 1,600 equivalent barrels. This producer has also more than met our targeted rate of return. Our average cost in Caravan is C73 cents per share and the stock has been recently trading close to C$1.40." Where does Camcor go from here? This past June, it closed the Camcor 2000 Energy Fund LP, which added C$7 million in available funds, and it's beginning to participate in larger private equity transactions, like the Midnight investment, says McVeigh. "But our longer-term goal is to increase our capital commitment to emerging oil and gas companies in Calgary by another $25 million, to $75 million. Why? The returns in this business are very rewarding." M