For small-cap E&P companies, the ability to access capital quickly-and in a cost-efficient manner-can be the deciding factor in capturing seminal growth opportunities or missing the upstream boat completely. In early 2004, Delta Petroleum Corp., a small-cap, Denver-based operator that trades on the Nasdaq as DPTR, found itself squarely at that crossroads. As it neared the close of 2003, it made the decision to focus on rapid growth through accelerated development and exploratory drilling in Wyoming's Wind River Basin and Colorado's Denver-Julesberg Basin, says Roger A. Parker, president and chief executive officer. "But to move ahead with this strategy, we needed an immediate capital infusion." Parker emphasizes that the company had a ready-to-drill inventory of prospects in front of it in both basins and just as importantly, a window of rig availability that would remain open just so long during first-quarter 2004. He considered a secondary offering of stock in the public market but quickly realized that, from the time of filing with the SEC to issuing equity, that process could take a couple of months. Parker then mulled over the idea of tapping the private-equity markets. That's when he turned to Sterne Agee & Leach Inc., a regional brokerage, investment-banking and research firm based in Birmingham, Alabama, with offices throughout the southeastern U.S. W. Barry McRae, head of Sterne Agee's energy investment-banking group in Birmingham, says, "Given Delta's plan for conducting accelerated Rockies drilling and its quick need for capital to execute on that plan, we discussed the idea of doing a PIPE, or private investment in public equity, offering," Simply put, a PIPE is the private placement of restricted, illiquid shares of a company's common stock, usually sold to institutional investors or qualified high-net-worth individuals within a matter of days or weeks-typically at a 10% to 15% discount to the current market price of those shares. The restricted shares are later registered by the issuer with the SEC, usually within 45 days, at which time they become freely tradable in the market. The advantages of a PIPE: the issuer gets immediate access to equity; the buyers, discounted shares that are soon liquid paper in the market. "In addition, the issuer has more control than it would otherwise have in a large public underwriting," explains McRae. He notes that since a PIPE deal isn't announced until after an issuer has secured the financing, the company is able to test the market in a short period without anyone knowing that it's in the market. "This gives the company the flexibility to decide discretely whether debt or equity financing makes the most sense at that time." Also, PIPE transactions sidestep the problem of significant market turnover, which typically occurs in the initial days of any public offering. "This type of transaction doesn't attract the 'quick flippers'-those that buy into a stock in the morning, then sell in the afternoon. By definition, PIPE investors are in a stock for at least 45 days." The investment banker adds that PIPE transactions are also considerably less expensive to execute than traditional public offerings, in terms of legal and accounting costs and the expenses associated with long road shows. "Generally, those expenses are less than one-third the same costs associated with full-blown common-stock offerings." From the issuer's viewpoint, there's yet another benefit to the PIPE approach. "Typically, the management of a small E&P company is required to be involved in every aspect of daily operations," explains Parker. "Thus, management doesn't have a whole lot of time to be on the road four to six weeks, trying to do a public offering. The ability to do it quickly through a PIPE is a particular plus." Michael D. Bodino, Sterne Agee's senior research analyst in New Orleans, who initiated coverage on Delta more than a year ago, says that entering 2004, Delta Petroleum had a growth story that made economic sense to investors-given the company's large inventory of drillable properties. "Notably, we saw several great plays in the Rockies where Delta could create a trillion-cubic-foot-equivalent (Tcfe) company with moderate risk," he says. That's exactly the type of growth story Delta communicated to private investors in February 2004 when it moved ahead with a $32-million PIPE offering priced at $8 per share-a very narrow 4.8% discount to the stock's market price of $8.40 per share at the time. "Investors liked the use of proceeds, so they were willing to accept a smaller-than-usual discount," explains McRae. "Moreover, our institutional sales force sold the shares to the private market in about four hours. Overall, from the time the trigger was pulled on the deal to the time the money was in Delta's drawer, only a week had elapsed." Buoyed by the timeliness of this execution-and the need for yet more quick capital-Delta Petroleum in June 2004 moved ahead with a second, $72-million PIPE offering through Sterne Agee-this one to support the time-sensitive, all-cash acquisition of southeast Texas producing assets from Alpine Resources, a private Houston operator. This PIPE was priced at $12 per share-again a very narrow 4% discount to Delta's then-market price of $12.60 per share. The overall $122-million purchase was consummated with a $50-million increase in Delta's credit facility from the Denver office of the Bank of Oklahoma, US Bank in Denver and Hibernia Bank in New Orleans. "We wanted to enlarge our producing position in southeast Texas and found it attractive that Alpine operated virtually all its properties there and, in most cases, owned a 100% working interest in its wells," says Parker. "We also saw this acquisition of high-volume, high-decline-rate properties as a good complement to our lower-volume, but long-life production in the Rockies." (For more on Alpine's assets, see "From Zero to $122 Million," Oil and Gas Investor, January 2005.) Bodino points out that as a result of the dual PIPE deals executed last year by Delta, its reserves have climbed from a year-end 2003 level of 90 billion cubic feet equivalent (Bcfe) to 168 Bcfe at June 30 to a current level of about 200 Bcfe. During the same period, he notes, the Denver operator's daily production has grown from 19 million cubic feet equivalent to 45 million, net of transactions. "In addition, the company is in the process of hooking up another 10 million equivalent per day of output from wells not yet on production," he adds. From a financial perspective, "this is a producer that has grown its enterprise value (equity plus debt) from $175 million at the start of 2004 to $650 million at the start of 2005," the analyst adds. Meanwhile, its stock has jumped from $6.05 per share to nearly $15. Sums up Bodino, "We see a lot of growth ahead for Delta, well beyond these numbers." Parker adds that as the result of Delta's 2004 growth, the company has also climbed the credit curve. He notes that since the Alpine purchase, JP Morgan Chase & Co. has become the lead agent bank for the company's lending group. "By virtue of this bank's size and capacity, our borrowing base has now expanded to $160 million from a level of just $35 million in February 2004." Sterne Agee completed three other PIPE deals last year for small-cap E&P companies: a $62-million offering for ATP Oil & Gas to accelerate drilling in the North Sea and restructure some debt; a $38-million transaction for Heartland Oil & Gas to acquire Kansas coalbed-methane assets from Evergreen Resources; and a $20-million financing for Westside Energy Corp. to accelerate drilling in the Barnett Shale. Says McRae, "In all these cases, the management teams had good business plans on which we believed they could execute-and they needed money quickly."