Pursuit of a Deal

June 1, 2011
Brian K. Tully

Platinum Energy Solutions offers insight into how the market funds energy companies. Energy capital markets are hot, but the universe of providers may be shifting.

Ask someone who has been in oil and gas long enough and they will likely say that as the business changes and goes through cycles, so, too, does oil and gas companies' access to capital. It would appear to be doing that currently, as commodity demand fundamentals have crept back to pre-2008 levels, just as advanced technology simultaneously drives new production. It should follow that how the industry gets capital may also be changing in response to developments in the domestic business landscape.

Daniel Layton, president, Layton Corp.

One of the people who thinks how the industry finds funding is transforming is Daniel Layton, president of Houstonbased investment firm Layton Corp.

"There are enormous opportunities out there for people, but they have to open their minds. They have to look at the big picture and understand that this is not the same industry it was 10 years ago," says Layton, who also heads an exploration and production company bearing his name.

Layton Corp. just closed the financing of a start-up oilfield services company, Platinum Energy Solutions Inc., a new entrant in the pressure pumping business. Layton Corp. partnered with Clearlake Capital Group to provide operating capital for start-up PES, comprised of $115 million in bonds and $30 in equity.

Opportunity and market need are necessary but not sufficient to getting a deal funded today, say the participants of the PES deal. Entrepreneurs with rough deals are sailing into the wind, as the investment climate is hot enough to demand scrutiny on business plans seeking capital.


New York banks have always wanted a piece of the oil and gas business, but recently that desire has manifested itself in what Layton says is a largerthan- previous position in Houston, and the numbers reinforce that decision. "If you look at the production- sharing agreements the majors are contemplating, onshore U.S. and international are both at about an 11% to 13% return," says Layton. If the return on projects is similar, then why not operate domestically in relative stability and safety, goes the rationale. What is clear is that the majors are back on U.S. shores putting big resources behind asset development. The banks follow activity. Layton says there is a lot of Wall Street money in the business today.

"They have had to come here and get a presence with the industry. On the other hand, the need for capital in this new wave of drilling is much higher, and you cannot source that locally," says Layton.

The economic realities of drilling programs in the hot plays, based on horizontal completions with dozens of frac stages, suggest the interest of New York firms would eventually manifest itself, given the excellent returns in the business. But these groups are largely serving the bigger companies undertaking expensive projects. Smaller, more focused investment firms have found a window of opportunity, carving out a niche created by the movement of the larger firms.

The process by which Platinum was funded is indicative of what Layton considers to be a fundamental shift in how the oil and gas industry accesses capital, characterized by both bigger New Yorkbased firms pursuing the companies with larger capital needs, and the ascendency of niche capital providers like Clearlake and Layton Corp., which target smaller independents and start-up opportunities.

"Companies like Clearlake are the future, and the new face of the industry," says Layton. "Ten years ago, people in Chicago or California were not attuned to what is happening in this space." Clearlake co-founder and principal Jose Feliciano agrees.

"The flip side of that for us is, it is very important to find the right partners," he says. "We looked up and down the oil services area for the right people."


Because there is no scarcity of money or potential deals, Feliciano says Clearlake went through a thorough process to arrive at an investment in Platinum.

"We canvassed the oil and gas industry broadly, looking primarily at services: pressure pumping, coiled tubing, and so on," says Feliciano. Clearlake currently favors opportunities in energy services and the midstream, but will look at upstream and other energy related endeavors. It will also inject capital into existing companies that want to grow.

"What's going on in the shale plays is certainly encouraging in fueling the broader services industry. Anything completion-related is hot. There is a very clear opportunity in pressure pumping," he says.

He notes that risking E&P takes the right team, something people with upstream opportunities should be mindful of when looking for a capital partner. In the meantime, services supporting the hot plays remain the obvious choice.

"There is a lot of stranded oil in these shale plays, so transportation is going to be a focus," says Layton, who is currently considering entry into tankage, pipelines and trucking. He sees these as immediate needs when operators want to monetize the stranded oil derived from the shale plays. His firm is also involved in a crude-purchasing business.

Feliciano of Clearlake echoes some of these considerations, which likely contributed to the eventual pairing.

"We are interested in taking any of these niche spaces which seem commoditized, but when you look at training and expertise, are far from it," he says. "In fact, we looked at five or six pressure pumping companies that couldn't do what PES can do."

Charles Moncla is chairman and CEO of Platinum Energy Solutions Inc., recently funded.

"We believe the services supporting the shale plays make more sense for us. We love the fracing business and the transportation business. That's where we see the majority of our focus," says Layton, who specifically brought in oil service veteran Charles Moncla to run PES as chairman and chief executive officer.

"If Charlie wasn't on board, then I wasn't interested," says Layton, indicating the impact of the right management on the attractiveness of the deal. Feliciano shares that sentiment.

Moncla sold his own drilling company, Moncla Well Service Inc., to Key Energy Services Inc. in 2007.

He built the company from one leased rig to a fleet of over 53 owned rigs at the time of sale.

"In my opinion," says Layton, "you couldn't do this particular deal without someone who had done it themselves from the ground up before."

Adds Feliciano: "This team in particular had the knowhow, expertise and connections in the marketplace, plus success in their own right. That is a pretty good predictor of success." Clearlake took the biggest piece of PES' debt offering and led the equity tranche as well.

"In this market, the deal better be 95% done," says Layton about business plans seeking funding. "The market does its homework and it wants to see a quality opportunity." Investors do not have time to give consideration to deals that still need work, or have big questions left to be answered. In the PES case, the kicker was that it already had some contracts, but the entire strategy was in place with an experienced team lined up to execute.

"We went into the raise with a pair of contracts for PES services of at least 12 months, with options for extensions," says Moncla.

Upon funding, he used some of the proceeds to purchase 50 pumps with over 2,250 hydraulic horsepower each, that are being delivered to contracted locations in the coming weeks. The company is also looking for locations in Texas and Louisiana to site yards to house and repair equipment. Moncla says the clients already secured had particular training and education in mind, and that will also be paid for with the initial raise.

"The money is there, but investors want to know how you are going to pay them back," says Moncla, who was grilled about equipment, availability and timing of delivery.

"They wanted to know how equipment was going to be delivered, and how we could guarantee it. Everyone is being told there is no availability for this equipment, but we knew we could get what we needed," says Moncla. "We will start taking delivery of the first equipment shortly."

The road show was intense, according to Moncla. Forty-eight hours on a jet over two weeks was a new experience for him, as he always funded the growth of his own company with cash. This time he had to make the trip to New York, among other places. They met with 63 people during the show, each of whom probed them on every aspect of the business plan. Potential investors became comfortable with the team and the concept during the process, and in the end, PES had investors.

Jose Feliciano, co-founder of Clear Lake Capital Group

Clearlake and Layton are both seeing many opportunities. Feliciano says culling the funnel of potential deals to thoroughly give due diligence takes resource management. As a result of the sheer volume, he says opportunities get prioritized.

"Last year we looked at over 500 investment opportunities, and we invested in less than 10," he says.

Because of the abundance of activity in shale plays, investors learn and prioritize the opportunities according to which shales are most interesting, and then within those plays, which potential partners are operating in certain areas. Preferred operators in favorable parts of a top-end play are not a dime a dozen, according to Feliciano.

"Finding that magical combination of opportunity, strategy and team is very challenging," he says. "But what we are finding is the higher-end, specialty players are bubbling up to the surface. So it isn't just about need for drilling and completions, though that will be there for the medium and long-term horizons. Within that, you have to be able to pick the winners," he says.


What kind of partner a provider is can be discerned by looking at its history and taking stock of its investment style. Layton uses his own firm as an example, relying on his experience as a guide for working with those seeking capital.

"Layton Corp. does not raise money from outside sources to invest in private equity deals. We like to take a principle position."

Layton says his firm will look at anything, as it does not have a particular mandate to guide investments, something larger capital providers are more likely to have, restricting them to certain kinds of investments.

"If someone comes to us with a startup, or with any deal that looks interesting, we can do it." Layton says his attitude towards start-ups and working with small entrepreneurs is derived from his time on that side of the business. He thinks people looking for that kind of relationship with their provider may have a more difficult time with a larger entity.

"We aren't the type of company that will tell you we will take 90% and give you 10%. We used to be the guys borrowing $200,000 from friends and family to put into a deal, and we have been on the other side. It makes us a friendlier company to deal with. Besides, some of the best deals come from people who put their last $100,000 into a deal."

Layton says some entrepreneurs don't realize how to access funds when they need capital. He says he frequently speaks with people who are in the dark about where to begin. He suggests being direct, but concise.

"We like to get a one- or two-page 'elevator pitch' letter, and if that looks interesting, we start a dialog," he says.

Due diligence goes both ways. Companies should research providers of capital, adds Feliciano, as, like deals, they are not created equal. These differences may not be so apparent when the market is hot and everyone is happy.

"Often, in good times it is easy to be a partner and to find a good partner," he says. Talking to management teams who have worked with a provider previously to get feedback is his recommendation.

"I would encourage everyone to explore how those partners behave in more difficult times. That is when you find out what kind of partner you really have."