A capital idea!

Is It Time for a ‘New Venture?’

American Association of Petroleum Geologists (AAPG)

Why start your own oil or gas company right now?

Cameron O. Smith
Cameron O. Smith

Cameron O. Smith, who’s in the business of financing start-ups, has two words of classic advice:

“Buy low.”

Smith is head of The Rodman Energy Group and senior managing director of Rodman and Renshaw LLC, a publicly listed investment bank in New York City.

Bob Von Rhee
Bob Von Rhee

This month he and AAPG member Bob Von Rhee, manager of KVR Energy LLC in Tulsa, will be co-chairs for “Starting Your Own Oil and Gas Company: Dream, Dare, Do!” a session set for the Mid-Continent Section meeting in Tulsa.

Think that starting a company is mostly a matter of struggling to get funding?

Wrong, Smith said.

“The goal of this session is to make sure that people know the opportunity to start a company is a matter of volition and ambition,” he said.

And buying low – or getting into business during a down-cycle in oil and gas prices – looks like a wise move.

Von Rhee said he has been involved in three firms funded by venture capital: Tidewest Oil Co., Sapient Energy and as a founding partner in Rockford Energy Partners. He was a partner in Rockford Energy, which the management exited in 2004.

As you will discover, in venture capital “exited” is a word meaning “cashed in.”

New ventures benefit not only from technical development of producing properties, but also any increase in oil and gas prices, Von Rhee noted.

“The price gain can lift many a bad acquisition,” he said, “and make you look good.”

Let’s Make a Deal

Venture capital investment in the oil and gas industry isn’t anything new, and a sizeable number of start-up companies have benefited from it.

Smith started arranging funding for oil and gas ventures at COSCO Capital Management, acquired by Rodman and Renshaw in 2008.

“We at Rodman Energy and earlier COSCO have arranged 50 financings for something like 40 companies in the past 17 years,” he said. “Fully three-quarters of those were start-ups.”

But what about now, with lots of talk about recession and problems in the capital markets?

“Sure, it’s a good time to be in the business,” Smith said. “The great thing about periods like now is that there are deals to be done.”

Von Rhee also sees opportunities for building a business today.

“From the professional geologist’s point of view, we’ve come through an extraordinary pricing environment in the past two years,” he said.

“My partner and I are seeing what we thought we’d see,” he added. “People who came into the business at very high commodity prices are having trouble, going into bankruptcy, etc.”

At the same time, Von Rhee noted, buyers and sellers seem to be “decoupled” in negotiating sales prices for properties.

Sellers “haven’t had what we might call market therapy,” he continued. “They aren’t going to get what they thought they were going to get nine months ago.”

Risk Averse?

New-venture financing might be available now, but that’s not to say the process of getting start-up funding is an easy one.

“It’s a particularly difficult time to arrange that kind of capital,” Smith said. “That’s my downside.

“Managers are concerned about existing problems in their own portfolios,” he added. “They are reticent about investing in what could be a falling market.”

Von Rhee has been through the venture-capital funding process and described it as challenging: “There’s quite a bit of lawyering that goes on,” with complex legal and financial documents, he observed.

“It’s a business venture, and it can’t be treated lightly,” he added. “I would rate it as a serious, possibly difficult process, that needs to be a business and financial focus.

“But it’s not an impossible process,” he added.

And money is there. Rodman Energy’s latest survey shows capital availability isn’t an issue, said Smith.

At June 30, its Private Capital Energy Index of 20 providers reported having just under $30 billion to invest in energy companies or projects. According to the National Venture Capital Association, U.S. venture capitalists invested $6.9 billion in deals during the first half of 2009.

The Mid-Continent’s session on start-ups also will feature a panel presentation and discussion with leaders of oil and gas companies who have built successful businesses through venture-capital funding.

“All of these individuals (panelists), including Cameron and me, are geologists,” Von Rhee said. “That’s what’s really interesting.”

Venture capitalists primarily look for experience and a successful record in a start-up management team, plus solid grounding for the new company, he said.

“The geologists and other individuals involved in this very typically bring assets to the table when they look for funding and invest their own money alongside the new capital,” he noted.

In his experience, this results in the company founders starting with a relatively small equity position in the new venture and ending up with 20-30 percent of the profits upon exit.

Some companies are sold to larger entities and have an ongoing existence.

But for the most part, venture-capital-funded oil and gas start-ups will have a closed life-cycle, Von Rhee said.

“There’s a point at which the original equity partners are looking to cash out and go on to other things. For the management, that’s also a cash-out point,” he explained.

The Business Side of Geology

It might sound odd, but the situation in the industry today involves money looking for solid and promising start-ups to fund, more than geoscientists looking for new-venture capital.

Part of the reason is that this price cycle has seen fewer layoffs, with fewer experienced managers wanting to start their own businesses.

“The typical source of start-up managements is coming out of mergers and acquisitions, something like that. That, too, has been at a low ebb for the past 12 months,” Smith noted.

And part of the reason is that so few geoscientists understand the venture capital process.

“Most geologists are unaware how to approach venture capitalists,” Von Rhee said.

“The geologist has always been the explorer, the idea person, but has never been coupled with capital. It’s been a classic problem within our industry,” he added.

So the “Dream, Dare, Do!” session hopes to provide good information to aspiring new-venture owners, even offering a “Dummies’ Guide to Private Capital Financing” discussion.

“Geologists love what they do, they really love their profession. As a consequence, they don’t get involved in the corporate finance side of the business,” Smith said.

That shouldn’t stop any geologist with desire and drive from seeking out capital for a start-up venture, he observed.

“Lots of people have done it,” he said, “and lots of people have done it with great success.”

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‘Dream, Dare, Do!’

A session on how to get funding for new ventures, “Starting Your Own Oil and Gas Company: Dream, Dare, Do!” will be offered Tuesday, Oct. 13, during the AAPG Mid-Continent Section meeting in Tulsa.

The session co-chairs are Cameron O. Smith, head of The Rodman Energy Group and senior managing director of Rodman and Renshaw LLC, a publicly listed investment bank in New York City; and AAPG member Bob Von Rhee, manager of KVR Energy LLC in Tulsa.

Scheduled panelists are:

  • Randy Foutch, chairman and CEO, Laredo Petroleum Inc.
  • Jim Hughes, president and CEO, SunTerra Oil & Gas.
  • Maurice Storm, president and CEO, Crow Creek Energy II LLC.

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