Whittier traces its growth from modest beginnings through RIMCO acquisition

Bryce W. Rhodes
Whittier Energy Corp.
Houston

Whittier Energy Corp. has grown rapidly over the last three years from a private company with a modest asset base of approximately $6 million, to a public company with assets in excess of $100 million following the completion of its recent acquisition of RIMCO Production Co.

Whittier Energy was originally capitalized in 1991 by the Whittier family with producing-fee mineral interests in Zapata County (Texas) and some small working interests. As a private entity, our access to capital was limited, and management’s mandate was to continuously reinvest the operating cash flow to grow the company organically. This was carried out by taking a portfolio approach and investing in a geographically diverse mix of non-operated exploration ventures and producing properties.

The company was profitable in these years but grew slowly until 2001, when management and the board reassessed its strategy and approved an aggressive growth plan, which included buying operated properties and the use of leverage. In addition, we would continue to invest in moderate-risk, third-party-generated exploration prospects in an effort to boost the overall returns on our portfolio.

Dan Silverman, Whittier’s chief operating officer, came on board as a consultant to apply his experience and expertise gained from doing acquisition and divestiture work for Apache Corp. and Torch Energy Advisors. We avoided competitive bid situations and concentrated on negotiated deals. We focused on buying smaller value ($1 million to $4 million) properties that were reasonably accessible from Houston. At this price level, we found this niche of assets was under the radar screen of many potential competitors.

Therefore, we believed we could competitively buy and grow an asset base of producing properties in a couple of core areas. And once the asset attained a certain size, it could become an attractive strategic asset in another company’s portfolio, offering our shareholders an exit opportunity, at a premium.

Our operating philosophy includes trying to minimize costs, and we historically have outsourced whenever feasible, including using outside services for operational accounting, consulting engineers, and pumpers. On the geotechnical side, we have been fortunate to have access to an excellent consulting group (Rincon Energy LLC in Carpinteria, Calif.) for seismic reprocessing and interpretation, geologic reviews, and prospect generation.

We closed on our first producing property, a $3.5 million, six-well oil field in St. Helena Parish (Louisiana) in April of 2002. For equity we used the proceeds from the sale of an asset in the Rockies. A three-year term loan provided by Shell Trading Co. comprised the debt.

One of Shell’s requirements was that we hedge our production for the full term of the loan, which was accomplished using a combination of swaps and collars. In July of 2002, we repaid Shell’s debt with the proceeds from a $15 million borrowing base credit facility provided by Compass Bank and simultaneously closed our second producing property acquisition, a 15-well oil field in Dimmitt County (Texas) for $1.6 million.

Our ability to complete transactions was, and still is, a function of finding suitable opportunities and having the equity to bridge the gap between the agreed sales price and what we can borrow, based on our proved developed producing reserves. In our early deals, our equity was very limited, and as a result, our acquisitions consisted of very mature properties with over 90 percent PDP reserves. This allowed us to borrow 65 to 70 percent of the acquisition value. Equity typically came from cash flow or the sale of an underperforming asset.

In the first quarter of 2003, Whittier was presented with a merger opportunity with a small company that had recently moved to the OTCBB exchange. The company’s assets included cash on hand, cash flow from non-operated producing gas wells, its public listing, and minimal social integration issues.

Management and the board agreed that for a modest amount of dilution this was an excellent opportunity for Whittier to begin laying a foundation for shareholder liquidity, gain access to capital markets, and have the potential to use its equity as currency. After weighing the additional costs, reporting requirements, and public scrutiny issues that come with being public, we elected to proceed with the merger.

In preparation for making the transition to becoming a public company, we hired Michael Young, a CPA with Big Six accounting experience with an emphasis on tax, as our CFO. Mike’s career includes positions as controller and CFO of a small public E&P company. His experience with public filing, registration, and compliance requirements have been an invaluable asset to Whittier in today’s demanding reporting environment.

As part of the going-public process, we also recruited an independent board member, Charles “Chuck” Buckner to chair our audit committee. Chuck is a retired Ernst & Young partner with extensive public E&P company experience and has been a great addition to our board.

By the end of the first quarter of 2004, we had set our sights on what became our fifth and sixth acquisitions. The latter, consisting of three separate producing properties, was also our largest to date, and in contrast to our others, it included a large component of non-producing reserves as well as upside drilling potential.

Financing these acquisitions was not going to be possible without an infusion of additional equity. Through a small private placement sold by the company, Whittier raised $2.4 million of new equity from various accredited investors, including Whittier management and members of our board of directors.

The offering was structured as a sale of units for $5.25, consisting of a share of common stock and a three-year warrant with a strike price of $7.50. Though not contingent, finalizing the equity raise closely preceded completion of the acquisition of the three South Texas fields.

Additional capital was provided by increasing our draw on our borrowing base and issuing a convertible note to the seller along with 300,000 warrants. This creative financing was a function of our public equity having real value as currency, which was part of our strategy.

With the addition of these new properties, the company became opportunity rich. It had gained the critical mass to remain active with internally generated growth and maintenance projects. The development, exploitation, and exploration potential of our property base and outside projects could keep us busy until the next significant acquisition opportunity was identified, which turned out to be RIMCO, one year later.

The recently completed RIMCO purchase is truly a transforming event for Whittier. It represents a 150 percent increase in reserves; a 140 percent increase in production; and a 400 percent increase in our asset base. The inventory of development locations and identified and leased prospects is large enough to keep us very active for the next two years and offers significant growth potential without relying on the next acquisition.

Just as importantly for us as a small company, the sale included RIMCO’s excellent geo-technical team of prospect generators, as well as a talented land group. The asset base overlays our core areas in South Texas and the Texas-Louisiana Gulf Coast and gives us a foothold in the Permian basin with two long-life properties-each with significant development potential.

This opportunity was first identified in the fall of 2004 and was initially felt to be well out of our reach in terms of value and our ability to finance, but we continued to monitor it. RIMCO’s management knew of our interest and encouraged us to take a serious look, a process which we began on a cursory basis in January of 2005 and continued to pursue after determining that we were not terribly far apart on value.

A critical factor was the involvement of our investment banker, FBR, which was known to both parties and was willing to work on a relatively small deal. This gave the seller added confidence that we would be able to raise the capital we needed to close in a timely manner. Also of importance was our interest in maintaining RIMCO’s geo-technical and land team in the merged entity. The fact that RIMCO’s management was set to retire and we could step into their shoes also facilitated the process.

Financing the acquisition required both new debt and equity. Following a road show format with our investment banker, we raised $50 million of new equity through a private placement structured as an automatically convertible preferred stock issue. As part of the process, Whittier agreed to apply for a NASDAQ listing, which would facilitate greater institutional investor participation in the company, more liquidity, and a larger share float.

The structure included some inducements to encourage management to meet the requirements of getting a NASDAQ listing, which automatically triggers conversion of the preferred to common. Additional steps taken to meet NASDAQ requirements include rolling back the stock 1:3 in order to achieve a minimum $5.00 share price, and reforming the board to have a majority of independent directors.

We have been fortunate to attract two industry veterans, Ray Seegmiller and David Kilpatrick, to fill those positions. An additional requirement is that Whittier register the newly issued shares by the end of the year or pay a two-percent annual penalty. Both these processes are underway and we expect to meet the requirements.

On the debt side, BNP Paribas teamed up with our existing bank and agreed to provide a new $75 million borrowing base facility from which we could draw up to $30.5 million, subject to meeting certain minimum hedge requirements in terms of volume and pricing, which we were able to do shortly after closing.

Whittier has grown rapidly and successfully over the last three years. Several factors have contributed to this. The company has talented and dedicated management and staff supported by an experienced board of directors, and we have a large controlling shareholder group that has supported our growth plans.

Management has been able to work with high-quality legal, banking, accounting, engineering, and IR firms to get the advice and expertise needed to function in the public environment, and we have had access to excellent technical and accounting support on an outsource basis. In addition, there is no question that we have benefited from a strong commodity price environment. The challenge is to execute and continue to grow in this very competitive and exciting industry. OGFJ

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