2007 Energy Deal Showcase - Financial Transactions Case Studies

A supplement to Oil and Gas Investor
Financial Transactions Case Studies
November 2007


Given the outstanding reputation and track record Randy Foutch enjoys in starting and
developing E&P companies, his latest venture, Laredo Petroleum, would have had no trouble finding willing financial institutions to provide initial support.

But, when the Tulsa-based company was formed in June 2007, then had to look for co-agentsfor a $300-million revolving credit facility with commercial banks, it was not surprising that Foutch turned to the Bank of Oklahoma as part of the team. The bank has been a capital provider in each of Foutch's three previous start-up companies based in Tulsa: Colt Resources (1991), Lariat Petroleum (1997) and Latigo Petroleum (2002), each of which were later sold to large public companies for more than $1 billion in aggregate.

Mickey Coats, now manager of energy banking for BOK Financial, says the bank's business relationship with Foutch dates back to 1991, when Foutch founded Colt. At that time, Coats remembers, Foutch came to the Bank of Oklahoma with more goals and ambition than equity. Now in his fourth start-up venture, Foutch could get funding from multiple sources, but because of the mutually beneficial relationship established years ago, BOK and Foutch continue their relationship, Coats says.

"We have really enjoyed working with Randy over the years," says Pam Schloeder, senior vice president, energy department, BOK. "He had just left his job at Dyco Petroleum as vice president of production in 1991 when he asked the bank to support his aspirations of forming an exploration and production company. He had not received very positive responses from any of the other banks in town.

"We decided to work with him and it has been a great ride for both companies. Randy has consistently performed and remains very faithful to BOK because we were with him from the beginning. BOK was the sole lender to his first company, Colt Resources, and was a participant in the lending relationships to Lariat and Latigo," she says.

In this latest venture, BOK is a co-agent of the $300-million revolving line of credit to Laredo, which has a $45-million borrowing base, and it holds 50% of the credit line.

"It is a five-year facility secured by production. The proceeds were used to acquire [$75 million of] producing oil and gas properties from an Austin-based energy firm. Interestingly, the company selling the properties was a customer of our Texas bank, Bank of Texas, and therefore, we were able to arrange for the seller, at the request of Laredo, to hedge the production at Bank of Texas prior to closing and then after closing, transferred the hedges to the Bank of Oklahoma, at no cost to Laredo," Schloeder says.

"We met with Laredo on April 9th to discuss the financing and closed the transaction June 4th, which was the longest period of time we have ever been given on one of Randy's deals. An unusual twist to this deal was the aggressive advance rate BOK was willing to extend to Laredo, largely based on Randy Foutch's past performance," Schloeder says.

For his part, Foutch says his team has always managed commodity price risk by the use of hedge transactions using futures contracts that its banks help provide. "This activity has gained importance as the general level of prices has increased, and the volatility has become much more pronounced," he says. "The credit facility will provide capital for the acquisition of oil and gas properties and for working capital purposes to fund the company's drilling programs."

The revolving credit is a typical oil and gas facility that has a borrowing base, determined by a semi-annual review of the company's oil and gas properties in terms of remaining reserves and the current and projected cash flow from the production revenues, he explains.

Foutch is again teaming with senior management that has been with him through his various ventures. He is the founder, chairman, chief executive and president of Laredo. Other key managers are Mark Womble, chief financial officer; Pat Curth, vice president, exploration; and Oran Hall, vice president, planning and development. They all worked with Foutch at his previous companies. A new team member is Jerry Schuyler, Laredo's chief operating officer, who joined in May 2007. Schuyler was most recently with St. Mary Land & Exploration Co.'s Houston office and has more than 30 years of industry experience at various worldwide locations.

In addition to the bank debt, global private equity firm Warburg Pincus has provided an equity commitment of $300-to $500 million. This is the third venture of Foutch's that the New York firm has backed; Lariat and Latigo were previous portfolio companies of Warburg Pincus.