HKW Sells Energy Company After 14 Mos.

New York buyout firm Hammond, Kennedy, Whitney & Co. Inc. last month completed its speediest investment ever when it sold energy services company C&J Spec-Rent Services Inc. just 14 months after acquiring it. The buyer, in the secondary deal, was Energy Spectrum Capital.

Robstown, Texas-based C&J Spec-Rent is a provider of coiled tubing and other services to the natural gas market. Coiled tubing pumping is a method of clearing unwanted debris, such as rocks and sand, from energy-producing natural gas wells to improve the efficiency of the site.

The way it works is that coiled tubing unit—essentially a tractor trailer with a large roll of metal tubing and a pressure pump attached to it—drives out to the natural gas well in question, inserts the tubing (sometimes up to 18,000 to 20,000 feet into the well) and pumps in a slurry that clears out the debris. “It’s like a Roto Rooter for a gas well,” HKW President and CEO Glenn Scolnik says as he describes the process.

HKW acquired C&J Spec-Rent, which operates exclusively in the South Texas area, in August 2005 for an undisclosed amount. The thesis was simple: world-wide demand for oil and gas—and thus oil and gas services—would increase over time due to the industrial revolutions in China and India, as well as from continuing consumer demand in U.S.

At the time of the buyout, C&J Spec-Rent had only two coiled tubing units at its disposal, and was forced to turn away business. Seeing an opportunity, HKW capitalized the company with between $12.5 million and $15 million to buy five additional coiled tubing units to add to its fleet. The response was almost immediate. EBITDA doubled a mere 10 months later as C&J Spec-Rent began picking up new business, says a source with knowledge of the transaction.

With market share growing rapidly, HKW had no intention of flipping the company after such a short holding period, but the mild winter of 2005-06 changed that. As demand for natural gas fell and production remained steady, the subsequent surplus prompted prices of the commodity to fall 66% below its August 2005 value, when HKW made its initial investment in the company.

The coiled tubing industry is tied to natural gas prices in that, when prices are high, well operators have more incentive to contact a coiled tubing services provider immediately if their production is stalled by debris than if the gas is selling for less, Scolnik says.

“When [the prices dipped], we didn’t feel any adverse affects on the company level, but we were worried that if prices continued to drop that we’d end up in a downturn,” Scolnik says. “The key in the oil and gas industry is to make your money and get out because it’s a volatile market.”

As the firm was preparing to sell C&J Spec-Rent, the company’s founder and CEO, Josh Comstock, was in the middle of preparing a new plan to enter a new line of business that would have required up to $75 million of additional capitalization, Scolnik says. He declined to shed any light on what the company’s new direction is.

“We are a $100 million-fund and the new line of business would have required a much larger fund than ours to get it done,” Scolnik says, “so it’s just as well that we sold [C&J Spec-Rent] upstream now, because its ready to take the next step.”

C&J Spec-Rent was a portfolio company in HKW’s second fund, HKW Capital Partners II LP, which raised a total of $57 million in 2002 and then reopened in 2005 to round off its total capital commitments at $100 million. The firm is currently raising HKW Capital Partners III LP. Scolnik declined to comment on the new fundraising effort.

The buyer, Dallas-based Energy Spectrum Capital, used equity from its vintage-2004, Energy Spectrum Partners IV LP vehicle to acquire C&J Spec-Rent. Calls placed to Energy Spectrum were not returned by press time.

Terms of the transaction, which was brokered by investment bank Growth Capital Partners, were not disclosed.—A.N.