U.S. Exploration Gets New Energy –

Frank Pottow, a managing director with Greenhill Capital Partners, expects high oil and gas prices to make 2004 one of the best years for the energy business in the last 20 years.

“Basically, there’s a continued increase in demand and a continued decrease in the supply of natural gas reserves,” he said. “These conditions make us very optimistic.”

Having completed five investments in the energy sector in the last 18 months, more than a quarter of the $254 million that Greenhill has invested to date from its $423 million fund is committed in that sector. Most recently, Greenhill, along with Lime Rock Partners, backed a platform called U.S. Exploration Partners Holdings, which announced the completion of a leveraged buyout of United States Exploration at the end of January. The $53.3 million deal takes the natural gas producing company, which owns reserves in the Wattenberg Field northeast of Denver, Colo., off the American Stock Exchange and into the private realm. Shareholders received $2.82 per share in cash.

Of the $53.3 million, Pottow said about $25 million was paid in debt provided by Wells Fargo, and the equity portion was split evenly between Greenhill and Lime Rock.

The company’s former president and chief executive, Bruce Benson, who owned a 17% stake in the company, thinks that selling the company made sense since it will provide liquidity to investors. “If shareholders can’t trade the stock, then there’s no value in it,” he said, adding that the Sarbanes-Oxley Act, which requires publicly traded companies to follow a new set of accounting rules, took a toll on the company’s cost structure and made it too difficult to continue as a public entity.

“The company has not been able to maximize its value,” said Pottow. “We can take it to the next level.”

Greenhill installed a new management team led by president and chief executive Steve Durrett, the man that Pottow backed at Ballard Petroleum in the late 1990’s when he was with SG Capital Partners. At Ballard, Durrett and his team drilled 100 new gas wells in proven, undeveloped reserves. The firm tripled its money in 18 months and sold the company to Alberta Energy Co., a strategic buyer that is now called Encana, in 2001.

At U.S. Exploration, Pottow thinks Durrett and his team can drill up to 200 new wells in the next three or four years, and eventually sell the assets to a strategic buyer.

“Steve Durrett and the same management team will apply the same techniques we applied very successfully at Ballard,” he said. “In this situation, we have similar geology, similar topography, similar cost structure, and it’s a similar part of the world. Whether we can triple our money or not remains to be seen. It’s not so much the geology of whether there’s stuff in the ground, it’s more an operations play of whether we can execute properly and we think we’ve got good team of executers.”


Buyer: Greenhill Capital Partners and Lime Rock Partners

Target: United States Exploration

Debt Provider: Wells Fargo

Financial Advisors: Petrie Parkman & Co. and McDonald Investment