Patina Oil & Gas Corporation
Patina Oil & Gas Corporation
Sales: $100.3 million (1997)
Stock Exchanges: New York
Ticker Symbol: POG
SICs: 1311 Crude Petroleum & Natural Gas
A company looking to grow through acquisitions, Patina Oil & Gas Corporation is an independent energy company engaged in the acquisition, development, exploitation, and production of oil and gas properties. Patina was formed in 1996 to facilitate the consolidation of oil and gas properties owned by Snyder Oil Corporation and Gerrity Oil & Gas Corporation. All of Patina’s assets were located at the Wattenberg Field in Colorado. During the late 1990s, the company held interests in 3,500 producing wells and 775 development projects. Approximately three-fourths of Patina’s reserves were related to natural gas. The company’s biggest customer during the late 1990s was Duke Energy Field Services, Inc., which accounted for 41 percent of the revenues collected by Patina in 1997.
Patina’s Formation in 1996
Patina’s sole asset at its inception were interests in oil and gas properties in the Denver-Julesberg Basin, a territory whose outer boundaries encompassed greater than a quarter of northeastern Colorado and small parts of the border territory separating Colorado from Wyoming and Nebraska. All of Patina’s properties were in Colorado, specifically at the Wattenberg Field, located approximately 35 miles northeast of Denver. Discovered in 1970, the Wattenberg Field stretched across the counties of Adams, Boulder, and Weld and was regarded as a major producing field. When Patina inherited the properties at Wattenberg in 1996, the field had produced in excess of three trillion cubic feet of natural gas equivalents during its 26-year existence as an oil and gas development property. Patina, from its inaugural day, became the largest operator in Wattenberg, responsible for producing more than 30 percent of the field’s production. Within a 40-mile radius, Patina held financial stakes in 3,550 producing wells and, perhaps more impressive, maintained operational control over 95 percent of the wells in which it retained an interest. This enviable level of ownership gave the company control over all operating procedures, an advantage that enabled company executives to implement decisions that best helped Patina without deference to external decision making. Patina officials decided when and where to invest capital, they decided when developmental drilling was appropriate, and they determined how best to optimize the production from the field to secure the best pricing for Patina and its shareholders.
To the other companies operating in Wattenberg, Patina appeared overnight as their biggest rival, assuming a stalwart position in the highly regarded Wattenberg Field that must have drawn covetous eyes. For its part, Patina was indebted to its predecessors for its vaunted debut as a corporation. The circumstances surrounding the company’s formation and its bountiful inheritance were directly related to the reaction of Patina’s predecessors to the forces at work in Wattenberg. Wattenberg was not the place for oil and gas drillers to chance upon one great producing well and collect their riches. Wattenberg was a field pocked with myriad wells, each containing relatively small amounts of oil and gas reserves. The strategy at Wattenberg revolved around drilling a large number of wells and drawing a relatively small amount of reserves from each drilling. Whereas this strategy would not strike outside observers at first blush as a lucrative business undertaking, Wattenberg offered oil and gas operators an inviting alternative to wells with massive returns on investment. The characteristic that made Wattenberg economically attractive was that nearly every drilling realized a producing well. Better than 95 percent of the wells drilled at Wattenberg became producers, a success rate that made drilling at Wattenberg a low-risk venture in a high-risk industry.
With much of the risk removed from oil and gas exploration, success at Wattenberg hinged on factors other than discovering the mother lode. To realize profits, companies were dependent on the reservoir characteristics of the specific area where they drilled and their ability to astutely manage the drilling. Success, accordingly, was linked to decidedly corporate functions and capabilities, that is, keeping capital and operating costs at a level that generated the greatest profits. There was, however, one other factor that dictated success at Wattenberg, and its influence led to the formation of Patina.
No matter how well managed a company was, its executives could not control the fluctuations in the price of gas. In an oil and gas field where the corporate capabilities of a company came to the fore, the price of gas meant much when financial totals were tallied. Patina’s predecessors—the companies who owned the oil and gas properties at Wattenberg prior to Patina’s formation—stood as a prime example of the effects gas price fluctuation could deliver at Wattenberg. When gas prices soared to $2.08 per Mcf in 1993, Snyder Oil Corporation and Gerrity Oil & Gas Corporation, both of whom maintained a presence at Wattenberg, moved to take advantage of the price upswing. Each company launched large-scale drilling programs, but gas prices began to slip precipitously shortly thereafter. In 1994 the price dropped to $1.70 per Mcf. In 1995 the price of Rocky Mountain natural gas continued its collapse, plunging to $1.34 per Mcf. Snyder Oil and Gerrity Oil found themselves in a potentially threatening bind. With gas prices down to their 1995 level, neither could earn a reasonable return on its production from Wattenberg. To resolve their dilemma, the two companies decided to consolidate their Wattenberg interests in a publicly traded company. That company became Patina Oil & Gas Corporation, the new, dominant presence at the Wattenberg Field.
The merger of the two companies’ Wattenberg assets into a publicly traded company, which, for reporting purposes, was majority-owned and consolidated into Snyder Oil, made the most sense economically. Patina, therefore, was formed in January 1996, a separate entity 74 percent owned by Snyder Oil, with Gerrity Oil shareholders owning the balance. In May 1996, Gerrity Oil was acquired by Patina. Although the arrangement struck Snyder Oil executives as the best response to the collapse of Rocky Mountain gas prices, the spinoff reportedly confused investors in Snyder Oil shares. Consequently, Snyder Oil executives made a strategic decision to sell its ownership in Patina and to plow the funds gained from the sale into the company’s core operations. Snyder Oil’s decision left Patina as a truly independent company able to pursue its own destiny without the influence of its majority owner, Snyder Oil. The decision to cut loose Patina from Snyder Oil caught the imagination of Snyder Oil’s president and the architect behind Patina’s creation, Thomas J. Edelman. Edelman saw the opportunity to use Patina’s assets as a foundation for building Patina through acquisitions. It was a strategy Edelman possessed considerable experience in employing.
As Edelman weighed the opportunity available to him, he looked from a vantage point supported by a career in the oil and gas business that spanned nearly two decades. Edelman had built two oil and gas companies from the ground up during his years in the petroleum industry, creating Lomak Petroleum, Inc. and the company he presided over during the mid-1990s, Snyder Oil. With each company, his formula for success had been predicated on the gains to be realized through acquisitions. In the process of building Lomak and Snyder, Edelman had completed more than 200 acquisitions with an aggregate worth of more than $1 billion. He was a respected, seasoned veteran in the art of acquisition, demonstrating negotiating skills that made his experience nearly as valuable to Patina’s regard on Wall Street as the company’s assets at Wattenberg.
Edelman resolved to embark on a new era in his career, with Patina as his vehicle for achieving growth. To execute the severance of Patina from Snyder Oil, Edelman completed a series of transactions that eliminated Snyder Oil’s majority ownership in Patina. Of the nearly 14 million shares of Patina stock owned by Snyder Oil, 10.9 million shares were sold to the public in a secondary offering at $9.87 per share, while the balance was purchased by Patina itself using the proceeds raised from a $40 million private placement to institutional investors. In addition, Patina sold $3 million of unregistered common shares to a group of its key managers. Of these shares sold to Patina executives, Edelman purchased $2 million. The whole series of transactions was completed in October 1997.
Patina plans to increase its reserves, production and cash flow in a cost-efficient manner primarily through: selectively pursuing consolidation and acquisition opportunities; efficiently controlling operating and overhead costs; operating its properties in order to enhance production through well workovers, development activity and operational improvements; and utilizing improved exploitation and development techniques to maximize the value of its properties. The company intends to pursue further consolidation and exploitation opportunities in Wattenberg while simultaneously focusing on acquisitions in other basins where Patina’s economies of scale and operating expertise give it a competitive advantage.
Expectations for the Future
Against this backdrop, Edelman had at his disposal a larger asset base than he enjoyed when he began shaping Lomak Petroleum and Snyder Oil into powerful petroleum forces. This was one of several factors that pointed to a promising future for Patina. The company’s presence at Wattenberg was another factor, a valuable asset considering the low risk involved in finding reserves and because of the distinctive attractive features of Wattenberg. There were as many as eight productive formations, or “zones,” beneath the field, ranging in depths from 3,600 feet to 8,000 feet. Each zone was given a name; in descending order they were Parkman, Sussex, Shannon, Niobrara, Codell, D-Sand, J-Sand, and Dakota. As Patina set out on its own in 1997, the primary drilling objectives were within the Codell and Niobrara formations, but other zones had yielded reserves. Between 1992 and 1997, Patina and its predecessors had invested roughly $350 million on development projects in the eight layers of Wattenberg, drilling 1,400 wells during the period. Development expenditures attributed exclusively to Patina totaled $8.3 million in 1996 and more than doubled the following year as the company became more aggressive, rising to $17 million.
Although Patina’s presence at Wattenberg represented a promising starting point in the minds of Edelman and Wall Street analysts alike, that was all it represented—a starting point. For the company to grow, suitable acquisitions needed to be completed, which put the burden of responsibility directly on Edelman’s shoulders. In late 1997 and early 1998, Edelman marshaled his forces to begin the expected acquisition campaign that would determine the worth of the company and the prudence of his decision to leave Snyder Oil. Edelman reduced Patina’s debt by $51 million in 1997 to enhance the company’s ability to acquire and he announced two corporate appointments that augured an imminent move on the acquisition front. In March 1998, Jay W. Decker was appointed president of Patina, freeing Edelman from one of the three top executive titles he had held since Patina’s formation. Continuing to serve as chief executive officer and chairman of Patina, Edelman offered a strong reference to the company’s imminent plans for expansion when he announced Decker’s appointment, saying, “his [Decker’s] addition will greatly strengthen our management team and broaden our exposure to acquisitions as we seek to substantially expand the company.” Acquisition was the keyword as well when the company appointed another individual to its management team. In May 1998, James A. Lillo was hired as vice-president of acquisitions. Edelman noted the addition of Lillo to Patina’s management team and reiterated the company’s focus on acquiring oil and gas properties, saying, “We are delighted that Jim has elected to join Patina. He brings strong technical and operational skills to the management team and will be instrumental in identifying and evaluating acquisition opportunities for us as we expand our operations into other areas.”
With its management team in place, Patina readied itself for the acquisitions that, to a large degree, would determine its fate. Analysts expected the company to identify acquisition candidates in the Rocky Mountain region. Their beliefs were based on conversations with Edelman, who reportedly perceived oil and gas properties in the Rockies to be undervalued in comparison with the Gulf Coast and Gulf of Mexico regions, and on the existence of other basins in the Rockies that shared characteristics with the company’s Wattenberg Field. As the company moved forward in the late 1990s, however, theories concerning its future acquisition targets were pure speculation. Patina was a work in progress, yet to make its first defining move.
—Jeffrey L. Covell