Deals Can Take a Circuitous Route

Patience and Flexibility Required

Cymraec Resources, nee Cymraec Exploration, was for the most part a typical startup company in 2000 when it was founded by Mike Looney, Mike Graham and Steve Zeboski as a prospect generation shop.

Cymraec (pronounced “karomak”) initially was a partnership with a couple of operators and a group of partners who funded projects from the standpoint of paying to reprocess the seismic data.

In a departure from most typical start-ups, this wasn’t just any seismic data.

“We acquired a significant amount of 2-D seismic data from Exxon in Louisiana, where we’re acquiring 3-D data now,” said company CEO Looney. “We struck a deal with Exxon, which allowed us to acquire license rights to their proprietary seismic data base not only in Louisiana but also Texas and a large portion of the continental U.S. This was a very big deal for us.”

Still, the founding trio recognized early on that this was only one step toward ultimately becoming a full-fledged E&P company.

“We had partners and two operators, but one operator was always out of money and filed for bankruptcy in 2004,” Looney said. “The other operator was good but risk averse.

“Even though we had generated about 400 prospects and leads from data we had over about a three-and-a-half-year period, we couldn’t get the wells drilled fast enough,” Looney said. “The partnership was dysfunctional with different agendas.”

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Cymraec Resources, nee Cymraec Exploration, was for the most part a typical startup company in 2000 when it was founded by Mike Looney, Mike Graham and Steve Zeboski as a prospect generation shop.

Cymraec (pronounced “karomak”) initially was a partnership with a couple of operators and a group of partners who funded projects from the standpoint of paying to reprocess the seismic data.

In a departure from most typical start-ups, this wasn’t just any seismic data.

“We acquired a significant amount of 2-D seismic data from Exxon in Louisiana, where we’re acquiring 3-D data now,” said company CEO Looney. “We struck a deal with Exxon, which allowed us to acquire license rights to their proprietary seismic data base not only in Louisiana but also Texas and a large portion of the continental U.S. This was a very big deal for us.”

Still, the founding trio recognized early on that this was only one step toward ultimately becoming a full-fledged E&P company.

“We had partners and two operators, but one operator was always out of money and filed for bankruptcy in 2004,” Looney said. “The other operator was good but risk averse.

“Even though we had generated about 400 prospects and leads from data we had over about a three-and-a-half-year period, we couldn’t get the wells drilled fast enough,” Looney said. “The partnership was dysfunctional with different agendas.”

Opportunity knocked when the prospect-rich Cymraec team encountered G. Warfield “Skip” Hobbs of Ammonite Capital Resources. Hobbs entered the picture to do due diligence on Cymraec, representing a potential partner.

Hobbs liked what he saw and gave his client a thumbs-up.

“We stayed in touch with Skip from 2001 onward and finally, after seeing the struggles we had gone through,” Looney said, “he convinced us when we talked at NAPE 2005 we had to get rid of the partners.

“He said the only way to do this was to go raise money and buy them out,” Looney noted. “By mid-February of ‘05 we had signed a contract with Ammonite to help us raise the money.”

The Money Game

Enter Andy Evans, vice president of the E&P group at ARC Financial in Calgary.

During the same NAPE event, the Cymraec team met with Evans to engage in preliminary discussions about becoming an equity funder.

The Cymraec folks quickly got busy assembling an information brochure and the documentation necessary to raise capital. Then the group hit the streets at the end of June with Ammonite’s assistance.

Ultimately, they had meetings with close to 15 different equity funders. And they resumed the earlier contact with ARC, which came in with multiple people to review the company.

“Our experience in evaluating and supporting early stage exploration companies in Canada led us to consider Cymraec an attractive investment,” Evans said.

“ARC stepped forward and said, ‘We want to do the deal’,” Looney said. “But they said ‘since this is our first venture outside Canada we want to make sure we have a U.S.-based equity funder with us.’

“So we then brought in Cadent Energy Partners, and they liked what they saw and elected to participate as an equity funder,” Looney said. “Also, the Energy Special Situations Fund in Houston and an individual investor from Austin elected to put money in.”

When all was said and done, the company raised $42 million during the process, rendering them able to buy out the people they needed to buy out and much more. ARC’s part of the deal tallied $17.5 million, or close to 40 percent.

The transaction closed at the end of October 2005, and Cymraec has since moved into new offices and staffed up from the original six people to 15 -- in large part due to relationships established by Looney over the past 30-plus years in the industry. The company operates in Texas and has filed for operatorship in Louisiana.

Warning: Potholes Ahead

The funding process sounds straightforward, but if you’re preparing to chase after the big money, beware ­-- the road taken to get to here from there had its share of potholes.

“It took a great deal of patience and perseverance to get through the transaction process,” Looney noted. “At times, you think ‘why am I doing this,’ but that’s just part of it.”

Evans concurred.

“Patience and flexibility were required on both sides to close financing,” he noted.

“There’s a whole lot of give and take on all sides, and at the end of the day you put aside any hard feelings that have developed,” Looney said. “It was a difficult and complex transaction to get done because it had a lot of parts, and many times it was very frustrating for all parties involved.

It helped that Cymraec management and investors shared a common vision for the path forward to value creation, which Evans summarized:

The bottom line: Everybody’s pleased with the outcome.

“We have great partners,” Looney said, “and we’re very happy.”