In December 2003, Quantum Energy Partners backed a new management team headed by Alan Smith in forming Chalker Energy Partners to focus on an East Texas resource play. The business plan called for acquiring producing properties and acreage along the Cotton Valley sand trend in a four-county area, drilling a significant number of wells to prove up the acreage and executing an exit strategy. Although Alan had never run his own company, he exhibited traits consistent with Quantum’s most successful CEOs — a clear vision and niche strategy, a proven track record of capital allocation, the ability to attract and lead a top-flight team, and an emphasis on execution and results.
The Chalker Energy Team and Strategy
Alan knew the target area from his experiences in field operations, asset management and business development with Arco, Burlington Resources and Ocean Energy, and he clearly wanted the opportunity to build his own company around a resource play like the Cotton Valley. He was confident that he could build a team that could profitably take a start-up company to critical mass and find a buyer to exploit the upside potential. In order to execute his vision, he recruited a geologist, reservoir engineer, operations engineer and an engineering technician — a proven team of individuals he had worked with before.
Quantum’s Role
Having never started or run their own company before, Chalker’s management team looked to Quantum to provide guidance and advice on the myriad of issues and challenges associated with getting a new start-up off the ground, as well as to provide a technical sounding board and lots of financial advice. Quantum leveraged its commercial banking contacts by arranging a $75 million senior credit facility and eventually a $20 million Term B subordinated debt facility to fund Chalker’s aggressive drilling program and to help grow the company. Quantum also complemented Chalker’s risk management strategy by helping to secure competitive hedges to protect the economics associated with acquisitions and drilling capital expenditures.
Chalker’s Results and Sale
Over a two-year period, Chalker made 17 property acquisitions and assembled a significant amount of acreage in the Cotton Valley play. In a tight rig market, the operating team secured three rigs and ran a program that drilled over 50 wells with a 100% success rate. The vision was achieved — a critical mass that included 10,000 net acres, net production over 14 MMcfed and proved reserves over 100 Bcfe. Chalker sold the assets in February 2006 for $225 million, earning the company’s equity investors more than seven times their money. Upon closing the sale, Alan said, “Quantum approached our business as a partner and not just an investor, and that meant a lot to us. Their financial strength along with our execution capability made Chalker a tremendous success.”
With Quantum’s commitment to building long-term relationships, Quantum backed Chalker Energy Partners II, which successfully sold a significant portion of its assets in December 2007 for approximately $250 million providing three and a half times return to the company’s equity investors. The Chalker management team decided to start their third generation company, and again picked Quantum as their institutional equity partner. Quantum is proud to be affiliated with the Chalker team and hopes to be a financial partner with Chalker for many years to come.