Hart’s Oil & Gas Investor Magazine Profiles Lime Rock Partners

7/1/1999

Corporate Background
Lime Rock Partners LLC was formed in mid-1998 by Jonathan Farber and John Reynolds, with a single focus: to invest growth capital in high-quality small- and mid-sized energy companies. Reynolds and Farber had worked together for years in the Energy Group at Goldman, Sachs & Co. before setting out on their own to make investments at Lime Rock. The two founders started their careers as energy research analysts at Goldman, where Farber covered small- and mid-cap E&P companies, primarily in the U.S. and Canada, and Reynolds covered both the integrated and independent oil sectors, before specializing in oilfield services. Reynolds went on to become Goldman’s senior analyst covering the oil service sector, earning the #2 ranking (Greenwich) among all sell-side oil service analysts in 1997, while Farber moved to the investment banking and principal investing side of Goldman, eventually serving on its Energy Investment Committee. One of Lime Rock’s first priorities was putting in place a high-quality team. In addition to Farber and Reynolds, the Westport office is rounded out by three full-time investment professionals with a variety of work experience. Mark McCall, an attorney by education, worked for Lehman Brothers investment banking division in New York and later helped start up a registered investment advisor and fund manager, prior to joining Lime Rock. J McLane came to Lime Rock from Pioneer Natural Resources in Dallas, where he worked as a financial analyst on a number of major corporate transactions. Pontus Willfors was an equity research analyst at Goldman Sachs prior to joining Lime Rock, and had previously worked for Handelsbanken Fonder, one of Sweden’s largest mutual fund managers. Lime Rock also works closely with John Clarkson, a petroleum engineer who acts as the firm’s exclusive agent in Canada. Based in Calgary, Clarkson spent over 10 years with Renaissance Energy where he served as Manager of Oil Development and Manager of Acquisitions and Divestitures. Lime Rock Partners has more than $200 million dollars in capital available to fund its investment strategy. The fund closed in October 1998 and by March 1999 Lime Rock had completed its first two transactions.

Investment Profile
Lime Rock’s mandate is to invest growth capital in energy companies with a value of less than $250 million. The firm looks for companies with strong growth opportunities and a clearly defined business plan in need of financing. Lime Rock’s primary investment criteria are to find management with a successful track record, a high degree of integrity, and incentives closely aligned with investors. Investments range in size from $5- to $25 million, with a strike zone of $10- to $15 million. Lime Rock invests only in equity and equity-related securities. Lime Rock has established four areas of focus within the energy industry, and its typical investment falls within one of these four areas: Exploration and Production, Oil Field Services and Drilling, New Fuel Technologies, and Service Providers to Energy Companies.

Capabilities
Lime Rock’s principals have extensive experience in providing advice to small energy companies and helping them access new growth opportunities and new sources of institutional capital. In 1997 alone, for example, Reynolds served as the lead research analyst on more than $2.5 billion of equity and equity-linked underwritings. Lime Rock strives to use its financial expertise to be a value-added partner to management, typically playing a role in strategic decision making at the board level. In addition, Lime Rock’s exceptionally long partnership duration (of up to 11 years) allows it to weather industry cycles along with its portfolio companies, rather than placing undue emphasis on quick returns.

Corporate Spotlight
Oil & Gas Investor’s editors talked to Jonathan Farber, John Reynolds, John Clarkson and Mark McCall.

Investor: Please explain your firm’s overall investment strategy.

Farber: We are looking to back entrepreneurial managers with demonstrated track records of success. The toughest thing to find in this business is good management.

Reynolds: We like to see our investment directly helping the company achieve its strategic plan. It is not particularly attractive to us when a company asks us for a cash infusion which immediately gets paid out to the bank. That’s not growth capital. We will look at helping a good company fix a balance sheet problem, but it has to be compelling.

McCall: It’s also tough for us to invest in a situation where the company wants to go out and drill one or two high impact wells. The risk parameters on deals like that are just too high.

Farber: Growth capital, from Lime Rock’s point of view, means funding a strategic plan for growth. That could include growth through the drillbit, through the application of new technology, or through intelligent acquisitions. We are most often attracted to companies that have an informational advantage in their area of focus.

Investor: How does your firm differ from others that provide these types of investment services?

McCall: Our strike zone, meaning the amount of money we are looking to invest in a given transaction, is a little bit smaller than most of our competitors. There are a lot of good companies out there that don’t require $50 million to be successful. That’s where we can come in and add value. And we do not charge transaction fees, in contrast to many of our competitors.

Farber: Our approach is also different in a number of ways. We have no intention of telling management how to manage their day-to-day business. We only invest where we already have a high degree of confidence in management’s capability. Instead, we feel we can add value at the board level through idea generation and through our financial experience.

Reynolds: A lot of companies in our strike zone have never had much contact with the broader financial community, meaning in particular with institutional investors. We can help them, because we know those investors and what they look for. There are key elements that need to be developed and at the same time, traps to be avoided as you grow a small company.

Clarkson: Having an on-the-ground presence in Canada gives Lime Rock an advantage when it comes to seeing Canadian deal flow. We can respond quicker than other U.S. investors.

Investor: Will you change your focus for the remainder of 1999?

Reynolds: Not really. We believe this is an opportune moment to make growth investments in the energy industry, and we will continue to seek out the best opportunities to put our capital to work.

Examples of Deals
In December1998, Lime Rock funded a convertible debenture to allow a private Canadian heavy oil company to carry out a test program involving a new technology with the potential to significantly enhance the economics of its heavy oil production processes.

In March 1999, Lime Rock invested C$10 million in IPEC Ltd., a publicly traded Canadian oilfield service company, to assist it in executing an acquisition strategy in the small-diameter pipeline construction sector in Canada. Lime Rock purchased common stock, with the proceeds going to fund two new acquisitions.

 

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