COSCO managing directors (left to right): Lane W. McKay, William E. (Bill) Weidner, and Cameron O. Smith
To Cameron Smith, the gusher of cash available for drilling and the resulting surge in E&P activity in recent years only make more valuable his original mission statement, authored in 1991, to “promote sound, sustainable, and profitable relationships between the financial and operational segments of the energy business.”
Smith serves as senior managing director of COSCO Capital Management LLC, widely regarded as a leader in private capital and venture capital finance for the energy sector. Founded in 1992, COSCO (an acronym for Cameron O. Smith’s Co.), has arranged for over $1.5 billion in private equity and debt financings, as well as half a billion in acquisitions and divestitures.
COSCO is headquartered in New York City and maintains offices in Houston, Hartford, Tulsa, Phoenix, and Calgary. It is affiliated with a number of related businesses, including COSCO Canada Ltd., based in Calgary (COSCan), COSCO Investments LP (COSCinv) of Houston, Private Energy Securities Inc. (PESI), outside of Hartford, and Strategic Energy Research and Capital LLC (SERC) of Summit, NJ.
Senior management
Smith, who holds a masters degree in geology from Penn State, has been an active participant in the oil, gas, and natural resource business since 1975. He founded COSCO 15 years ago, after 17 years on the operations side in the US and Canada. Born in Calgary, Smith is a third generation oilman, whose grandfather, William F. Buckley, Sr., moved from Texas and Mexico to New York in 1921, before setting up an oil company in Caracas, Venezuela. Smith serves as COSCO’s CEO and heads up its New York City headquarters.
Private placements and all other securities work are conducted through PESI (NASD, SIPC), which is managed by William E. (Bill) Weidner, who also serves as a managing director of COSCO, which he joined in 1997. Weidner, who resides outside of Hartford, CT, has been active in the energy business since 1980, first as a geologist in the oil and gas industry, then, starting in 1988, as a banker, principal, or intermediary, on the investment side. Weidner holds an undergraduate degree from The College of Wooster and an MS degree in geology from Kent State University.
Lane W. McKay, based in Calgary, is CEO and a director of COSCan. He is also the third managing director of COSCO, which he joined in 2003. McKay is in charge of developing private capital business in all of Canada. This includes arranging private placements of equity and structured debt for COSCO’s Canadian energy clients, advising capital sources regarding investment strategies, particularly in Canada, and assisting both buy- and sell-side clients on acquisitions, divestitures, and mergers.
Before joining COSCO, McKay had been in the commercial property and casualty insurance brokerage business and was a co-founder of Canada Brokerlink Inc., a consolidator of privately owned P&C Insurance Brokerages, where he completed 36 private acquisitions and 4 divestitures, building Canada Brokerlink into the country’s third-largest general insurance brokerage network.
T. Prescott (Scott) Kessey, who heads up COSCO’s Houston office, has been affiliated with COSCO since 2000. He was appointed a principal in 2001. A graduate of the University of Texas with a BBA degree in finance, real estate, and accounting, Kessey has been a licensed CPA since 1992 and serves as CFO for the firm, a function he has also performed on an interim basis for a number of the company’s clients. Prior to joining COSCO, Kessey was employed by Integrated Seismic Solutions, American Exploration Co., and KPMG Peat Marwick.
The final senior member of the COSCO team is Warren M. Shimmerlik, who became a COSCO principal in 2004. Shimmerlik, also based in New York City, serves as key liaison among COSCO, COSCan, and SERC, as well as heading up COSCO’s private secondary transactional business. Previously, he spent nearly 2 decades as a top-rated Wall Street energy investment analyst following the energy business in senior positions with Merrill Lynch & Co., L. F. Rothschild Unterberg Towbin, and County NatWest Securities USA. Shimmerlik earned a BSBA degree from Lehigh University in 1970 and an MBA from Columbia University in 1972.
Mark Kellstrom heads up SERC, COSCO’s newest affiliate. Kellstrom and his two partners, all formerly with Pritchard Capital in New York, opened SERC’s doors on Dec. 18, 2006. SERC provides research, trading, and investor relations services focused on both private and public companies active in energy and other natural resources. SERC is also active in placements of public energy securities.
“SERC rounds out the financing options COSCO can provide its energy clients,” Smith said. “We now can raise capital equally well on the public side, as well as on the private. And for the buy-side,” Kellstrom hastens to add, “we provide outstanding trading and research services. The quality of our relationships with our buy-side clients is of paramount importance to us.”
COSCO colleagues
In addition to its 10 full-time personnel, not including the 3 managers at SERC, COSCO has 10 “colleagues” - individuals and organizations experienced in the energy sector with which or whom COSCO periodically collaborates on specific deals. This mutually beneficial relationship has expanded the scope of the company by increasing materially COSCO’s intelligence about local investment opportunities, its ability to perform due diligence, and its access to capabilities normally associated with larger firms.
At present, COSCO colleagues are located in Houston, Dallas, Tulsa, Oklahoma City, Denver, Santa Barbara, London, Sydney, and Caracas.
Developing the vision
Cameron Smith says he created COSCO for love of a young woman. Shortly after he was married, Smith moved from New York, where his family’s 7 public oil companies were then all headquartered, to Tulsa to start Taconic Petroleum Corp. His wife, Liza Vann, an actress, however, declined to join him, continuing to live and work in New York. Over the next 13 years, during which Smith saw his wife on average every third or fourth week, Taconic and its wholly owned Canadian subsidiary, Albercan Oil Corp., formed 3 highly successful exploration joint ventures in the US and Canada, sponsored several exploration and acquisition-focused partnerships, and engineered several significant corporate acquisitions, including one with complex cross-border holdings in the US and Canada.
Despite the growing success of Taconic, at the end of 1991, Smith decided to sell the company and move back to New York to “see if my marriage could withstand a full-time relationship!”
“Liza has been the inspiration for my two best decisions,” Smith concedes.
In trying to figure out what he could do in New York “to make an honest living”, Smith recalls, he thought he might try to become what he, as president of Taconic, had never been able to find while at Taconic: someone in New York who really understood the small-cap private E&P business and how to raise serious growth, as opposed to tax-driven capital. He also realized he had too often seen capital come out of the East and fall into hands that everyone in Tulsa, Dallas, or Denver knew would not treat it fairly. Smith’s vision was that COSCO could fill a key roll as advisor to energy companies seeking compatible capital, while at the same time assisting professionally managed capital, itself, to invest in the energy business.
In mid-1992, Smith got his first real break, when, as COSCO, he became engaged by Odyssey Partners LP, a $2 billion public hedge fund with an active private equity practice, to reorganize and monetize some legacy energy investments. Eventually, he moved in-house and for the next 4 years [1992-1996] basically became Odyssey’s full-time energy advisor.
“During this period, I received the equivalent of a post-doctorate in private equity investing,” he said, adding, “I attended all the investment meetings, wrote innumerable investment critiques, and developed a real understanding of how private equity investors make decisions.”
In 1996, when the founders of Odyssey retired, Smith went out on his own. A year later, Bill Weidner joined him, and, together, they significantly expanded COSCO’s mandate and practice, overseeing its expansion into its current business model.
Areas of expertise
Over the past 15 years since its inception, COSCO has become one of the leading advisors to small and mid-cap private and public energy companies seeking capital through private placement financings. The firm also has been an advisor to many experienced, professionally managed energy investors, themselves, particularly on the East Coast. COSCO is a co-investor with most of these private equity funds, as a consequence of its principle of investing in every private equity mandate it takes on.
COSCO has always focused on private capital as that form of financing most suitable for energy companies, particularly start-ups. As compared to retail investors and those that manage public funds, private capital, COSCO believes, in the main is far more knowledgeable and patient. Until recently with SERC, COSCO has avoided the public markets, which it sees as far more mercurial and which bring with it “onerous regulatory burdens” that often inhibit or impair a management’s ability to focus on value creation. After a company reaches a certain size and growth profile, however, COSCO recognizes that public markets may provide liquidity or access to cheaper capital to finance further growth. This is where SERC comes in.
Prior to joining COSCO in 1997, Bill Weidner’s focus had been almost exclusively on the buy side. He had worked for 8 years for RIMCO, primarily a provider of mezzanine debt to the oil and gas industry, after completing a year’s training program in the commercial lending group at The Bank of New England. This was in 1985, when, newly married and with a young family, he had decided he had better move to the financial side, after working for 5 years as a petroleum geologist for companies active in the Appalachian basin and the Gulf of Mexico. As a consequence, Weidner now heads up most of COSCO’s mezzanine and other structured debt mandates, as well as engagements with companies headquartered in Appalachia and along the Gulf Coast. Over the past 2 years, alone, Weidner has lead debt financings of over $120 million for COSCO’s clients.
With respect to private equity, Weidner noted that there are plenty of discriminating investors available currently for the “right” management teams. Apart from a strong track record and solid business plan, to attract private equity, management must be willing to invest personal funds in the venture, Weidner cautioned. “Private capital insists on alignment between management and investors, which means, in addition to sharing in the benefits of the financial partnership only after profits are quantifiable, i.e., at monetization, management must put up sufficient proportion of its ‘personal liquid net worth’ to share in the down side risk of the investment,” he added.
Canadian market
Private financings are less common in Canada than in the US, says COSCO’s Lane McKay. One reason is that public markets in Canada have historically been very efficient at raising large numbers of very small financings, thus making the public markets unusually accessible to small and micro-cap companies. This is in sharp contrast to the US, where public markets are accessible only to larger companies with a market capitalization of, perhaps, $500 million or more, a void which private capital has effectively exploited over the past decade.
Nevertheless, both the market in Canada for private financings as well as the number of Canadian sources of private capital are growing, said McKay. Over the past 2 years, COSCan, in fact, has originated 9 financings, raising over $160 million for its clients, making it one of the leading private placement agents in all of Canada.
“Private equity participants view their decisions to invest differently than public investors,” said McKay. “For one thing, they tend to recognize that it takes time for a company to achieve its business plan. They are not short-term players.” This is particularly beneficial to Canadian operators, many of whose business plans require winter drilling and long permitting schedules, with which public investors often show little understanding or patience.
COSCO Investments
In keeping with its commitment to invest in every private equity mandate it takes on, since 1997, COSCO through COSCinv has invested in a total of 26 energy companies, funds, and direct property interests. Seven of these investments have been monetized to date, with better than an 8:1 ROI and a dollar-weighted average IRR above 80%.
“The model is simple,” explains Weidner. “We source the investment opportunity, perform extensive due diligence on it, shape the business plan with management, bring it to market, and then take up to the last 10% through COSCinv. The investment fund we have brought in for the remaining 90-plus percent then adds its experience through representation on the board of directors, and we know within 5 to 7 years, there will definitely be an exit, which typically is the downfall of a minority position in a private company. And the returns certainly speak for themselves.”
Education
Since its inception, COSCO has published extensively on private capital and its investment interests and actions with respect to the energy sector. COSCO representatives have contributed to numerous interviews in both the industry and popular press.
Starting in 2005, COSCO began publishing the COSCO Private Energy Index Report , including results of its own, semi-annual survey of the COSCO Private Capital Energy IndexTM, a group of 20-25 professionally managed private capital sources, representing a broad cross section of the private capital world active in energy investing.
“We have been told by a number of endowment fund managers and other institutional investors that the COSCO Private Energy Index Report is fast becoming the foremost objective source of quantifiable data about the vectors in the energy investing predilections of the private capital community,” Smith said.
In terms of its educational outreach, however, COSCO may be best known for its Private Capital for Energy Forums TM, which it has sponsored 19 times since 1976, first in New York in conjunction with the IPAA, and now annually in Houston and every other year in Calgary.
The purpose of the forums, Smith says, is to permit energy company executives to get face to face with as large and representative a group of private capital managers as is practical in a single day in order to “demystify the private capital process and whet the industry’s appetite for this marvelous form of financing”.
At each forum, COSCO selects speakers who represent both providers of equity, as well as mezzanine debt capital. Care is given to feature capital managers seeking investments over a wide range of business profiles, risks tolerances, and scales. In addition, 4 or 5 oil and gas executives whose companies have been the beneficiaries of private capital always participate in a panel discussion about their experiences raising and living with private capital.
“The relatively small size of the forums allows attendees to meet individually with the panelists to discuss their own financing needs with the capital providers they deem most sympathetic to those needs,” says Smith, who adds that the next Houston forum will be held on June 6 at the Four Seasons Hotel. (Visit www.coscocap.com for information.)
How the investment community sees oil and gas
As to COSCO’s take on the current status of institutional interest in investing in the energy business, “it has traditionally been cyclical in nature,” said Weidner. “Frankly, for the past couple decades, pension funds and institutional investors considered the industry to be ‘high risk, low reward’ and most of its participants ethically challenged.”
That attitude has changed radically in recent years, he added. The pervasive distrust of the oil and gas business has receded, and the industry is now getting an outstanding share of private placement equity.”
Warren Shimmerlik noted that, over the past decade, the returns to investors have been just too good and opportunities remaining are still too great for investors to pass this sector up.
“Most investment bankers are simply looking for a sales mandate,” said Shimmerlik. “[COSCO is] downright discriminating! We’re looking only for quality deals. After all, first and foremost, we approach each opportunity as an investor, ourselves. Smith noted that COSCO takes its due diligence work very seriously. “We check references on each member of our management teams,” he said. “If there are any character flaws, we won’t go there”. Scott Kessey added, “We look for someone who has had clearly measurable financial success on a small scale, but who appears to have the talent, with the right funding, to duplicate this success in the future on a larger scale.”
Unconventional gas deposits - particularly gas shale, tight sands, and coalbed methane - have become attractive targets for many new and existing E&P companies in recent years. Over the past 5 years, COSCO has arranged over $250 million of equity for 4 companies pursuing these business plans.
“The development of new technologies, especially horizontal drilling, has opened up reservoirs and geographies previously off limits,” said Smith. “Companies that have been able to exploit these resources have seen excellent ROIs, and this, in turn, has spurred increased interest from the investment community.”
COSCO’s survey of the COSCO Private Capital Energy Index for the first half of 2006 showed the companies in the Index had just under $20 billion in aggregate funds or budgets available for investment in the energy industry. This represented a doubling from the figure reported a year earlier.
According to Smith, “This substantiates the overwhelming anecdotal evidence that a truly significant amount of capital is currently available from private sources for investment in energy.” “It will be interesting to see what our survey for year-end 2006 shows (due out in March). We have seen a complete retreat of the momentum investor from the energy sector, but the closed-end equity funds and other long-time professional energy investors all appear to have increased their funds and budgets, looking to take advantage of this downturn in commodity prices.”
COSCO’s future
COSCO sees no reduction in its break-neck activity. Between its private capital advisory mandates, fostering its relationship with SERC and expanding into placement of public securities, managing its portfolio of existing, as well as raising capital for future, investments, and finally continuing to publish, host forums, and spread the private capital doctrine, there is little time to rest on its laurels.
“Will you ever want to slow down?” we asked Smith. “Not likely!” he shot back. “So long as I’m doing what I love, working with the great people at COSCO, and helping those in our industry who deserve it get the chance to do whatever they’ve always wanted most to do, what could be more fun?”
