Petrohawk Energy Corporation

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Petrohawk Energy Corporation

1100 Louisiana
Suite 4400
Houston, Texas 77002
U.S.A.
Telephone: (832) 204-2700
Fax: (832) 204-2800
Web site: http://www.petrohawk.com

Public Company
Incorporated: 1997 as Beta Oil & Gas, Inc.
Employees: 154
Sales: $258.0 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: HAWK
NAIC: 211111 Crude Petroleum and Natural Gas Extraction

Petrohawk Energy Corporation (PEC) is an independent oil and gas company with properties concentrated in Texas, New Mexico, Oklahoma, Kansas, and Louisiana. PEC controls total proved oil and gas reserves of 437.3 billion cubic feet equivalent. An aggressive acquirer, PEC is managed by Floyd C. Wilson, who serves as its chairman, chief executive officer, and president and holds a 67 percent stake in the company.

ORIGINS

Massive, multibillion-dollar mergers in the oil and gas industry tend to attract much of the public's attention, but the small and mid-sized competitors in the industry engage in meaningful deal-making as well, orchestrating the acquisitions, dispositions, and mergers that propel the industry forward. PEC was an enterprise created at the negotiating table, an oil and gas concern that represented a combination of assets drawn from two companies, Beta Oil & Gas, Inc. and Petrohawk Energy L.L.C. Although the driving force behind the company's management and mission came from Petrohawk Energy, its origins were embedded in Beta Oil.

Beta Oil was formed in 1997, beginning its involvement in the oil and gas market at an opportune juncture in the industry's development. Between 1997 and 1999, commodity prices plummeted, causing the price of oil and gas assets to fall as well. Beta Oil swept in, spending its first years in business purchasing assets at depressed prices. The company quickly and cheaply assembled a collection of properties, forming an asset base that leaned heavily toward the exploration end of the oil and gas business. To strike more of a balance between exploration and production, the company purchased Red River Energy in September 2000, gaining a foundation of producing assets to provide a consistent source of cash flow to fund its exploration activities, a so-called "portfolio approach." By 2001, the company's strategy was beginning to deliver its desired results, as Beta Oil commenced an active drilling schedule. Roughly 55 percent of the company production output came from the purchase of Red River, while the remaining 45 percent was produced through its exploration projects. In all, the company owned interests in more than 275 wells primarily in Texas, Oklahoma, Louisiana, and Wyoming, by mid-2001, enjoying robust gains in production as it found its footing. Beta Oil's production total in 1999 amounted to 486 million cubic feet equivalent (Mmcfe) of gas production before jumping to 1.9 billion cubic feet equivalent (Bcfe) in 2000. By the end of 2001, the company was projecting a 100 percent increase in its production volume to 3.85 Bcfe.

Beta's production volume continued to record exponential increases during the first years of the 21st century, expanding by a factor of ten by the time PEC's other organizing entity, Petrohawk Energy, was founded. The principal figure behind Petrohawk Energy was a 30-year veteran of the energy industry named Floyd C. Wilson, an executive with a wealth of experience in starting up oil and gas ventures. In his career as an entrepreneur in the energy sector, Wilson demonstrated a penchant for forming a company, building up its assets, and then selling the company to another oil and gas company. In 1987, he founded Hugoton Energy Corporation, took it public in 1994, and sold it in 1998 to Chesapeake Energy Corporation for $450 million. Next, in 1999, he formed 3TEC Energy Corporation, serving as its chairman and chief executive officer until he sold the venture to Plains Exploration & Production Corporation in June 2003 for $350 million, a transaction that left him free to pursue his next start-up, Houston, Texas-based Petrohawk Energy L.L.C.

A REVERSE MERGER IN 2004

In forming Petrohawk Energy, Wilson solicited the help of former 3TEC executives. To help finance the venture, he gained the backing of EnCap Investments and Liberty Mutual, an affiliate of Liberty Energy Holdings L.L.C. The mission of the company was specific and, if executed according to plan, relatively short-lived: build up assets, convert to public ownership, and sell the company to another company. Like Hugoton Energy and 3TEC, Petrohawk Energy embraced a build-and-sell strategy, vowing, in filings with the Securities and Exchange Commission (SEC) "to monetize at an appropriate time with the goal of providing superior returns to stockholders." Wilson accomplished his first two goals, acquiring assets and taking the company public, at roughly the same time. He took the most expedient route to converting to public ownership by approaching Beta Oil in late 2003, proposing to execute a reverse merger. Under the terms of the agreement, Petrohawk Energy said it would invest $60 million in the stock of Beta Oil, which would give Wilson majority control over the Tulsa, Oklahoma-based company. "Petrohawk is a new company that was started earlier this year," Beta Oil's president and chief executive officer, David Wilkins, said in a December 16, 2003 interview with Tulsa World. "They definitely have the ability to raise capital." Wilson, in the same edition of Tulsa World, said, "We intend to use this investment to provide a platform of future growth." When the reverse merger was completed in June 2004, the entity that emerged was PEC, a Houston-based company with Wilson serving as its president, chief executive officer, and chairman. The company represented an amalgamation of Beta Oil's 30 Bcfe and Petrohawk Energy's three Bcfe.

COMPANY PERSPECTIVES

Petrohawk's business strategy focuses on achieving increases in the per share value of our common stock through the combination of attractive acquisitions and further development of existing properties, complemented by potentially significant exploration projects.

While officials were finalizing the reverse merger in June 2004, Wilson was in Dallas, Texas, working on completing his next goal. His objective was to expand his newly formed company taking shape in Houston, and he had heard that Ronald Wynn, who was in Dallas, might be interested in selling his company, Wynn-Crosby Energy Inc. Wynn-Crosby was the operator of eight partnerships formed between 1995 and 2002, a venture backed by roughly 60 investors that controlled 200 Bcfe of proved reserves in southern and eastern Texas, the Permian Basin in Texas and New Mexico, and the Arkoma Basin in Oklahoma and Arkansas. The discussion between the two energy executives progressed smoothly. "We used those meetings to come to an understanding of the range of value that would lead to a deal until we could get into the technical data," Crosby reflected in a March 2005 interview with Oil and Gas Investor. "If I were starting a company and trying to build a public entity, our property base would be a great one to start with," he added. Wilson evidently concurred, agreeing with a handshake in Dallas to push forward with the deal. The deal, revealed to be a $425 million transaction, was announced to the public in November 2004, joining Wynn-Crosby Energy's 200 Bcfe with PEC's 33 Bcfe, which provided a substantial increase to PEC's profile. "This is a transforming event for Petrohawk," Wilson noted in a statement quoted in the November 2004 issue of Oil and Gas Investor. "We believe these high-quality, long-lived assets include significant upside, and we will attempt to boost recovery rates within an accelerated development program. We will continue to pursue our combined growth strategies—acquisitions complemented by an aggressive drilling program."

ACQUISITION OF MISSION RESOURCES IN 2005

True to his word, Wilson pressed ahead with expansion following the Wynn-Crosby Energy deal. In February 2005, PEC completed the purchase of Proton Oil & Gas Corporation, paying $53 million for the company's proved reserves of 28 Bcfe located in Louisiana and Texas. Wilson's next acquisition was much larger, rivaling the size of the Wynn-Crosby Energy purchase. In April 2005, he announced that PEC was acquiring Mission Resources Corporation, a Houston-based company with proved reserves of 226 Bcfe. The $500 million acquisition, completed in July 2005, doubled PEC's size in terms of reserves and production, achieving growth in a manner chosen by many of its rivals. "Companies want to grow production," an analyst explained in an April 5, 2005 interview with the Houston Chronicle, "and a lot of them have expressed difficulty achieving the growth rate they want from drilling only—so they turn to acquisitions." The Mission Resources acquisition included three significant fields in the Permian Basin, as well as interests in the Gulf Coast and the south Texas regions.

Acquisitions fueled energetic financial growth during PEC's first years in business. Oil and gas sales leaped from $12.9 million in 2003 to $258 million in 2005, making PEC roughly twice the size of Hugoton Energy and 3TEC when Wilson sold the companies. By August 2005, the company was reportedly searching for a suitor, seeking to sell the assets it had acquired during its first two years in business. "We prefer to grow a smaller cap company because once it reaches a certain size you start getting into the treadmill," a PEC executive remarked in an August 6, 2005 article in Corporate Financing Week, before adding, "We hope to do a couple more deals." The sale of PEC was not imminent, but it was on the horizon. In the interim, Wilson and his team worked to make PEC a more desirable company, efforts that included acquisitions and dispositions.

As PEC entered the second half of the decade, it likely entered its last years as an independent company. In early 2006, it moved in two directions as it prepared for its eventual sale. In January 2006, the company acquired Winwell Resources, Inc. for $208 million. The purchase gave PEC 106 Bcfe of proved reserves in northern Louisiana. On the same day it purchased Winwell Resources, the company added to its holdings in northern Louisiana by paying $86 million for assets belonging to Redley Company. In early February 2006, the company countered its increased involvement in northern Louisiana by severing its ties to the Gulf of Mexico. PEC reached an agreement with Northstar GOM, L.L.C. to sell nearly all of its Gulf of Mexico properties for $52.5 million. The divestiture stripped PEC of approximately 25 Bcfe. As Wilson looked to the immediate future, further acquisitions and dispositions were possible, but in the longer term only the company's sale to another oil and gas company appeared certain. PEC executives were expected to be done with their building efforts by the end of the decade, at which point the history of PEC would become part of the history of another energy concern.

PRINCIPAL SUBSIDIARIES

Petrohawk Operating Company; P-H Energy, L.L.C.; Red River Field Services, L.L.C.; Petrohawk Holdings, L.L.C.; Petrohawk Properties, LP.

PRINCIPAL COMPETITORS

BP PLC; Comstock Resources, Inc.; Royal Dutch/Shell Group of Companies.

KEY DATES

1997:: Beta Oil & Gas, Inc. is formed.
2000:: Beta Oil acquires Red River Energy, substantially increasing the number of producing wells it owns.
2003:: Petrohawk Energy L.L.C. is formed.
2004:: In a reverse merger, Beta Oil and Petrohawk Energy L.L.C. are united, creating Petrohawk Energy Corporation.
2005:: After paying $425 million for Wynn-Crosby Energy the year before, Petrohawk Energy doubles in size by acquiring Mission Resources Corporation for $500 million.
2006:: Winwell Resources, Inc. is acquired for $208 million.