1200 Smith Street, Suite 800
Houston, Texas 77002
Telephone: (713) 759-1770
Fax: (713) 759-1773
Web site: http://www.spinnakerexploration.com
Incorporated: 1996 as Spinnaker Exploration Company, L.L.C.
Sales: $272.9 million (2004)
Stock Exchanges: New York
Ticker Symbol: SKE
NAIC: 211111 Crude Petroleum and Natural Gas Extraction
Spinnaker Exploration Company is a Houston, Texas-based natural gas and oil exploration company operating in the Gulf of Mexico. Although most of its success has come from drilling in shallow waters, the company has become increasingly involved in riskier, but potentially more rewarding, deepwater plays. Unlike most of its competition, Spinnaker eschews growth through acquisitions, preferring instead to keep a clean balance sheet and rely on its technical expertise to grow through the drill bit. The company has a massive 3-D seismic database of the Gulf of Mexico, one suitable for a business far larger in size, which has created a competitive advantage for Spinnaker. With a large-scale view of the region, Spinnaker's researchers are able to detect geographic trends that allow them to pinpoint likely deposits of natural gas and oil. Armed with this knowledge, the company is able to intelligently bid on available leases and then drill successful wells. From its start in late 1996 until early March 2005, the company has drilled 104 successful wells out of 176 attempts. As a result, Spinnaker boasts proved reserves of 332.6 billion cubic feet equivalent (Bcfe) of natural gas. The company is publicly traded on the New York Stock Exchange.
After earning a petroleum engineering degree, Spinnaker's future chairman, president, and CEO, Roger L. Jarvis, gained chief executive officer experience at King Ranch Inc., the famous cattle ranch that over the years became involved in a number of businesses, including oil. Jarvis was hired in 1987 to head King Ranch Oil & Gas Co. but was soon tapped to head the parent company as president and CEO, posts he held until 1995 when King Ranch underwent another management upheaval. Jarvis was responsible for expanding King Ranch's activities in the Gulf of Mexico. After taking off a year, Jarvis decided to return to the oil and gas business and once again he looked to the Gulf, a play that many in the exploration business had dismissed. "Not long ago it was known as the 'Dead Sea'—the continental shelf in the Gulf of Mexico that juts out 200 nautical miles," explained Forbes in a 2001 company profile. "The Department of Energy had predicted the Gulf would be drilled dry of natural gas by 1985. Didn't happen: The region still supplies 24% of U.S. natural gas production. Then, in the mid-1990s, Exxon, Mobil, Royal Dutch/Shell and BP all pulled up their shallow-water stakes and paddled out to the oil-rich deep end."
It was this opening in the shallow waters of the Gulf that Jarvis targeted for his new company. For a name he wanted something nautical, latching onto "spinnaker," the large billowing sail used by a ship running ahead of the wind. "A spinnaker creates great speed, is colorful and easily recognized, and all of these aspects are consistent with our company," Jarvis explained in 2002 to Rigamarole, a magazine published by vendor Diamond Offshore Drilling, Inc. "We have the ability to move fast when necessary, we have a niche and we are unique." After incorporating Spinnaker as a limited liability partnership in December 1996, Jarvis lined up funding and, more importantly, the data he would need to successfully compete in the mature Gulf of Mexico. First, he arranged for $60 million in private equity funds from New York's giant venture capital firm, Warburg, Pincus & Co. LLC. Another investor was Petroleum GeoServices ASA (PGS), a $1 billion Norwegian global oilfield service company. In addition, through Diamond Geophysical Service Corp., PGS licensed to Spinnaker 3D seismic data on 1,400 blocks in the Gulf of Mexico blocks, giving the company one of the largest databases of anyone operating in the Gulf and providing the kind of advantage Jarvis felt was necessary before embarking on a drilling program. PGS also promised to provide Spinnaker with all new data it gathered for the next five years on a nonexclusive basis.
Jarvis told Oil & Gas Investor in 2000 that central to Spinnaker's strategy was "the belief that an exploration company must have a very large pool of prospect opportunities on its plate relative to its projected activity.… Put more bluntly, it's been shown time and time again that when too much money chases too few good ideas, the outcome isn't favorable." Using the PGS seismic data, Spinnaker began creating a large pool of drilling prospects, which were then graded to select the best possible candidates. Forbes detailed the work of the company's geoscientists in a 2001 article: "They're looking at seismic data illuminating the porous gas-trapping geologic formations under the seabed. Deciding where to drill is a constant tradeoff between anticipated reserves and risk factors—from sand quality to vertical stresses on the rock. Those risks are assigned numerical values and measured against the probability of finding natural gas deposits."
Starting in March 1997, Spinnaker began participating in federal offshore lease sales, and also landed partnership and farm-in arrangements, to gain interests in targeted Gulf of Mexico blocks. The company drilled its first successful well later in 1997 and began generating revenues, more than $200,000 for the year. The focus at first was on the shallow waters, but even at this stage management was beginning to look at the deep water plays of the Gulf and developing a long-term goal of creating a balance between shallow and deep water properties, a combination that promised both stable growth and a high rate of return. The shallow water wells quickly generated cash flow, while the deep water projects, though more costly and time-consuming to develop, offered a greater potential return. Whether deep water or shallow, however, Spinnaker pursued big fields, an approach that avoided the problematic combination of high start-up costs and a quickly depleted field. Although not part of the plan, the big field focus would make Spinnaker the lowest-cost operator in the Gulf. By taking a portfolio approach, the company was also able to avoid the pitfall of many an independent who hyped a particular well and became perceived in the market as a one-trick pony. Furthermore, Spinnaker developed a sophisticated hedging program to make sure of steady, predictable cash flow.
In 1998 and 1999, Spinnaker continued to build on its early success. Sales increased to $3.3 million in 1998 and the company started out strong in 1999, on its way to recording $34.3 million in revenues (90 percent derived from gas sales), and its first profitable year, netting $1.4 million, this despite drilling five dry holes in a row. Nevertheless, successes far outweighed failures as the company hit on 21 of 30 attempts, an enviable 70 percent success rate. As a result, from the beginning of 1998 to the close of 1999 Spinnaker was able to increase its proved reserves from 13.4 billion Bcfe to 84 Bcfe and increase daily production nine-fold. It also added significantly to its seismic database, procured mostly from PGS.
The company sought to take advantage of its strong growth to tap the public equity market for funds. The company had already reincorporated in Delaware in 1998 as Spinnakers Exploration Corp. and four months later changed its name to Spinnaker Exploration Company in anticipation of going public. However, due to depressed oil and gas prices during this period, market conditions were not suited to energy exploration and production companies attempting to make an initial public offering (IPO). After a 20-month drought for energy IPOs, Spinnaker saw an opportunity when commodity prices rebounded in 1999 and launched its offering in late September of that year, with Credit Suisse First Boston acting as lead underwriter, joined by co-underwriters Donaldson, Lufkin & Jenrette; Nesbitt Burns Securities Inc.; Prudential Securities; and Bank of America Securities LLC. The company hoped to price its shares between $16 and $18 per share, but in the end settled for $14.50, resulting in a net of $108 million. This cash, along with Spinnaker's $85 million bank credit facility, would fund a $115 million drilling budget for 2000. Drawing on its large seismic database, the company did not lack for drilling candidates.
In 2000, Spinnaker remained focused on shallow water wells, although it was involved in a supporting role in a pair of deep water plays, including one with Shell Oil Company. However, Jarvis made it clear that the company intended to become a deepwater operator. In the near term, Spinnaker took advantage of market conditions—rising oil and gas prices, coupled with low oil inventories and a natural gas shortage—to enjoy a strong year. The company increased its drilling activity and grew its oil and gas reserves by 75 percent despite increased production. For the year, Spinnaker posted revenues of $121.4 million and net income of $38.6 million. It was also well positioned for even greater growth. Its seismic database now covered 1,400 blocks in the Gulf of Mexico, a 50 percent increase over the previous year, and the company also held interests in 207 Gulf leases, an 80 percent increase over the previous year. As a result, Spinnaker possessed an abundance of solid drilling prospects at a time when such leads were in short supply.
Strong growth continued in 2001 as the company made 19 new discoveries in the Gulf, including four fields in deep water: Front Runner, Front Runner South, Seventeen Hands, and Callisto. Front Runner and Front Runner South looked especially promising, possibly containing 120 million barrels of oil, making them world-class fields. Spinnaker owned a 25 percent interest in the fields, meaning that it might own about 30 million barrels of oil, an especially high number when compared to the 26 million barrels the company possessed in total reserves at the end of 2000. The company also held interests in untested acreage in the area, as well as interests in five other deep water discoveries and a slate of other deep water prospects. It also improved its long-term prospects by submitting winning bids in a pair of auctions of federal offshore and gas drilling leases. In the second auction, covering the Eastern Gulf, held in December 2001, Spinnaker and its partners landed two of the top three prospects.
Spinnaker's goals are to expand its reserve base, increase cash flow and net income and to generate an attractive return on capital.
Natural gas prices were soft in 2001, prompting some independents to step back on production, but debt-free, cash flow-strong Spinnaker viewed the same conditions as an opportunity. A lack of demand for drilling rigs in the Gulf meant that day rates for jack-up drill rigs dropped from $50,000 a day to $15,000. The competition's cutting back on production meant that gas supplies would begin to diminish, leading to a rebound in prices. At the end of 2001, Spinnaker's balance sheet revealed significant improvement over the previous year, with revenues increasing to $210.4 million and net income to $66.3 million.
To all appearances, Spinnaker took a step back in 2002. Its drilling success rate took a hit and the company was unable to locate the major finds that had marked the company's brief existence. Sales dipped to $188.4 million for the year, and net income fell to $31.6 million. On the positive side, however, 2002 demonstrated that Spinnaker's business model was sound, as the company continued to generate a strong return. Moreover, it was making significant progress in building a balanced portfolio between shallow and deepwater projects and gaining greater expertise in deepwater drilling.
High commodity prices were a significant factor in Spinnaker's improved balance sheet in 2003, as revenues rebounded to $226.9 million while net income improved to $36.6 million. Much of the company's money, and management's attention, was devoted to Front Runner and another deepwater play, Zia. The latter commenced production in 2003, and in 2004 the Front Runner field complex began producing as well. High commodity prices continued in 2004, leading to an increase in revenues to $272.9 million and net income to $53.9 million. During 2004, Spinnaker discovered another potentially large field, the Thunder Hawk Field, in which the company held a 25 percent interest. It also looked beyond the Gulf of Mexico for the first time, announcing in early 2005 that it would participate with Devon Energy Corporation to take a 12.5 percent stake in a deepwater play in Nigeria. The deal was the culmination of years of searching around the world for investment opportunities. Spinnaker hoped to transfer the expertise it gained in the Gulf of Mexico to West Africa where it hoped to build a significant business. The year 2005 started out strong, as Spinnaker posted revenues well above the same period the previous year. The company, with its balanced approach, appeared to be well situated to enjoy sustained, long-term growth.
WP Spinnaker Holdings, Inc.; Spinnaker Exploration Company, L.L.C.
Devon Energy Corporation; The Houston Exploration Company; Pioneer Natural Resources Company.
Antosh, Nelson, "Spinnaker Races Ahead in Gulf in High-Tech Search for Oil, Gas," Houston Chronicle , May 20, 2001, p. 16.
Cook, Lynn J., "Rigging the System," Forbes , November 26, 2001, p. 205.
——, "Top Shelf," Forbes , November 26, 2001, p. 204.
Haines, Leslie, and Rhonda Duey, "The Deep Shelf," Oil & Gas Investor , May 2003, p. 24.
Much, Marilyn, "Houston, Texas Oil Company Prepares for Demand Onslaught," Investor's Business Daily , August 28, 2000, p. A12.
Perin, Monica, "Spinnaker Exploration Launches $115 Million Public Offering Bid," Houston Business Journal , July 23, 1999, p. 7.
Toal, Brian A., "Setting Sail," Oil & Gas Investor , February 2000, p. 40.
Wetuski, Jodi, "Small Companies. Big Plans," Oil & Gas Investor , December 2000, p. 70.