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Barnett Shale Small Fry Hitting the Big Time, Too

The natural gas boom in Fort Worth's Barnett Shale has brought a raft of out-of-towners to the area looking to make a killing in what many believe is the hottest gas play going. But what about the locals who've worked in the energy patch all their lives; are they benefiting from all the activity?

In most cases the answer is yes. Those who saw the boom coming and formed their own service companies are doing particularly well as strategic and private equity investors come to town looking for a piece of the action. At a time when mom and pop shops are finding it hard to keep up with their growing businesses, there is no shortage of investors wanting to buy them out and put them on the payroll, Scot Cockroft, owner of Dallas-based VR Business Brokers, told NGI.

"I can have an offering and in one day have 30 private equity groups contact me," he said. "It is not like that in any other sector we deal with. I have represented companies outside of Texas and we have not gotten that type of interest."

Over the last couple of years Cockroft has seen his own business double as he matches sellers among the energy patch small fry with eager buyers from Wall Street. He estimated that in 2005 he handled about $25 million in transactions, which doubled to about $52 million last year and is expected by Cockroft to double again this year. "Compared to other industries, doubling a company is fairly unheard of," he said. "Therefore, I think we easily have five years before this will level out to the typical type of industry growth."

Cockroft has brokered deals in the Barnett ranging from $1 million to $20 million. While he's brokering more deals than he did two years ago, the bulk of the growth has come from appreciating deal values.

Prices are going up, but sellers are often reluctant at first because they don't want to let go of the businesses they built from the ground up. Fortunately for them, they don't have to. They can get the capital and business expertise they need and remain on the payroll. The sellers and the buyers both want it that way, Cockroft said. "What's prevalent is people wanting to stay around," he said. "That's what buyers are also wanting, whether it's private equity groups, strategic buyers or otherwise. They're realizing that there are tight relationships in the Barnett Shale so they would not be interested in buying if the seller was wanting to retire, for example."

The small company operators in the Barnett often are finding their backs against the wall with the rapid growth that's going on. "I'm getting a lot of service-type companies that are servicing the rigs and they're coming back to me and saying, 'I cannot grow my company fast enough to meet the expectations for this area.' I have many, many companies that literally started three or four years ago; they kind of stumbled into it and now are getting such demand they can't keep up. Everyone who has contacted me has told me the same story of how they're having a hard time keeping up."

Buyers in the Barnett Shale are willing to be a lot more flexible than they are elsewhere, Cockroft said. He remembered a deal last year that started as a leveraged buyout and then the seller decided he wanted to continue working with the company but wanted to sell out in an all-cash deal. Private equity money bought the company out and the former owner is now an employee, one with a well-funded retirement ahead. "We've seen a lot of flexibility that you don't typically see in other sectors," Cockroft said.

Not every story is quite so happy, though.

"I saw a company last year that literally went bankrupt in the Barnett Shale," Cockroft said. "That was so surprising to me I did more research and [found out] the owner of that company had Ferraris, boats... everything that you could imagine and literally took all of the money out of the company instead of keeping it in the company."

Fortunately for the further development of the Barnett, most small business people have resisted the temptation to splash out at the expense of their businesses.

"I believe that the best stories that are going on in the Barnett Shale are the guys that have been in oil and gas all of their lives," Cockroft said. "Their dad and maybe their grandfather was in oil and gas, but they have not been the business owner. When this boom has come along, they've decided to start a company. They remember what their roots are about, where they came from, and now they're being overwhelmed by the business. That's why private equity groups are coming in.

"There are people who have been here all their lives combined with the Harvard MBAs that are coming in, putting structures to things. The combination that's happening here, I think, is phenomenal and is really the true story here. It is really the uniqueness of the Barnett Shale that you just don't see in other places."

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