HRCP Investment:
Petreco, Inc.
     
  Business

Petreco International ("Petreco" or the "Company") of Houston, TX designed and provided equipment used in the processing and treating of crude oil, natural gas and water.  The Company's engineered modular processing products were custom designed for each application and acted as critical components of hydrocarbon production, refining, and processing systems.  Petreco maintained worldwide operations servicing a global base of independent and major upstream oil and gas producers.

Sourcing, Transaction and Opportunity

Originally, HRCP directly expressed interest in Petreco, then a division of Baker Hughes Corporation called Baker Process.  Baker Hughes subsequently attempted to bundle Petreco within the sale of other divisions, but this effort was unsuccessful, which created an opportunity for HRCP to negotiate a direct purchase.  Principal co-investors included Babson Capital and other LP investors, Tanglewood and management.

Petreco was a neglected division within Baker Hughes but it possessed brand-name products and a strong design and engineering heritage.  HRCP's experience in the oil and gas process industries and partnership with one of its Executive Affiliates, Brad Goebel, the former President and CEO of Applied Process Solutions (a previous HRCP portfolio company), presented the opportunity to create a stronger and more vibrant enterprise with the potential for add-on acquisitions.

Value Creation

Innovative Deal Structure.  HRCP created a joint venture partnership with Baker Hughes whereby Baker Hughes retained a subordinated equity interest in the business, which allowed Baker Hughes to deconsolidate the business and monetize half their investment.

Culture Change.  Petreco had become unfocused and undermanaged within the greater Baker Hughes organization.  The Firm introduced long-time HRCP Executive Affiliate Brad Goebel as well as additional management to the organization, all of whom became shareholders.  The HRCP-controlled board consisted of two HRCP representatives, as well as representatives of management, an industry-focused co-investor and representatives from Baker Hughes.  The Firm developed a clearly defined market strategy and streamlined reporting and operating plans.    

Add-On Acquisition.  Petreco acquired KCC, based in the United Kingdom and with operations in Abu Dhabi, with internally generated cash about a year after the Firm's purchase.  KCC enabled Petreco to add leading gas processing products and capabilities to complement its existing oil and water processing expertise, thereby giving Petreco a full line of hydrocarbon processing equipment.  This strategic acquisition increased the scope (geographic and product) of operations, as well as critical mass with certain customers.

Cash Flow.  New product development and aftermarket products resulted in organic growth and increased market share and, taken together with improved operations and margins at the combined businesses, enabled Petreco to produce strong cash flow and pay down debt quickly.

HRCP Contribution

Hired new management team including CEO, CFO and COO
Initiated, with management, the KCC acquisition
Changed proposal process to focus on highest margin opportunities rather than sales
Leveraged sales relationships with a multinational presence and expanded geographic footprint primarily through integration of the KCC acquisition
Aligned all investor interests which enabled Petreco to tap extensive financial resources at lower cost to fund dramatic growth
Negotiated, with management, private sale to strategic buyer

Investment Results

Management was approached by industry buyer Cooper Cameron in June 2003 and was offered approximately seven times EBITDA for Petreco.  Although HRCP was optimistic about the prospects for the company, the large bonding requirements from the Company's rapid growth and the Firm's ownership structure (particularly the follow-on capital limitation due to the SBA structure) led us to accept the attractive price.  The Company engaged Simmons & Company to assist in the sale process and confirm that the purchase price was at or above what could be obtained through a full market auction process.

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