Kleiner-Backed Terralliance Begins To Implode

Kleiner Perkins is on the verge of having a massive crater in its energy portfolio, but it has nothing to do with cleantech. Instead, the trouble involves Terralliance, a stealthy oil and gas exploration company that quietly raised $295 million in equity funding from KP and others.

peHUB has learned that Terralliance has fired its founding CEO, laid off around 80% of its workers, closed offices and is desperately trying to renegotiate a massive debt-load. If it can’t get the last piece done, then Terralliance might itself become a fossil fuel.

“It’s all about restructuring the debt, but the lender doesn’t seem too eager to bail out the equity guys,” says a source familiar with the situation. “[The lender’s] feeling is, hey, the product works.”

That product is software that Terralliance says makes it easier and cheaper to locate oil and gas. The company then uses the software to do its own exploration, rather than simply selling it to third parties. Here is how Terralliance explained it, in a draft private placement memorandum from 2007:

Terralliance is an exploration and production (E&P) company in the upstream oil and gas (O&G) industry. Over the past 7 years, Terralliance has invented, perfected and proven two new technologies that precisely map underground oil and gas deposits in 3 dimensions, and has undertaken using these technologies as the basis for an international exploration program. We call the two technologies Direct Hydrocarbon Mapping (DHM), and Seismic Energy Spectral Analysis (SESA). With DHM and SESA, Terralliance is able to dramatically reduce the risk that the exploration projects it undertakes fail for lack of commercial concentrations of hydrocarbons. Terralliance has proven its ability to locate and produce commercial concentrations of oil and gas in new exploration areas with over 93% success. In short, we replace the imaginations of geologists about where to drill for new hydrocarbons – historically right 20% to 30% of the time (even when addressing extensively and narrowly studied areas) – with an impartial, repeatable scientific process, which is right over 90% of the time.

It was this technology that convinced Kleiner Perkins to invest an initial $10 million in March 2004 at a $40 million valuation (the company had previously been self-funded). One year later, Kleiner Perkins and Goldman Sachs invested another $35 million at a $125 million valuation. Then came the motherload in August 2006, when Terralliance raised $250 million at a $910 million valuation. That deal included Kleiner Perkins, Goldman Sachs, DAG Ventures and Ithmar (Dubai-based PE firm). A Fortune article from last summer also lists Passport Capital as an investor, but they aren’t mentioned in the PPM.

The aforementioned PPM was seeking to raise a Series D round in excess of $1 billion, with a $50 million minimum investment. That round never closed, but Terraliance did secure a large debt package that included some sort of convertible securities.

Since then, however, something went horribly awry. Sources say that founding CEO Erlend Olson spent “like a drunken sailor,” made exploration and extraction promises he couldn’t keep and that the investors — namely Kleiner Perkins — were “shocked” by the initial results of a recent audit.

The board quickly showed Olson the door (it’s unclear if there will be future legal action), and began moving to stem the damage. One response was to lay off approximately 80% of the company’s workforce, and to close several offices. According to a fairly recent company backgrounder, Terralliance had a core staff of 62 and offices in five different countries — including its Newport Beach, Calif. headquarters and an “international new ventures” office in Kuala Lumpur.

“A lot of the work Terralliance was doing could be easily outsourced, like the exploration fieldwork,” a source says.

Terralliance and its venture backers also want to renegotiate the company’s debt, but that is proving very difficult. The lenders apparently believe that, if the company can’t survive under its current capital structure, that the best bet for recovery could be an asset sale or other type of liquidation (that’s really me surmising, as I haven’t spoken to the lender, or even been able to identify it). Terralliance also is seeking new equity capital to help make its loan payments, but so far has not been successful.

All of this, of course, makes it look like the VC investors were either asleep at the wheel, or perhaps duped (shades of Entellium?). KP’s reps were John Doerr and Joe Lacob, while Goldman’s were Joe DiSabato and Ken Pontarelli. Also on the board was private investor Ken Foster (former CEO of Newfield), while Colin Powell is listed among its advisors.

A spokeswoman for Kleiner Perkins declined comment, and a message left at Goldman Sachs has not been returned. I also emailed Gary Peacock, who as of last check was Terralliance’s CFO, but no response there either. I’d call the company, but its phone number isn’t publicly-available (website is bare-bones, to say the least).

Update: Just got sent a working phone number, but no receptionist nor employee directory. Seems Gary Peacock left last August, at which point he was replaced by someone whose phone number is now disconnected. Still trying…