Steve Pruett and his well-placed partners have put together one of the biggest new E&P outfits to hit the Permian in several years.
By Al Pickett, special contributor
The most important factor in securing equity funding for a start-up energy company is people, according to Steve Pruett.
“It is a marriage of people, experience, a business plan, and a basin,” said Pruett as he cited the critical issues that investment firms look at in determining what company to support. “It is such a competitive business. Business efficiency and drilling efficiency, commodity prices and execution are all key issues, too.”
Pruett is president and chief executive officer of Elevation Resources LLC, one of the newest companies to focus its acquisition, leasing, exploration, and development of hydrocarbon resources in the Permian Basin. Elevation Resources announced in April that it had obtained a $400 million line of equity financing from an investor group led by Pine Brook Road Partners, a New York-based investment firm focused on building business in the energy and financial services sectors.
Elevation Resources, which has opened an office in downtown Midland at Centennial Tower, plans to become a substantial exploration and production player in the Permian Basin. It will have its primary focus on horizontal drilling opportunities in the Wolfcamp formation in the Delaware and Midland basins, according to Pruett. He adds that his company also plans to seek horizontal drilling opportunities in the Bone Spring and emerging Cline Shale plays.
“Drilling horizontal wells normally costs $5 million to $9 million,” offered Pruett, who is also chairman-elect of the Permian Basin Petroleum Association. “It is very capital intensive. It used to be that you needed $20 million to $50 million in equity investment to start a new company. When horizontal drilling became the norm, the idea of $400 million in equity investment became more consistent with companies’ business plans like ours.”
He said Elevation Resources plans to build a staff and establish a $200 million annual budget.
“We aspire to be a $2 billion company in five years,” he asserted. “Our first drilling projects probably will not be operated. But we plan to have operated drilling projects by the end of the year.”
Pruett, who most recently served as senior vice president of corporate development for Concho Resources, Inc., said he has previously been involved in three other start-up companies, including First Reserve Oil & Gas Co., First Permian, and Legacy Reserves LP.
Legacy’s CEO, Cary Brown, called his friend Steve Pruett “one of the smartest, hardest-working guys I know.”
“He was instrumental in the formation and early growth of Legacy,” Brown added. “One of the nicest guys I know, and someone who is completely capable. A fantastic guy.”
Another of Pruett’s friends, investment banker Jay Chernosky, echoed those sentiments.
“He’s an extremely talented individual,” said Chernosky, managing director of investment banking at Wells Fargo in Houston. (Chernosky worked with Pruett on the Legacy Reserves IPO launch.) “He has a strong technical background and a strong financial backhground to go with it. Steve has the skill set to be successful from a leadership standpoint, from a financial standpoint, and from a technical standpoint, in an oil and gas startup.”
Chernosky is also a hunting buddy of Pruett’s. “We’ve done a lot together over the years.” But Chernosky admitted he had not tackled any of the high, challenging peaks in Colorado that his buddy scales as a pasttime. He laughed. “He’s an athlete,” he said. “Stays in shape. Works out.”
Pruett, meanwhile, says he couldn’t be more excited about starting Elevation Resources. “This is the first time I get to start a company with a blank page,” he said. “I know what I want to do and not what someone else wants to do. I am 51 years old, so it is now or never.”
Pruett believes he has the right partners to bring the necessary experience to Elevation’s business plan.
“I am fortunate to have partners of the caliber of Gary Dupriest, Gary Causey, and Tim Reece,” he stated. “Coupling their operating expertise with the financial wherewithal and strategic guidance of Pine Brook makes for a strong foundation from which to launch a Permian-focused oil and gas resource development company.”
Dupriest, Causey, and Reece have decades of experience working in the Permian Basin, most recently with Samson Resources, which has pulled its operations from West Texas. Dupriest, Causey, and Reece have brought much of its technical and operating team with them from Samson to Elevation Resources.
“Pine Brook is pleased to partner with Elevation,” Craig Jarchow, a managing director on Pine Brook’s energy investment team, said in the April announcement. “This is the right team pursuing the right opportunity at the right time. We have known Steve Pruett for years, so we know first-hand the strong commercial and leadership skills he brings to this opportunity.”
Pruett believes the experience that he and his partners provide the new company, along with Elevation Resources’ business plan to focus on horizontal drilling in the Wolfcamp formation, made it an attractive candidate for equity financing from Pine Brook.
Execution of the plan is important, too.
“Spud to spud time is what matters,” he added, in addressing the importance of controlling costs.
But the other important factor that made Elevation Resources attractive is the Permian Basin itself, according to Pruett.
“The Permian Basin is unique in how thick the hydrocarbon intervals are,” he explained. “In some places, it is more than 3,000 feet thick. In other basins, it may be only 50 to 200 feet thick, so you have only one shot at prosperity. With horizontal drilling, you can tap unconventional resources that were not productive with vertical drilling. For example, operators have tried to replicate the vertical Wolfberry play that has been so successful in the Midland Basin in the Wolfbone in the Delaware Basin with only mixed success. Operators with horizontal capabilities are doing much better drilling horizontal in the Wolfcamp in the southern Delaware Basin. Although a Wolfbone vertical well may cost $3.5 million compared to $8 million to $9 million for a horizontal well in the Wolfcamp or Bone Spring, the increased rate and reserves improves the rate of return compared to the vertical Wolfbone well.”
Of course, companies are now turning to horizontal Wolfcamp wells in the Midland Basin as well, tapping the area where the Wolfberry wells first sparked the region’s current boom of activity.
Building the company
Pruett claimed Elevation Resources hopes to eventually build an acreage position of 50,000 acres over three years, but he said the company needs to be patient in acquiring that acreage and eventually turning its resources into cash flow.
He contended that blocks of acreage will become available as some of the early horizontal players in the Permian Basin seek joint ventures or opt to focus on their inventory because of the high cost of horizontal drilling programs.
“We need to be patient,” he claimed. “Some of the large operators are overloaded with acreage. These plays are so capital-intensive that many companies don’t have the cash flow to fund all of their prospects. Lease prices have stabilized, too.”
Pruett pointed out, however, that Elevation Resources is not interested in an acreage speculation play.
“The music has stopped on acreage flipping,” he said. “That is not our game. It won’t generate the kind of financial returns we and our investors seek. We plan to lease opportunities, farmout, or acquire undeveloped acreage where we can create value. We plan to grow the company through the drill bit.”
He claimed all the pieces are in place for Elevation Resources to hit the ground running.
“I am very blessed,” Pruett said. “I have great partners and excellent private equity partners. That is a great combination.”
And now the real work begins for Pruett and the Permian Basin’s newest exploration and production company.