New money, new blood, new horizons: The next generation of wildcatters gears up for the future.
By Paul Wiseman
“This rise is like the World War II rise—those guys coming home after World War II. You know, the oil field kind of ramping up for them,” says J.D. Smith.
J.D. Smith is the 30-something cofounder and CEO of EnCore Permian, a new E&P firm using proprietary software to identify available properties. Smith and his business partner, COO Josh Lorenz, are part of what might be called the next generation of oil patch wildcatters. Smith sees his generation flooding the oil fields much as did the GIs returning from World War II—entering in sufficient numbers and with enough energy to transform the way the business works.
Humans using technology
Technology—Big Data in particular—is a huge part of that. Smith and Lorenz’s software, Mineral Scout, prowls big data, using “sophisticated queries to provide a competitive edge in a crowded leasing environment,” says Lorenz.
Computers, however useful, do not trump the human equation. EnCore Permian’s offices are located in the heart of downtown Midland to maximize the opportunities to shake hands and see eye-to-eye.
The adoption of new technology extends to all aspects of the business, says Steven Ilkay, an oil and gas industry analyst based in Toronto, Canada. New technology is driving new assumptions about the industry, particularly in the Permian Basin.
“Some of the assumptions that the industry had, previously, about the Permian obviously haven’t been true,” Ilkay said. “Now, these new technologies—that’s really the key—is when you apply the new technology and methods of understanding as far as new drilling and completion technologies, you realize that the rock is way more productive than the industry believed. Technology has changed what’s possible.”
Because of that, Ilkay is excited for the future. “There’s been a lot of learning in the last decade with the rise of unconventionals.”
This new technology, including multi-well pads, walking rigs, highly efficient rigs, more productive fracturing procedures, and more, has reduced costs, increasing the number for formations accessible at lower prices. Ilkay likens the advances, particularly multi-well pads, to the efficiencies of scale seen in the manufacturing sector.
As technology changes happen faster and faster in the oil patch, the new entrepreneurs are managing formations differently in a variety of ways.
While some operators have had success with downspacing in order to get more wells per section, Ilkay notes that others are drilling less densely. The second group is completing their smaller number of wells with more proppants: “Basically, more intensive completions as opposed to more wells per section, getting better results per thousand foot laterals.” Both methods have had varied rates of success, but every attempt makes the Big Data mine a little deeper.
One thing making the area so attractive to innovators is its multilayered producing zones. Previous producers tapped one zone at a time, but Ilkay says new horizontal drilling and fracturing technologies have made it easier and more economical to produce as many as eight productive intervals in one field.
Layers are also often leased separately, which makes lease-tracking software like EnCore Permian’s Mineral Scout very important in sorting out the corresponding layers of data.
Deep strata are what attract the majors. They’re looking for areas in which they can produce big numbers for decades. Ironically, this very situation is what also gives opportunity to the entrepreneurs, in Ilkay’s view.
“The market is willing to accept a size and scale of the reserves there that’s really suited to a major,” he said. “At this stage of the cycle, they’re all searching for reserves—that’s why you’re seeing large transactions like Marathon and Exxon and what have you.” The majors began moving into the Basin in large scale when it appeared the market was at low ebb, when they could accrue assets at rock bottom prices.
“That’s why it makes sense for these entrepreneurial land-type groups to put these assemblies together with some really detailed science and create a case; not so much because someone’s going to drill it all out… but for a large operator, it gives them a lot of comfort knowing that the reserves are there, and technically recoverable.”
When a relatively new company formed by two former Red Raiders sold Midland Basin assets to Parsley Energy for $2.8 billion in February, the industry took note. But this was just the largest deal of its kind, not the only one, says Reed Olmstead. Olmstead is the Houston-based director of North American upstream research for consulting giant IHS Markit.
While Permian activity has historically been spread among companies of all sizes, equity-backed management teams like Brigham Resources or Silver Hill have started to sell to majors in recent months.
“Typically, what we’re seeing smaller operators do is get in, prove up an asset, and flip it. It’s sort of your classic real estate flippers type of attitude.” Like Chip and Joanna Gaines of the oilfield.
Equity-based management teams—modern-day wildcatters in Olmstead’s terms—usually have a greater tolerance for risk than do the majors.
“I’ve always said that the unconventional industry has been built on companies that you’ve never heard of. Because it’s the companies that fail that help set the fairway for how the operations and acreage should progress,” said Olmstead.
For EnCore Permian’s Lorenz, it’s also about aggregating and configuring—and not just for selling. “We want people to know that we have some great assets and we want to make deals,” he said. “We have some partners that want to drill with us, but we know that, in some cases, we’re going to have to make trades to create drillable blocks.”
He continued, “Some companies, they buy stuff and they’re just going to go sell it to the highest bidder. We’re going to be more strategic about how we operate, who we deal with…. We’re amenable to making deals.”
The point of “drillable blocks” is significant because of the proliferation of horizontal and multi-pad drilling. While majors have always looked for huge blocks, new technology has driven even the smaller companies to buy or trade assets in order to maximize economies of scale.
Those that do sell to majors may then have a 9-10-figure windfall to reinvest. Olmstead observed, “What we’re starting to see is a reinvestment of that. We’ll see a company prove up some acreage—maybe they acquired it in 2013 or 2014, taking a very big risk because the Basin was in such an unconventional infancy—they’ve now proven it, ridden that wave up, they’ve cashed out of their position, and now they want to get back in.”
The challenge is that, now, the remaining opportunities for discovering undervalued assets are diminishing.
As the oil flows out, the money flows in. So much money has flowed into the Basin—from both private equity investors joining with the new generation and from majors—that the opportunities are indeed getting harder to find.
“We’ve actually coined a term that I’ve heard going around—Permiania—and really, because of all the hype, we may start to see some operational constraints.” Olmstead added, “This may push some capital up to North Dakota that would’ve preferred to go to the Permian Basin, but that’s several years down the road.”
By then, potential Permian Basin investors may be quoting baseball philosopher Yogi Berra: “Nobody goes there any more, it’s too crowded.”
Right now, because of “Permania,” the Permian Basin is the land of opportunity for everyone, including the new breed of entrepreneurs and wildcatters. Private equity capital is available, recoverable reserves are plentiful, and buyers are ready to spend into the billions for proven assets. Or if, like Lorenz and Smith at EnCore Permian, an entrepreneurial firm wants the opportunity to drill out assets itself, technology has made many of those reserves profitable at $50 per barrel.
Paul Wiseman is a freelance writer in Midland, Texas.