The way business is done in the Basin is changing fast, and many are saying that it’s a game for ever-bigger entities, but these three operators say that smaller can still be better—and they explain how and why that works for them.
by Hanaba Munn Welch
All it takes is a lease.
The Permian Basin is one of the largest richest oil producing regions in the word, but it’s a place where small operators exist among the giants. The big corporations have some natural advantages over the little guys, but anyone can go after a slice of the Permian pie and, when the stars align, share in the wealth. Besides, being small isn’t always a disadvantage. There are benefits.
Interviews with three small operators—two stereotypical and one not—explore three different perspectives on what it’s like not to be Exxon Mobil or Occidental in the Permian Basin.
First, New York investment banker-turned-oilman Avi Mirman:
The Permian Basin success story of his company, Lilis Energy, is yet to be written, but Lilis is off to a promising start with a 6,900-acre toehold in the Delaware Basin (as of March 2017) and plans to expand the contiguous acreage to 10,000. No small feat for a company previously teetering on the edge of bankruptcy, Lilis’ surge came when they met requirements for NASDAQ re-listing of its common stock and began trading March 14 on the NASDAQ under its original symbol, LLEX.
Mirman, chief executive officer, is proud of what he’s accomplished at Lilis, but if he were a character in a Western movie, he’d be the quintessential stranger in town, pushing though the Permian barroom doors, drawing some raised eyebrows from patrons already in their places, maybe swaggering a little because he’s blessed with a good sense of who he is and he’s not unhappy about it. That said, he would be the first to admit that he’s a little surprised to find himself where he is.
“I’m not an oil and gas person,” he said, acknowledging that his basic identity is banker.
But he’s getting there.
Mirman’s first notable involvement in oil and gas was in 2010, when Recovery Energy hired him as a consultant. In two years he helped Recovery raise $100 million in capital, but the company continued to struggle despite a concurrent general rise in oil prices—not to the mid-2008 high point but up from the low point at the beginning of 2009.
“In 2013, the company was basically dead in the water—no production, no real reserves, no cash flow—a disaster,” Mirman said, exaggerating only slightly. “I decided to leave the investment banking industry and become president of the company.”
At the end of 2013, the company acquired its new name, Lilis. In 2014, Mirman became chief executive officer and president, in that order, and saw Lilis through a restructuring, raising equity, converting debt to stock, securing a line of credit. Meanwhile, oil prices plunged drastically from June through the end of the year and into 2016. Not good.
Mirman had planned to return to investment banking. He didn’t. “We were really struggling,” he said. “We were basically bankrupt.”
Lilis stock had dropped to eight cents a share. (At the beginning of April of this year it stands at about $4.) Lilis could have filed for bankruptcy like other upstream companies in similarly difficult circumstances. Mirman had other ideas. “I put my investment banker cap on and said ‘Wow, there’s a lot of opportunity out there,'” he said.
The opportunity that Lilis latched onto was Brushy Resources, based in San Antonio. “They were in a big mess too,” Mirman said.
Brushy had $33 million in debt. Justifiably, Brushy’s bank had brought the company to a standstill; Brushy couldn’t drill. Mirman painted a bleak picture: “What you see is two really hurting companies—two bankrupt companies.”
But Brushy had something Lilis wanted—a lease in one of the hottest parts of the Permian, the Delaware Basin. “We doubled our acreage position,” Mirman said.
And with the merger, Lilis shifted its focus from the Denver-Julesburg Basin to the Delaware and subsequently moved its headquarters from Denver to San Antonio, getting to Texas as fast as it could, as the saying goes.
Lilis has continued to increase the size of its footprint in the Delaware, and Mirman himself is enhancing his oil patch credentials academically, pursuing the University of Tulsa’s prestigious master of energy business degree.
Mirman is proud of the way the merger with Brushy has given Lilis a chance to emerge from difficult times and stay in the oil game alongside the big corporations. He likes to think being small isn’t bad, but some aspects of the business can be challenging to small companies—case in point, gas transport. “The company is considering building our own facilities—a processing plant and our own gathering lines, given what we expect our production to be,” he said. “We think being in control of our destiny is warranted.”
Landmen are working diligently to help Lilis add more acres to the Permian holdings. Owners of the minerals at stake face the big-versus-small choice, especially if they’re being courted by big-name entities as well as small. Mirman contends mineral owners should feel greater assurance leasing their land to Lilis or their representatives. Various factors come into play.
“It’s not just the [lease signing] bonus,” he said. “There’s a good chance they’re going to get horizontal drilling in a short period of time.… I think we’ve already announced what our drilling program is. Twelve in 2017. In 2018, at least 20 with two rigs running.”
Lilis isn’t just going to “drill a quick well to hold a lease,” Mirman said.
In the world of vendors and suppliers, Lilis and other small competes compete in some cases with bigger corporations for some services and goods. “We tend to stick with the smaller ones,” Mirman said. “We know what it’s like to be small.”
Securing and scheduling frac’ing can be difficult, especially now that drilling is picking up in the Permian. “There are companies that drill a well and wait four to five months,” he said.
But Lilis has a good working agreement with Universal Pressure Pumping, Mirman said. “Universal is a terrific partner,” he said.
But what Mirman seems to like most about being small is the chance to know everyone he works with. “When you have 20,000 employees, it doesn’t work that way,” he said.
It’s no wonder Lilis employees know each other well. Much of the time they live together, staying in living quarters at the San Antonio headquarters through the workweek. “The thing I’m really most proud of is our culture,” Mirman said. “Everybody works 12 to16 hours a day because they want to. Most people commute from other states to work.”
Lilis department heads are all “rock stars” in their areas of expertise, Mirman said, mentioning petroleum engineer Brennan Short, chief operating officer, Joseph Daches, chief financial officer and treasurer, and stopping himself from listing them all. Getting the right leader for each department would be Mirman’s primary definition of aligning stars for success. And he thinks that’s just what he’s done.
Even so, nothing’s a given. But Mirman puts a good spin on the element of risk.
“While investing in a smaller operator is absolutely riskier, it doesn’t take as much to move the needle with a small operator as with a large one,” he said. “There’s more risk, but the rewards can be really satisfying in my opinion.”
Next, independent operator George McAlpine of Midland:
George McAlpine has his own set of thoughts on the pros and cons of being small in the Permian. He readily shared some of his views by phone with PBOG. But rather than speak as a representative of his family’s business, he chose to speak simply as an independent operator. McAlpine’s brand of reticence is the kind that often bespeaks solidarity and success.
Is smaller better? Yes and no, he said.
“You don’t put up with a bureaucracy,” he said. “It allows you to operate a lot leaner.”
But a leaner staff means the operator may not have a person or department dedicated to complying with regulations and all the paperwork (or computer work) attached thereto. “Somebody like Oxy has a dedicated regulatory department,” McAlpine said. “That’s all they do.”
McAlpine believes the requirements of regulatory agencies are often more burdensome than they need to be, especially when the mandates come directly from the federal government. “The Railroad Commission has been very good to deal with,” he said. “New Mexico [where federal agencies are among the regulatory authorities on federal lands] is more complicated.”
As for relations between operators and owners of minerals, situations vary. “As a small independent, we’re very responsive to being a good tenant, a good operator,” McAlpine said. “If the landowner also owns the minerals, that makes things better. That landowner wants to see that operator do as well as he can.”
But in the Permian, even landowners who own no minerals understand that drilling for oil comes with the territory. Everyone generally gets along, McAlpine said.
As for shareholders, if the company isn’t publicly traded, the situation is less complicated. There’s less pressure. “Wall Street looks at these major oil company stock prices and calculates how much oil reserves are behind each share,” he said. “There is pressure to try to replace the oil that you produce.”
But an independent operator works simply with stockholders who have working interests in the wells and stakes in the leases. The goose and gander rule applies. Everybody’s in it together in a more personal way. “It’s a closer relationship,” McAlpine said. “Our philosophy is as a small independent we really try to operate efficiently, following all the regulations and being in compliance. Also, by being small, we charge overhead for every well we operate. We try to keep it small.”
Last, Phelps White, a Roswell-based operator and consultant:
Owner of Primero Operating and Primero Services, a consulting company, Phelps White responded to a few e-mailed questions from PBOG with a thoughtfully written treatise based on his 40 years’ experience in the Permian. Despite a beginning disclaimer that his views are based on his life and “may be helpful or not,” his words will ring true with others who have shared his experiences in the vast Permian Basin and will enlighten those who have not. With minor edits, White’s thumbnail autobiography and thoughts:
A small operator, I currently operate 25 wells; at one time I operated around 70. I started in the business in 1976 working for a well service company in Artesia, New Mexico. I worked as a floor hand in the summer while earning a geology degree. I went to work for a small oil and gas exploration company after I graduated in 1979. I worked in the operations department and drilled and completed many wells all over New Mexico in and out of the Permian Basin. In 1986 due to economic conditions, I lost my job and contract pumped for a couple of years. In 1988 I put together my first prospect, sold it, and made a well. Since that time I have been an oil and gas operator involved in exploration and production, mostly in the Permian Basin. From 2001 to present, I continue to operate, but I also have consulted in the drilling and completion operations in and around the Permian basin for many small operators.
For insurance purposes, I had to break up my consulting and operating companies, My operating company is Primero Operating, Inc., and my consulting company is Primero Services, LLC. For my operating company I have two employees. One does my production and governmental reporting and keeps track of lease requirements and operating agreements as well. The other is a receptionist-accountant and takes care of our revenue disbursement and joint interest billings. The receptionist-accountant also helps with my consulting company.
I have found my career in the oil and gas industry very rewarding and have always looked forward to going to work. It comes to mind that it is an industry full of opportunity, an industry where you can build substantial wealth out of a piece of ground previously thought of as “goat pasture.” Even when the results of your exploration are a dry hole, good jobs and income brought wealth to the community through the supply and service companies.
The excitement of drilling a wildcat well is indescribable. The thrill of victory and the agony of defeat is readily visible on the faces of folks who are involved whether they be geologist who has worked on a prospect for years or an investor who just knew this deal would help their kids go to college or fund his retirement. I’ve seen grown men cry based on results of a well.
QUESTIONS AND ANSWERS …
Basic availability to small and large operators?
The Permian Basin underlies a very large area with many different geological environments and therefore a lot of different types of plays. In my mind exploration can be divided as “old way” and “new way.” These ways are totally different in nature and require much different types of equipment and capital.
In the old way, economic success was based on structural position, porosity, and permeability. Exploratory targets are typically smaller and the economic conditions depended entirely on [the aforementioned] structural position, porosity, and permeability. The smaller, more traditional prospects are risky, more geologically controlled, but cheaper to get into. In my opinion the old way is still the best option for a smaller operator since it is cheaper to get into and the upfront and drilling costs are much lower than those used in the new way. For a promoter it is easier to attract smaller investors, if needed, due to the lower costs.
Today our industry is propelled by the larger “new way” resource plays which demand horizontal wells and frac technology. The resource targets tend to be much larger but less risky than the more traditional targets. Once the trend is located the targets are large and less dependent on geologic environments. The acreage cost in these trends tends to be very expensive and the operator needs more acres but the risk is less. Typically there must be access to lots of water and the access to large reservoirs for water disposal. Drilling costs for these targets is much more expensive than in vertical wells. Production equipment and facilities are also much more expensive. Operating expenses are much higher due to the need to dispose of water. In my opinion the new way is especially suited for the larger operators who have access to large amounts of capital.
For the smaller operator the Permian Basin still holds large areas where acreage costs have not gone through the roof. There are still some old way targets but they will require good geologic ideas or luck, with luck being the preferred method.
How do the small compete?
The smaller operators can compete in the Permian Basin through acquisition of acreage and production outside of the major trend areas for the resource plays where acreage costs are prohibitive. It is a large pie and there are opportunities. Smaller operators are not at a disadvantage for services since the Permian is loaded with small independent suppliers and service providers. Most of the oil in the Permian Basin outside the major trends is trucked and therefore oil pipeline access is not an issue. The gas market on the other hand is terrible right now with the infrastructure loaded, gas being flared all over (lots of gas waiting to get into the market). Due to the loading of the gas lines, the transporters in some areas are charging prohibitive fees for the more marginal gas production. Seismic data is accessible to anyone via several brokers in the basin.
Access to Acreage?
There is still acreage available to the smaller operators outside of the resource trends in the Permian Basin. There are large tracts of land outside of the trend areas that are still open or are held by marginal production—tracts that can be acquired by relieving the operator of plugging liabilities.
In Texas the acreage is normally privately owned. In New Mexico the acreage is owned by the state and federal government as well as privately. Acreage can be acquired by leasing directly from the owner or via farmout or term assignment from a lessee.
Smaller is nimbler?
A smaller operator can more than likely move a little quicker than a larger company on private and state lands, but on federal lands the permitting process is so lengthy and has so many administrative hoops to jump through that I’m not sure anyone can move nimbly on federal lands.
Compliance with regulations an undue burden?
My experience is that the government agencies may be hard to deal with sometimes, and I’ve seen other operators really struggle with their relationships with these agencies. I’ve worked with the regulatory agencies in California, New Mexico, Kansas, and Texas and have found that they are usually fair and will work with you. The key to dealing with the authorities is mutual respect that you hope goes both ways. It is important to keep in mind that they have a job to do. You may not like their job, but it helps you to help them do their job as opposed to fighting it. Their stick is so much larger than yours that sometimes it is just best to work with them.
The BLM (Bureau of Land Management) and NMOCD (New Mexico Oil Conservation Division) in New Mexico seem to be a little more aggressive in their wellsite inspections than the TRC (Texas Railroad Commission). This is probably due to the fact that in Texas the land is mostly private and you deal more with the landowner. Depending on where you are, these landowners can actually be tougher than the government in New Mexico. In New Mexico the majority of the lands are owned by the state and federal government, and the BLM and NMOCD are charged with protecting the land for the citizens the United States and New Mexico.
The EPA has started talking about rules that will really make it hard for the small operator. The reporting and permitting requirements are so onerous that it may require additional staff just to keep up. Certain air quality rules may make it impossible for some of the marginal wells to remain economic and will place large capital requirements on the smaller operators.
White’s sobering closing thought—that regulations have the potential to squeeze out small operators and shut down some marginal wells in the Permian Basin—hasn’t happened yet. And even if regulations become more burdensome, the Permian won’t likely lose its allure—not when all it takes is a lease.
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