Smaller Permian Operators Play 'Small Ball' to Expand Growth Options

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Written by Paul Wiseman for Industrial Info Resources (Sugar Land, Texas)--Small-cap operators in the Permian Basin often feel dwarfed by the majors and large independents in the fight to expand by adding assets. They either lack the resources or the funding options that would open them to larger deals.

Adopting more creative strategies, therefore, becomes a survival technique. Rather than cling to production of 5,000, or 19,000, or even 100,000 barrels of oil equivalent per day (BOE/d), one panelist at the recent Louisiana Energy Conference in New Orleans discussed a "small-ball" strategy that lets them add assets with options ignored by the major players. Another panelist said they avoid horizontal wells, but use horizontal frac techniques to reinvigorate verticals, providing them with economic access to an overlooked market.

Small Ball Gets a Big Boost
In a session titled "U.S. Onshore E&P--The Permian Remains the Dominant Onshore Basin," one basin operator explained it this way. "If we can do three $300 million deals in a year, it's the same as doing a $1 billion deal," said Jason Pigott, the chief executive officer of Vital Energy (Tulsa, Oklahoma), which produces about 47,000 BOE/d in the Permian. This was his answer to the moderator's question of how smaller companies expand their Permian footprint without bidding against the majors.

Because those deals are ignored by the majors, they tend to be more affordable to buyers like Vital. The company recently added assets in Howard County, Wolfcamp D and others, which altogether added a few years' drilling inventory at reasonable prices.

Not that Pigott isn't frustrated with the ironies of the marketplace, admitting: "If I were at an investor conference, the summary at the end of the day would be that you guys need to create scale. You can't use cash, you can't use equity, you need to add inventory. But adding inventory at tier 9-20 (in the drilling rig availability pecking order), not (having) inventory at the front of the rig schedule, and you need to do it below your multiple; but you trade below the multiple because you don't have scale. That's the challenge that we face." Attendees chuckled at the irony.

Scott Thelander, the vice president of finance and treasurer for Earthstone Energy Incorporated (NYSE:ESTE), agreed that the capitalization bar is set high. "The bigger you are, the better you trade (on the market), and all of us are only going to grow through acquisitions--you're not going to drill your way to it."

Being active in one of the world's most productive basins does have the advantage of presenting plenty of opportunities, Thelander said. Indeed, his company has grown quickly through acquisitions, moving from 15,000 BOE/d to today's 100,000 BOE/d.

Combining Unconventional with Conventional
Another strategy is to return to conventional wells, another overlooked resource, said Paul McKinney, the chief executive officer of Ring Energy Incorporated (Midland, Texas). Ring produces about 19,000 BOE/d in the Permian. In that process, Ring has carried over some unconventional technologies.

"They make great economics," McKinney said, while admitting that applying unconventional methods in that context is "more geologically intensive. You've got to study, you've got to get out there, and for a small company our size we believe there's plenty of opportunity to pursue that. For us, that is part of how we have reduced our entry costs and reduced the cost of acquiring additional resources, and (it allows) us to continue to build and grow the company."

Staying in the Production Lane Boosts Flow
Even with acquisitions, there's still a need to develop assets, and accurate drilling can move that needle along further, Thelander said: "What's really important is to stay in the formation when you're drilling a well. What I found was, when you stay in the formation" and stay in the best rock, using petrophysics and seismic, "you get as much as a 50% increase in production."

Thelander noted the process requires a private-equity partner to be willing to take the risk and participate in developing those wells.

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