Energy-focused private oil and gas company Falcon Seaboard has launched a $145mn fund dedicated to acquiring acreage in the Permian basin, spread across Texas and New Mexico. Chief executive David Dewhurst, the former Texas lieutenant governor, Humberto Sirvent, managing director for mergers and acquisitions, spoke with Argus about the reasons behind the new fund, progress so far and expectations.
What made you decide to set up the fund?
Dewhurst: For the last eight-nine years I have been involved with a partner in the Piceance (basin) in western Colorado. We have been drilling for years and it was time for us to monetize our investment. I decided that when that occurred, I wanted to take Falcon Seaboard into the Permian basin for a number of reasons. It is a low cost producer, in most of the areas it has got multiple benches and as the US government reported earlier in the year, there are some 22bn bl of recoverable oil in the entirety of the Permian basin.
So that is why late last year we started working on putting together a fund. Since the time I started in the oil and gas business, in the early 1980s, I have exclusively used our own money, money that we had made from co-generation, money that we made from oil and gas. But the size of the Permian and what we wanted to do is larger than what we fund just ourselves. So for the first time, we are reaching out to friends and people that I have known, to see if they want to invest with us in our fund. We just recently were able to go public in the sense that we could send our documents to friends that have asked repeatedly over the years if we were doing something.
How has the progress been so far?
Dewhurst: We have been working since December-January, with a couple of different smaller companies in the Permian. We have some 12,000 net acres in the southern Delaware and the Midland basin. We are working toward being in a position to have accumulated on a net acreage basis, some 20,000-25,000 acres in the southern Delaware and the Midland basin within the first year and a half, approximately, the end of 2018.
How would these work? Will you be the operator or have JV partners?
Dewhurst: On the acreage we are working toward acquiring, there will be a combination in which there are current operators and acreage in which we will most likely operate. Because of the tremendous amount of vertical well control in the southern Delaware and the Midland basin, we are comfortable with our technical team drilling horizontal wells to develop the acreage which has not been drilled horizontally.
On the 12,000 net acres — we are not the operator. We are discussing our involvement in drilling horizontal wells with a couple of the operators because we have more expertise. We are basically looking at this in a bit of a contrarian way. And that is — a lot of the well-funded private equity funds, raising or being capitalized at $500mn-$1bn, would not be interested in the strategy we are employing, which is to try and buy Tier I quality assets wherever we can find them economically and develop them. A lot of our competitors are looking for 10,000-20,000 acre positions.
We want to buy right. We buy right and then selectively drill horizontal wells to increase production and the value of our property. At the same time, we don't shy away from stripper wells, which we will work over to increase production, monitor the decline curve and look at selling some of the acreage of some of the stripper wells when we have established a decline curve of 2-4pc.
The contrarian aspect of our strategy is that we are willing to work a little harder in putting together our acreage and not insisting that it be contiguous. But we are still looking at putting together acreage, so that we can drill more than 5,000 foot laterals. We are looking at being able to drill where we have the acreage, 7,000-8,000 foot laterals.
What is giving you confidence of the success of your plan?
Dewhurst: Most other companies are trying to accumulate larger contiguous acreage and that is resulting in them paying anywhere between $20,000-$40,000/acre. That is not a strategy to me that works economically, or what we want to achieve for ourselves and our investors.
That is why we are willing to do a joint venture with a couple of drilling companies. And that's why we are not shy about going and drilling several lateral wells on a section here and a section there, or two sections here or two sections there, come in and economically do some pad drilling and keep our costs as low as possible. We want to keep our finding and completion costs, plus our lease operating expense (LOE) at a price where we can make a 15-20pc return.
Has the change in the US administration helped?
Dewhurst: This current administration has sent a signal that they are willing to be open to change, to relax some of the regulations to, in my words, not be restrictive and only come down against people once they have done something wrong, rather than pre-empting the discussion by trying to make drilling more and more difficult. So in that sense, I think it has been positive for the country.
My wish is that the government just leaves the oil and gas industry alone. There are enough regulations. Let us go and do the best job we can. Someone intentionally does something harmful, you can throw the book at them, otherwise leave the industry and the good players alone.
What's the appetite like from international investors?
Sirvent: There is strong demand for dollar denominated assets, real assets and that is as strong as ever.
Also there is a lot of derivative benefit for international clients investing here in the States because everyone knows we have the best technical expertise. So besides a good dollar denominated return, you get to learn our best technology, what's made us so efficient. So a lot of international investors we have been speaking with want to have that access and the way they get that access is by investing substantial amount of money in US oil and gas.
