Starr Spencer – SPGlobal – Houston – Private US exploration and production companies are typically smaller in resources and staff than their larger rivals, but what they lack in size they often make up for in lower unit costs, according to executives.
One reason is that small operators must be more nimble, competitive and adaptive to a changing market, and therefore must carefully select the best areas of the best plays and squeeze every ounce of profit from every dollar spent, Parker Reese, CEO of Ameredev, a private Austin, Texas-based producer, said last week at the EnerCom Oil & Gas Conference in Denver.
Ameredev is formally called Ameredev II. The previous Ameredev operated in the Southern Delaware Basin in West Texas, but in 2017 sold its assets to Callon Petroleum.
The Northern Delaware is a very prolific producing area and a major playing ground of large Permian operators ExxonMobil and EOG Resources. Lea County is reportedly the second-highest crude producing county in the US, after McKenzie County in North Dakota, producing about 486,000 b/d, according to Lea County information cited during another presentation at EnerCom.
Private companies often have cost structure advantages, which is key to both well returns and corporate-level returns, Reese said.
LOW OPERATING EXPENSES AN ADVANTAGE
“Private companies have low lease operating expenses (LOE), low general and administrative (G&A) expenses and low interest expense,” he said, citing research his company put together from FactSet and company filings.
For example, Reese’s presentation slides showed private E&Ps averaged 3 cents of LOE per dollar of capital employed. In contrast, large public E&Ps with market capitalization of over $20 billion and small-to-mid-caps under $20 billion, both averaged 5 cents/dollar of capital employed.
Reese’s slides gave similar statistics for G&A, interest expenses, and also showed private players potentially see larger free cash flows per dollar spent than publicly owned entities.
Capital budgets were the one area where private players spent more than their public counterparts, he said.
“But when you get to free cash flow, you expect a higher return on capital employed yield at that point,” he added.
Private companies must also be innovative, and in some cases a jack-of-many trades, said Chad Hathaway, CEO and founder of Hathaway LLC.
The producer currently has four major fields with at least 73 oil and natural gas wells that collectively produce 500 b/d in Kern County, California, around Bakersfield in the state’s San Joaquin Basin.
While California presents well-known operating challenges, there are also opportunities such as fields that produce heavy crude oil that earns a premium prices. For example, Midway-Sunset Kern River postings are currently about $3/b-$6/b above WTI.
And the state has low land costs, a large refining capacity hungry for local crude and wells that produce little or no natural gas and are low-decline because the fields are conventional – Hathaway cited 8% average decline. Also, well costs are low – $400,000 or less apiece, the company’s CEO said. That compares to $4 million or more for a typical Texas shale well.
At Jasmine, Hathaway’s largest producing field, the company formed a DrillCo in 2017 when oil prices were lower than now. In that structure, widely used by E&P companies to fund drilling projects, outside investors typically agree to fund a share of well costs in exchange for an interest in the leases.
HATHAWAY DRILLCO PAID OFF WITHIN THREE YEARS
“The DrillCo … not only funded the facilities and improvements, it almost paid itself off in less than three years, in a very low oil price environment,” the executive said.
In addition, Jasmine and many other eastern Kern oil fields characteristically produce fresh water. In a state where water to farmers is regulated, “there are significant beneficial re-use opportunities for that water,” he added.
“We sell it to farmers and they use that to offset what they’re allocated from the state … and generate a revenue stream from the water,” he said, adding other California operators such as Chevron and California Resources Corp. do likewise.
Rig site innovation is a feature of Great Western Oil & Gas, which operates in the liquids-rich western Wattenberg field in Colorado. The company pioneered the concept of “twinning” rigs and fractionation crews, company CEO Rich Frommer said.
“Every location we move into, we generally move two rigs [and frac crews] onto,” Frommer said.
That reduces the company’s cash-to-cash cycle times, which translates to lower finding/development costs and lower operating expenses per barrel of oil equivalent, and accelerates cash flow, he said.
Using two rigs also generates operational efficiencies and reduces spud-to-sales time by 50%, and shortens operating time on drill pads which its neighbors nearby appreciate, Frommer said.
And, it stirs a little competition between the two crews.
“There’s no scoreboards on those pads, but those guys are aware of how long it takes them to drill a lateral or how many frac stages they get done per day,” Frommer said. “We’ve seen tremendous improvements just by putting those next to each another.”