'It's been an amazing ride.'

As you are reading this article, Black Elk Energy, a Houston-based independent, is three years and one month old. Let’s revisit late October 2007. John Hoffman, off of a lengthy career with Amoco and more recently Stone Energy, decides to start his own company. The idea is to buy up undercapitalized assets, primarily in the Gulf of Mexico (GoM), and apply capital and technology to improve production from these assets. He starts with about six employees and US $1 million in seed equity.

As of Aug. 31, 2010, the company had a proven value in excess of $500 million net of all liabilities and future costs – a pretty good return on investment.

John Hoffman, CEO of Black Elk Energy

Unlike other companies that were early entrants to a new play or just happened to be in the right place at the right time, Black Elk has maintained a steady and focused growth strategy. Basically, it does one thing – buy undercapitalized assets with growth potential and exploit them – and it does it well.

It is not involved in rank exploration, and it does not buy sunset properties. Its success, Hoffman said, is based on five priorities:
• It never puts anyone in an unsafe situation;
• It never knowingly harms the environment;
• It strives to be in compliance with the law 100% of the time;
• It focuses on exploitation at the lowest possible cost (finding and development costs run about $2.88/boe); and
• It exploits the richest opportunities in its portfolio in any given year.

This has led to some enviable numbers: an annual 450% reserves replacement; a yearly doubling of reserves in each new field acquired; more than 20 MMbbl of proven reserves, 79% of which are developed; daily production of just under 12,000 boe; and a solid footprint in the Deep Shelf play in the GoM, which it is just beginning to assess.

Considerable study goes into an asset before it is considered for purchase, Hoffman said. “Our operations are geographically very diverse from a hurricane risk standpoint. From that standpoint, we have a very low-risk profile.” He added that structural engineering analysis is conducted prior to purchase to ensure that the assets can withstand 100-year storm conditions.

Once the asset is purchased, the technical experts front-end load field studies to risk/rank all of the opportunities across the portfolio. “This ensures that the technical teams are working on the highest value opportunities every day,” he said. “That’s something unique compared to other places I’ve worked.”

Bullish on natural gas
While the Black Elk portfolio is evenly split between oil and natural gas, Hoffman is pleased to have acquisition opportunities in so many conventional gas fields. Given today’s low gas prices, these assets are very affordable and offer considerable value upside. Black Elk believes in the future of natural gas in the US.

Black Elk’s High Island 571 field is a high-producing field from an acquisition in early 2010. (Image courtesy of Black Elk Energy)

First of all, the US is moving toward a more natural gasbased power supply, the most efficient fuel to withstand power surges in the market. It also is the least expensive fuel on the market today.

Of course, unconventional gas currently is oversupplying the market and keeping prices low, but Hoffman expects that to change. “Shales are unproven,” he said. “They hold real promise, but until those are fully proven technically, we think there may be a change in the industry’s view of the longevity and the perceived size of that resource.”

Additionally, there is the “green” agenda, which natural gas producers hope will embrace their commodity as a “bridge fuel” to alternatives and renewables. “It’s our perception that we can play a role in providing that greener fuel to the US,” he said. “Therefore, we do have a bias toward natural gas.”

Giving back
Black Elk has a goal of doubling its size every year. But it also is dedicated to doubling its charitable contributions every year.

The company is planning its third annual golf tournament with the Louisiana Association of Community Action Partnerships (LACAP), a private, non-profit agency organized to promote programs engaged in raising the social and economic standards of low-income residents in that state. This event is tentatively planned for early summer 2011.

Black Elk recently partnered with Oilfield Helping Hands (OHH), a Houston-based organization that raises money through a variety of events and distributes financial resources to families in the oil patch in financial need. A recent OHH fundraiser raised money for the families affected by the Macondo disaster in April. In addition to providing monetary support, Black Elk employees have volunteered at OHH events and cooked for the participants, providing all the food and supplies required.

“If you think of communities, the oil field is a community in and of itself,” Hoffman said. “Given the situation with the Macondo well, a lot of oilfield families have been negatively impacted. There was a lot of collateral damage. We felt like Oilfield Helping Hands was a charity that we needed to throw our support behind.”

The end of 2010 and the beginning of 2011 will yield additional charitable contributions and possible alliances. Currently the company is forging a partnership with St. Jude Children’s Hospital and is looking to grow its financial donation in 2011. Black Elk also will contribute to a holiday program called “Home for the Holidays,” a tie-in with LACAP and the New Orleans Saints to provide heating solutions and insulation for families in the area.

‘You don’t have to be large to be great’
Hoffman tries to maintain an open-door policy and a family environment within his company. Black Elk’s organization chart is a “pie” with all contributors shown with roles rather than ranks.

“It’s intended to show that we all collaborate together and work together,” he said. “There are no boxes or lines that create subconscious barriers to communications.” In addition to spending time in the field talking to his operators to be sure the company’s fundamentals are being maintained, Hoffman helps out in more subtle ways as well.

“It’s like I took all of the things that in 30 years I’ve seen work and did those while avoiding the things that didn’t work,” he said.

He added that he feels good about surviving the typical growing pains and still running a company at which it is fun to work. That, combined with a great track record and enormous potential for future growth, seems like a good recipe for success.