One of the advantages of having an investment portfolio structured like a three-legged stool is the flexibility it provides to adjust weightings. The Broe Group, based in Denver, runs a multibillion-dollar portfolio spread among real estate, transportation and energy holdings.

This past year, founder and CEO Pat Broe signaled via several deals in the Denver-Julesburg Basin his belief that the dramatic downturn in oil and gas prices offers the opportunity to increase the group’s emphasis on energy. The veteran real estate investor has maintained heavier weightings in real estate and, to a lesser extent, transportation, over the years, but that is beginning to shift. Does real estate have a lot more room to run? It may, but Broe, known for his instincts as a deep value investor, senses more upside in the beaten-down energy sector.

Many of Broe’s holdings outside the energy sector offer synergies with the company’s oil and gas operations. For example, its transportation affiliate, OmniTRAX Inc., has railroad, port and terminal operations and is the second-largest operator of short-line railroads in the U.S., with 17 rail lines and 2,000 miles of track in the U.S. and Canada.

Broe’s energy affiliate, Great Western Oil & Gas Co., which it launched in 2005 with an initial undeveloped 1,500 acre parcel of land near Windsor, Colorado, today operates more than 400 wells in the Denver-Julesburg Basin. The Broe Group recently agreed to up its interests in the basin through a partnership with the Canada Pension Plan Investment Board (CPPIB) in a $900-million deal to acquire all the D-J assets of Encana Corp. The transaction is due to close next quarter, with The Broe Group participating with a 5% interest.

In January of last year, Great Western purchased 14 producing wells and 816 net leasehold acres in Wattenberg Field adjacent to its land holdings in Weld County, Colorado. In June, it supplemented its D-J position with the purchase of 6,000 acres and eight producing wells in Wattenberg.

Oil and Gas Investor sat down recently with Broe and Great Western Oil & Gas president and CEO Rich Frommer to discuss the company’s growing presence in northern Colorado’s energy sector and its appetite for more deals.

“We’ll probably spend a couple of billion dollars in oil and gas acquisitions over the next couple of years. With the benefit of our hedges, we are very underlevered,” said Broe Group founder and CEO Pat Broe.

Investor To set the stage, Pat, can you give us the backdrop to your early entry into the energy space and how you acquired some of your initial acreage?

Broe When film manufacturer Eastman Kodak was failing, I was able to buy a significant acreage position from it in northern Colorado. The properties included the underlying mineral rights, substantial proved undeveloped reserves and a suite of railroad assets. These were some of the building blocks that led to forming Great Western Oil & Gas and our transportation subsidiary, now called OmniTRAX, as well as the Great Western Industrial Park, which hosts a major frack sand terminal operated by Halliburton Inc. The Broe Group has been a significant job creator in northern Colorado.

Investor It sounds like you tend to look for value in what are often distressed situations?

Broe I love buying out-of-favor things—that’s one of my joys. I started doing it with buildings, land and railroads. When I bought Great Western Railroad, it was troubled, with only 600 carloads; now it has about 42,000 carloads and is no longer troubled. Our railroad moves a lot of frack sand.

Investor What’s your level of oil and gas production currently?

Broe We have about 50,000 net acres, with the bulk of it in the core of the [Niobrara/Codell] play. Output is running at over 12,000 barrels of oil equivalent [boe] per day, with an oil/gas split of roughly 65%/35%. The play gets gassier as you go south. Owning the mineral rights means that we have an advantage similar to that enjoyed by Anadarko Petroleum Inc., in that we don’t have to pay a royalty of 20% to a third party. Obviously, that helps the economics.

Investor What are your plans for growth?

Broe We want to be a larger player in the area. The D-J’s a wonderful basin.

Frommer Our desire is to continue to find attractive assets at this stage of the commodity cycle. Overall, we’re a bull in terms of the oil and gas industry. We believe in the economics of the D-J Basin, and with Great Western Oil & Gas, we have a team with a lot of expertise and a proven track record. We can ride through this part of the cycle and benefit from what comes out of it. We believe the recent depressed prices are unsustainable.

In the meantime, we are curtailing some of our drilling and completion activity until later this year and focusing efforts on coring up our land position.

Investor With oil prices having broken down below $40 per barrel and even $30, is there reason to believe there’s a greater chance of consolidation in the D-J?

Broe We believe the prospects for consolidation are good. There are a lot of companies that are much smaller than us who may see the benefit of a consolidation. Then there are the much larger guys who have way too big a position, that don’t get any value for their inventory that is 10 to 20 years, and who could realize a cash infusion today. The difference between us and a regular oil company is that we have a lot of assets there. In addition to oil and gas, the railroad is a phenomenal asset, and we have a lot of real estate there, too.

We’ll probably spend a couple of billion dollars in oil and gas acquisitions over the next couple of years. With the benefit of our hedges, we are very underlevered. Our debt-to-EBITDA ratio is roughly 1.5 times. I think that within probably 30 to 90 days you’ll start seeing some consolidation.

Investor How aggressively have you employed a hedging strategy?

Broe We’ve hedged as much as we physically could. The problem is that we were still ramping up our production, and we won’t hedge beyond our physical production and development plan. But hedges have been the secret to our success. Bear in mind that we can’t hedge our other operations in real estate or the railroad.

Frommer Fundamentally, it makes sense to have a larger footprint and to enjoy the economies of scale that come with it. And it helps if you’re able to block up acreage to drill two-mile laterals; this materially reduces our footprint and impact to local communities. One of the positives of the downturn is that it’s shaken out some of the excess in the cost of drilling wells, and we continue to use improved technology to increase our efficiency.

Broe We’re long-term optimists on oil and gas. As we’ve said, we like value investments, the sectors that are out of favor. We want to continue to be able to buy assets at good prices and we like the economics in the D-J. It’s in our backyard, and our management team knows the nuances of how to drill, complete and produce in the area.

Investor What are the best outlets for your production?

Broe It’s diversified. Some goes to the Suncor refinery in Brighton, Colorado, and some goes north to Guernsey, Wyoming. We have access to pipelines to Cushing, Oklahoma. It all depends on where you can get the least deduction off WTI prices.

Investor Looking ahead to the growing footprint you’ll have with the Encana transaction, can you expand a little on how you came to partner with the Canada Pension Plan Investment Board?

Broe Our relationship with the CPPIB originally came through working with them in the real estate sector. We liked the investment style they brought to the table in terms of having deep pockets, putting long-term capital to work, with no definitive horizon for having to liquidate, and also having the ability to play through the cycles.

There was a match in the way we both thought about the real estate and now the oil and gas business.

Investor How would you characterize your investment style?

Broe You can think of us along the lines of a hybrid private equity and family office. Our investment style allows us the flexibility to be agile and to have capital available like private equity sponsors, but not be subject to the pressures of having to plan an exit from an investment in just three to five years. We consider ourselves long-term investors, and we want partners with a similar time horizon and patience.

Investor What is the broad outline of the planned purchase of Encana’s D-J assets?

Broe The former Encana assets will be placed into a jointly formed entity, called Crestone Peak Resources. The transaction involves some 51,000 net acres, with production running at about 23,000 boe per day in the first half of last year. The net production addition to our existing D-J production will be a little over 1,000 boe per day. We’ll have two seats on the board, reflecting a more significant role in Crestone Peak than that indicated simply by a 5% equity investment level.

Investor How would you compare oil and gas to the real estate leg of the portfolio’s stool?

Broe Our view is that real estate is closer to the end than the middle of the cycle. We’ve been primarily a seller over the last couple of years. We’re harvesting capital there, and a lot of it is going into oil and gas, which we believe is an attractive place to put capital if you’re a long-term investor.

Investor So possible candidates for funding should know your telephone line is open?

Broe Yes. It’s an interesting time in this marketplace.

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