Midland petroleum engineer Arlen Edgar has been a fan of the Permian Basin for years, through the venerable basin's ups and downs. An independent for nearly 40 years, these days he mostly invests in drilling deals. Producing-property and royalty acquisitions, long a favorite strategy, have lately become too expensive, he says, thanks to the rush to black gold throughout the oil patch.

He loves the Permian, knows the geology of most of its fields, knows almost everybody in the basin, and knows who's dealing. The only time he left was for a three-year stint in Brisbane, Australia, in the late 1960s, when he was working for Midland company Tipperary Corp.

Edgar graduated from Tarleton State University, a two-year school, and then transferred to the University of Texas, where he graduated in 1957 with a B.S. in petroleum engineering. His first job was with Pan American Petroleum Corp. in Odessa, later to become Amoco. From 1961 through 1973 he worked for several independents. Since 1973, he has been an independent consultant and investor in drilling deals.

His resume reads like a tour of the U.S. oil patch. In 1981, while serving as president of the Society of Petroleum Engineers, he traveled the world. In 1993, he received SPE's DeGolyer Medal for Distinguished Service. In 1986, he was president of the American Institute of Mining, Metallurgical and Petroleum Engineers; in 1992, president of SPEE (Society of Petroleum Evaluation Engineers). In 1996, he was president of SIPES (Society of Independent Professional Earth Scientists).

He is a trustee emeritus of the Abell-Hanger Foundation, a Midland philanthropy that sponsors science and technology lectures at the Permian Basin Petroleum Museum and Hall of Fame, among other activities. To honor his 16 years of service on the foundation's board, the latter named the series the Arlen Edgar Distinguished Lecture Series.

Investor: Why the oil business?

Edgar: I was always fascinated with the idea of getting something of value out of the ground, so I was destined for either mining or oil and gas. And, my colorful, sort of foul-mouthed uncle flew an airplane back then and was in the oil business. I was a great admirer of his.

Investor: Yet, you took a pay cut on your very first oil industry job.

Edgar: Yes, that's right. I had worked for Amoco for three summers during college, first as a field roustabout, then as a roustabout at a gas plant, and the third summer, as a relief pumper. But when I graduated and became a junior engineer for them in Odessa, I made less than when I was a pumper. That was quite a start to my career!

Investor: How have buying production and investing in wells changed?

Edgar: The Permian is in a frenzy now, but I don't see people going off the deep end like they did in the early 1980s. For a long time it was possible to negotiate a production deal with sellers, but now it's gotten too competitive. I haven't bought producing interests in three years. But I still get in on drilling deals. If I buy production, the return is dictated by what the competition is paying. But there is unlimited upside if you buy into a drilling deal—if you are right.

Investor: Are drilling deals changing?

Edgar: They are, because of all the activity out here. It's been hard to get leases in the past two or three years, what with the Wolfberry, the Wolffork, the Wolfbone. For starters, most leases call for higher and higher royalties. It used to be an eighth interest, and now it's usually 25%. A quarter is almost standard. For another thing, there's the higher cost to drill and frac a well. A Wolfberry costs $1.7- to $2 million to drill and complete, versus a vertical Spraberry for a fraction of that. I'm happy now to be a non-operated working interest owner.

Investor: Would you ever invest outside the Permian?

Edgar: I have from time to time, but right now, no. I have plenty on my plate here, so I'll stay within about 150 miles of Midland. I find the morning reports for all those wells very stimulating.

But you cannot invest in a vacuum. This is all colored by my perceptions of what's happening in the worldwide oil industry, and if I think oil demand is sustainable and so on. My worldwide travels when I was president of SPE affect my thinking and help me decide.

Investor: How do you evaluate deals?

Edgar: I look for a three-year payout or less, and ultimate gross return on investment of at least two or better. I look for situations that could lead to more development wells. My philosophy is to get in a lot of deals with small interests and let the law of averages work for me. That creates more administrative work, but no one well can sink me.

Investor: What was your best deal?

Edgar: We bid on a package of royalty and mineral interests on 450 tracts in 14 states. We out-bid and left $100,000 on the table, and people thought we were crazy. Then the Arab oil embargo hit and oil soared. Today that package still throws off every month about six times the monthly income when we bought it, and we've gotten our money back about 15 times.

Investor: What was the best advice you ever got?

Edgar: Offices have lights in them for a good reason—you can work nights and weekends, and that may pay off later on. And if you know you've done what's right, what is ethical, things will work out for you.

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