Oil and Gas Investor chatted with Houston-based Sheridan Production Partners founder and chief executive Lisa Stewart recently upon the closing of the $1.8-billion Fund II. Sheridan's "war chest" is now about $3 billion, when combining the raise of Fund II and leverage through a bank revolver. The company seeks conventional oil and natural gas assets.

Investor: How did you decide to go after Fund II?

Stewart: We had gotten to spending a little over 80% of Fund I with our Exco deal last year, so we wanted to make sure we were reloaded. We decided last December to get started, and we went to work on this new raise in March 2010.

Investor: What is the composition of the investor group this time around?

Stewart: We had a lot of our Fund I investors returning, which is good, but we did throw the net a little broader this time, and brought in a number of new investors who were equal to the quality of the ones we had. We have endowments and pension funds.

I like to say this was a round trip of drive-ins, diners and dives. I am a foodie, and we actually prefer road food.

Lisa Stewart: founder and chief executive, Sheridan Production Partners.

Investor: You closed at $1.8 billion, when the goal was $1.3 billion. Why was it oversubscribed?

Stewart: The reason I think people were willing to invest with Sheridan is because we did so well with Fund I. We've bought great assets and we lowered the operating costs and we increased the production a little bit, even though that is not our main mandate. They feel that owning oil and gas properties is a hedge against inflation, and what we do is on the low end of the risk spectrum. Our rate of return has been in the mid-teens.

Investor: What does your production profile look like?

Stewart: We are 43% oil on production, but our reserves are just the reverse, with 60% of reserves oil and about 40% gas. We'll be much more oily in the longer term, and we've got some gas assets in South Texas and Oklahoma that are in relatively steep decline, so over time, oil and gas production should be about equal in volume. Current production is about 19,000 BOE a day.

Investor: Do you hedge?

Stewart Yes, absolutely. That's a big part of our story. At the time we make an acquisition, we generally hedge enough volume to ensure we get back our initial investment. We are highly hedged on oil through 2014 and fairly well hedged on gas to 2013. We seek return of capital, then it's about what our operating team can do to enhance production and lower operating costs.

Investor: What are you looking to buy?

Stewart: We like the Permian Basin, Oklahoma, the Austin Chalk and South Texas. We wouldn't mind expanding into the Rockies. Anything conventional. We are agnostic as far as whether to buy oil or gas, but we do like for the majority of our assets to be mature, long-lived and conventional. I think it's a good time to buy gas assets. It feels to me like the market for conventional gas assets ought to be good right now. We are all about margin.

Read additional coverage on Sheridan:

Sheridan Reels In $1.8B For E&P Investments

Sheridan Closes $1.3-Billion Fund