Executive Q&A: The Treadstone Energy Identity

[Editor's note: A version of this story appears in the April 2019 edition of Oil and Gas Investor. Subscribe to the magazine here.]

Frank McCorkle cut his teeth in the oil fields. The CEO and co-founder of Treadstone Energy Partners began working as a roustabout on his dad’s homemade workover rig in southeastern Kansas at age 11 on Saturdays and holidays, and by age 13, full time in the summers. His father built the rig from an old truck, a tractor engine and piecemealed parts that serviced wells less than 2,000 feet deep. “I didn’t know anything else,” he said. “I had good field experience.”

The family oil business, though instructive, couldn’t be described as lucrative. The homestead in Sedan lacked air conditioning and heating, and during the winter McCorkle cut firewood on Sundays to burn in the wood stove in one room. “We were a poor family, but we had everything we needed,” he recalled. He graduated at the top of his class with a love for math and science and a strong work ethic. With a scholarship in hand, he pursued a degree in petroleum engineering at the University of Tulsa nearby.

Following his sophomore year, BP Plc offered him a summer internship in Alaska, which he accepted just a few days after marrying his wife, Kristin. “We were going to get married later, but we moved the wedding up so we could go to Alaska together for the summer,” he said. “We loved Alaska, and we loved the people.” When evaluating job opportunities at graduation, he had one question for interviewers: “Can you take us to Alaska? And BP was the only one that would.”

McCorkle worked for BP as an engineer for a total of 23 years, beginning in 1988, and in its Anchorage office for 13 years, working the Prudhoe Bay and other Alaskan assets. He also worked on the North Sea, Midcontinent and Eagle Ford divisions while with BP.

In 2011, he and two BP colleagues broke off to form Treadstone Energy Partners I with $50 million in backing from Kayne Anderson Energy Funds. Treadstone I redeveloped the Fort Trinidad asset in East Texas before exiting for $715 million in 2014, a 16-times return. Oil and Gas Investor recognized the program with its “Best Field Rejuvenation” award in 2012. (See, “What’s Old Is New Again,” Oil and Gas Investor, July 2014.)

He and the same team formed Treadstone II in 2014, headquartered in Houston, this time with $100 million in commitments from Kayne Anderson. This second iteration holds some 40,700 net acres in the East Texas Austin Chalk and Eagle Ford Shale region in Milam, Robertson and Burleson counties in Texas. The position abuts the northwestern border of the WildHorse Resource Development Corp. position recently acquired by Chesapeake Energy Corp. for almost $4 billion. Treadstone II exited 2018 with approximately 2,700 barrels of oil per day net production, with seven wells waiting on completion.

McCorkle spoke to Oil and Gas Investor at his office near Tomball, Texas.

Investor: Tell me about your experience working in BP’s Alaska unit, and what you learned from that.

McCorkle: I learned so much working for BP up there. I started out in engineering, and it was a very active place. There were a lot of well workovers, drilling, field expansion, waterflooding and miscible gas flooding. I got opportunities to work in all of those activities and obtained a broad background in engineering.

When I arrived, there were a lot of young engineers, and within a year and a half I was a senior engineer. Now, that’s scary looking back, but at the time it’s just how it was. You just didn’t really think about it because everybody was young, and so you just did the work. You tried a lot of things that a lot of the big companies won’t do anymore. They just won’t do unique ideas often.

Investor: Like what?

McCorkle: I was involved with some of the very first horizontal waterflood injectors. Nobody believed it would work, but we tried it and it worked really well.

I was involved with some unique workovers to repair some wells. We had wells that would produce several thousand barrels a day, and we had some that broke, producing rocks to surface. And when I say rocks, I mean the size of your fist. They were big rocks. I came up with a unique idea to fix it, and we tried it and it worked. We actually pumped cement down there, shut it off, and then perforated three feet above [the cement plug]. Nobody thought it would hold, but it ended up making 8,000 barrels of oil a day.

Another thing, we had a heavy oil tar layer at the bottom of the reservoir. In the gassy area of the field, the horizontal wells were drilled just above the tar interval to minimize the gas. One well was drilled too deep, into the tar layer, which would not allow the oil to flow to the wellbore. We brought some bugs in—you know, microbes—to see if we could dissolve enough of the tar to actually allow the well to produce. And it did. So the well wouldn’t produce until we put the microbes down there and let them eat out some of that heavy oil tar. My partner, Gene Roberts, worked this project with me.

So they just let us come up with ideas.

Investor: What was your motivation to leave BP and form your own company?

McCorkle: I’d always planned to have a company someday. Years ago I set a goal of having a company that produced 5,000 barrels a day before I was 50. Just something crazy that I wanted to do.

BP was getting to be a really big company and was starting to act like a really big company, so the BP I had grown up with was no longer the BP that existed. I just found it was not as much fun. I never really liked politics.

I was on the petroleum board at the University of Tulsa with Mike Heinz (managing director with Kayne Anderson), so one day I said, “Hey, Mike, one of these days I’m going to come ask you for a bunch of money to start a company.” I was just throwing that out there. Then the next year we see each other again at the board meeting and he said, “Hey, you ready to go?” “Are you serious?” I said. “I’m four and a half years to early retirement. Can it wait four and a half years?” He said, “I can’t make any promises.”

I talked to my wife. It was a big risk, obviously, and I was probably overconfident. She said, “If you can find two crazy people to do it with you, I'll be okay with it.” She knew I only had two people on my list of people to ask, and they both agreed.

Investor:How did you form your team?

McCorkle: I picked the best land person I knew out of BP and the best engineer I knew out of BP, and that’s how we formed our team. Gene Roberts and Key Sanford.

Key was always up for a new adventure. He had worked at BP maybe 10 years. And Gene is an engineer’s engineer, so working at BP had gotten very difficult, and he was ready for something different. I was his first boss at BP, and he says I’ll be his last boss. They are both still part of the organization.

Investor: What was it like coming out of BP after 23 years?

McCorkle: We realized we didn’t have any clue how to start up an oil company. That’s the reality of it. We realized that there were a lot of things that just happened that we had no idea how they happened. So we started learning a lot. How do we get data? How do we get computers? Just everything. So it took us a few months to get oriented, and we started looking at a bunch of little deals. We were probably looking at all the wrong stuff, to be honest. They were way too small to make a private-equity company work.

We actually bought a little deal that ended up not working out, but fortunately it got us into an area where we finally started looking around. And that’s where we found our first real asset.

We saw a series of wells in the Buda that had performed really well. We started to evaluate this area, looking at offset production, trying to figure out what was going on with it. About that time an asset comes up for sale in the area we were looking in, a deep-gas unit that had been formed for gas recycle—and it had an uphole oil zone that had never been exploited because of that.

Our bid was three times most of the other companies’ because we were not bidding on the deep gas. Everybody but one company already working in the area was bidding on the deep gas, a little bit of PDP and maybe a little bit of upside. And we were bidding completely on the uphole oil zone. It had a great ending.

Investor: If that differentiated you with Treadstone I, what differentiates you in Treadstone II?

McCorkle: We’re always looking for an asset that’s in an area that’s out of favor and in an area that we think is just overlooked. We’re trying to find something that nobody else really sees.

On our current asset, we had tried to get Anadarko to sell it to us for over a year. Anadarko had a deal with KKR to drill Eagle Ford, and it covered certain acres and they wouldn’t sell anything inside that deal. So when we kept bugging them, they ended up carving out part of their asset in this area and putting it on the market.

It was fairly competitive. Originally, the Austin Chalk and the Buda were all drilled with open laterals, so most people were bidding on PDP and maybe a few more infill wells. But we were looking at it from the standpoint of drilling horizontal cased-hole and fracked completions.

Investor: Treadstone II was formed just ahead of the downturn in 2014. Did that affect your strategy?

McCorkle: It didn’t affect our strategy, it just made it very difficult to find anything. People were not wanting to sell anything during the downturn. We worked over multiple counties looking at stuff in areas that we liked trying to get a deal, and then people would just decide not to. It made it very hard to find something that we thought was attractive.

Investor: Why’d you choose the Austin Chalk?

McCorkle: The industry believes that if you drill into a fractured reservoir, you drain out all the fractures, and you’re done. There’s nothing left, and that’s why your well goes on screaming decline. We take a different view on that. We believe there’s a lot of reservoir that’s not connected to those fractures, and by bringing in modern frack techniques, we can bust up the rock a little more and connect more of it.

Until fairly recently, people had not been doing that in these types of reservoirs. They are doing modern completions in the Permian; they are doing them in the Eagle Ford. But if you look at the Austin Chalk, it’s been fairly recent.

Investor: Your first three wells had mixed results?

McCorkle: They were in three different reservoirs. We wanted to go out and test everything at once, so we tested the Georgetown, the Buda and the Austin—all three. The Georgetown was a bigger unknown out here. There’s only a handful of Georgetown wells within a few miles, and for whatever reason, even though you look at those wells that are a few miles away, there’s no water in them. But for whatever reason, ours is very high water.

We did the Buda, and because people are doing this wine rack pattern, we did the Buda and Georgetown close together. We ended up with a Buda well that was very high water too. It produced several hundred barrels of oil a day initially, but it was not what we were looking for. And the Austin well is the one that worked out really well.

Investor: Let’s talk about your Holden-Moore well.

McCorkle: It’s our best well. This well produces right now about 1,000 barrels a day, and it has produced a little over 300,000 barrels over six months.

This was our first plug and perf well. It was also in an area that historically was a little bit lower water cut. The carbonates tend to be 50% to 70% water cut throughout their life. It was significantly better than we would’ve expected it to be in this area.

Investor: Is the Eagle Ford prospective on your acreage?

McCorkle: It is. There’s always been a debate in our area depending on whose map you look at as to whether our area is too far on the fringe, or inside the good area. And so we decided we had to drill a well to prove that up or not.

We drilled a 10,000-foot lateral and did a typical industry frack on it, and we did something slightly different that we think may help. Our first Eagle Ford well is at 1,400 barrels a day flat, and we can still draw it down another 2,500 psi. We have it choked way back right now, so it should stay flat at 1,400 barrels a day for several months.

We’re very excited about it. We have two more wells on the rig schedule coming up soon, and then we're planning more.

“The industry believes that if you drill
into a fractured reservoir, you drain out
all the fractures and you’re done.
We take a different view on that.”

Investor: Why is the Eagle Ford not the primary target?

McCorkle: Because the area wasn’t supposed to be very good. That’s the bottom line. The reason we drilled it is because we would never get any value for it unless we took the risk to prove it up. So we decided to take the risk to prove it up.

Investor: What’s your plan for 2019?

McCorkle: Near term, we’re going to focus on the Eagle Ford. The next two wells in the Austin will get us clear across our acreage position to prove up the extent of it. The oil is proven productive and there’s been recovery, it’s just more about showing that our new completion technique will work across the whole acreage position.

We will end up drilling probably 30 wells this year, maybe a few more. We’ve been drilling with two rigs for a short period of time because we wanted to get certain wells done. We’re going to drop the second rig for a while because we have such a large inventory of wells that need to be fracked and put online, then we’ll probably pick up the second rig again midyear.

Capex will be close to $200 million from cash flow and debt. Later this year, we should be able to free cash flow two rigs quite easily. So even for a public company [looking to acquire], that should start to become attractive where they can pick up an asset that can cash flow however much development they want to do. A two-rig development out here is quite a lot.

Investor: What is your exit strategy?

McCorkle: I hope somebody wants to buy it.

Investor: Do you see that as a problem right now? Do you think you’re going to have to hold for longer?

McCorkle It could be a problem. We anticipate trying to go to market later this year once we’ve fully proven up our area in the Austin and the Eagle Ford. We don’t want to go to market until we believe we’ve proven it because we don’t want people to come in and say, “Well, we can't pay you for that.” But we anticipate trying to go to market this year. If we don’t get what we think is a reasonable price, we will keep it.

Investor: Are you still aiming for a four-times return?

McCorkle: When we evaluate something, that’s our minimum target. We got a 16 on our first company. We won’t get a 16 on this one. I’m not expecting that by any means, but I do think it’s worth more than four times what we have in it.

Investor: Do you think the drill-and-flip model is dead or dying?

McCorkle: I hope not. There’s a lot of debate on that right now; we think not if you get into the right area. Drill-and-flip is more drilling than it used to be, for sure. It used to be you’d drill a handful of wells and everybody agrees to it. Now we’re drilling wells across our whole area to prove it out.

We had this internal debate on how much is too much. So midyear we’re probably going to be at 10,000 barrels a day. At what point do we have so much production that it almost does the opposite that buyers don’t want it? I don’t know the answer.

Investor: With exits being challenged in recent months, some private-equity firms are looking to transition to becoming a “yieldco,” a longer-term company that produces dividends vs. an all-out exit. Is that option on the table?

McCorkle: Not yet. And the reason I say that is we’re still planning on trying to market it. If that doesn’t work, then everything’s on the table after that. If we don’t sell it later this year, then I suspect the exit strategy’s completely different, and we have no idea what that looks like. So by the time we bring all these wells online, assuming they are type curve wells even, we will be significantly above cash flow for one rig.

But the exit strategy’s an issue that we don’t have clarity on.

Investor: What threats or opportunities do you think are being overlooked in today’s marketplace?

McCorkle: I see this market as still an opportunity to buy. We have Treadstone III started up already. We’ve got a good operational team in place, and we don’t want to lose them when we’re done with Treadstone II. We’re working on some areas that we like, but we do not have assets in Treadstone III yet.

Investor: What is your strategy for Treadstone III?

McCorkle: At this point, our strategy is going to be the same. We’re still looking for stuff that is overlooked by the industry, but it may be extremely difficult to find an asset that fits our strategy. And we know that. It was very difficult this time. So we have talked about that at some point we may have to go with a strategy that says maybe we’re only looking for a two to three times return, but it’s a much larger investment.

We have a $100-million commitment with Kayne, but if we bring them an asset that is really attractive and it’s double that, they’re going to be fine with that.

Investor: How did Treadstone get its name?

McCorkle: We found it difficult to come up with a name, so one of my partners liked the Jason Bourne series. [Treadstone is a secret organization in “The Bourne Identity” book and movie.] “We were just kind of an undercover company coming in and sneaking into places that nobody else was looking at and doing something with it. It gives us good name recognition, that’s for sure. …But no spy business stuff here.

Steve Toon can be reached at stoon@hartenergy.com.