Everyone knows the drill on where to drill. The Permian Basin is one of the only basins truly left standing, with economical wells even in this environment. It’s all about the sweet spots, the core-of-the-core in the Delaware and Midland basins. It’s a hot area, but its com­petitive prices may leave some smaller private companies burned. Now, certain E&Ps are turn­ing to a different, more conventional area that all of upstream could stand to watch. It’s time to keep an eye on an area that has the potential to be a hot spot a few years down the line.

At Hart Energy’s annual Executive Oil Conference held in Midland, Texas, this November, attendees heard from three pri­vate operators proving up acreage outside the Permian’s celebrated zones. Executives dis­cussed their operations and strategies in the Central Basin Platform (CBP), offering a rare glimpse into life on the fringes.

In order for a smaller private company to earn a long-term return in the Permian Basin, it’s best to step outside of the shadow of large companies and shine a light on the subtle opportunities in areas that aren’t bristling with activity. Steve Pruett, president and CEO of Midland-based Elevation Resources LLC, said, “You have to do things differently. We can’t go head to head with the public companies and spend $40,000 per acre.” And it’s possible that acreage is getting even more expensive, par­ticularly in the prized portions of the Midland Basin, where QEP Resources Inc. paid a record $58,000 per acre earlier this year.

Public companies have access to “unbe­lievably cheap capital,” compared to private E&P companies, Pruett said. Consequently, these smaller counterparts struggle to achieve scalability. Elevation felt it couldn’t create a sizeable block, even in trying to make “post­age stamp” positions coalesce. “You can’t get manufacturing efficiencies and leverage infra­structure that you need to make it scalable,” Pruett said.

Even after building 15,000 net acres in the Delaware Basin’s Reeves County in Texas, Pruett felt it was time for the company to set its sights elsewhere. Due to its difficulty in expanding its position in the northern Delaware Basin in southeast New Mexico, an area with “some of the best economics in the Permian,” Elevation is “likely to exit both the northern and southern Delaware Basin,” Pruett said.

With a $$423-million line of equity from investors led by Pine Brook Road Partners and a borrowing base credit facility led by Wells Fargo Bank, Elevation is focusing its energy and capital on the CBP, pursuing conventional reservoirs in a horizontal, multistage hydraulic fracturing format, Pruett said. It started with eight prospect areas across the basin.

A cloud of dust

Difficulty lies in determining which sec­tions in a less-popular area of the Delaware Basin are the most worthwhile. “The line of demarcation between Tier one and Tier two through Tier 100 is very sharp,” Pruett said. The short span of two miles could separate strong economics in the Wolfcamp from a normally pressured, gassy area that requires $60 per barrel (bbl) of oil and $3.50 per thousand cubic feet (Mcf) of gas “to make it work.” Pruett recognizes that private equity is getting priced out of many Tier one areas. As a result, “we’re looking in other areas where with three yards and a cloud of dust, and some good drilling and completion technology and persistence, we can make a go of it at $40 per barrel in the Central Basin Platform.”

Unlike the other two operators who spoke on the Executive Oil Conference panel, Eleva­tion isn’t pursuing the San Andres. However, it is looking “for fields that are structural plays like the San Andres,” only deeper, below the Wolfcamp.

While some operators may write off Ele­vation’s outlier position in the CBP, Pruett is confident that in this case, the term is a misno­mer. Instead, the company is applying creative approaches to tackle the subsurface, “which is far more complex than our human brains can contemplate,” Pruett said.

By analyzing its position’s principle stresses and remaining reserves in known productive formations and applying horizon­tal drilling and multistage sand fracks in the CBP, Elevation has cracked open new oppor­tunities in old fields, even one dating back to the 1940s. “It was marginal on a vertical basis, but with the right orientation and the right sand frack technology, we’ve opened up something that others wouldn’t have thought of,” Pruett said.

He credits Elevation’s private equity spon­sor and bankers for its ability to experiment and take risks. Not all tactics are winners, but “you’ve got to have a technological and exe­cution edge,” and “hopefully, on balance, the good ideas overcome the bad ones.”

In these mature formations in the CBP, Ele­vation has succeeded in taking drilling from 60 days to 30 days, $8 million dollar wells to $5 million dollar wells and making the wells eco­nomically viable in a $40 price environment, Pruett said. He’s confident that the CBP is the ideal for now, and potentially a place to sell for a handsome profit later.

“I wish we had every dollar we’ve spent elsewhere to spend on the platform, where we can compete and grind it out the old-fashioned way while no one else is looking, make good wells and someday sell for a profit.”

Competition

The Midland Basin has been “the heart” of Henry Resources LLC’s play and its primary focus for 47 years, said Danny Campbell, pres­ident. The Midland-based company was among the first to develop the Wolfberry in the early 2000s. Today, the company is pursuing hori­zontal wells in the play.

The E&P company, which is backed by Kayne Anderson Capital Advisors, doesn’t plan to block up too much acreage in prime Midland Basin territory, preferring to keep its positions to more practical sizes relative to the size of the company. “We can do 80 acres to 1,000 acres and do well,” Campbell said. “Because it is a capital-intensive business, if we get too big of a block, capital can drown us.

“We can’t compete at $30,000, at $40,000, at $50,000 per acre. No, that doesn’t work for us.”

In keeping with this strategy, the E&P is spreading out from the more historically well-known parts of the Midland Basin into less-charted territory.

“It’s very competitive—we’ve spent some time testing the edges,” Campbell said. The region’s competitive prices are “one of the reasons we’re south of the Big Lake Fault; it’s one of the reasons we went into the Sheffield Channel.” In the former, Henry Resources “is having some success” and aims to “get wells down in a range of $4 million and get 400,000 to 600,000 barrels. That’s a good rate of return for an independent.” Unfortunately, in the lat­ter, “we found hydrocarbons, just not enough,” Campbell said.

“When we can’t compete in the big blocks in the Delaware and Midland basins, we go back to the platform where there is a lot of oil,” Campbell said. “We just have to figure out how to get it out.”

Over the last few years, Henry has seen promise in the CBP in the Upper Devonian in Crane County. Its first horizontal San Andres well is located in Yoakum County in a transi­tion zone; it was drilled in early 2016 and did not complete until recently. Currently, it is doing 100 bbl of oil per day and 2,500 bbl of water per day.

Campbell views the transition zone as one with residual oil of 30% and oil saturation of 40% to 45%. “The good news is the San Andres has a lot of oil in place across the Cen­tral Basin Platform,” Campbell said. If Henry Resources plays it right in the window of oil cut vs. water cut, there could be significant payoff.

“If we can find the areas where the transition at a certain pressure will give us recoverable oil, it’s a major play,” Campbell said.

When you’re working the periphery, a com­bination of creativity and teamwork is often required to get the job done. “You have to get creative as an independent to play in this game,” Campbell said. Henry Resources’ strategy involves operating with less than 50% working interest at times “and teaming up with some other independents to get the well drilled. That’s how we’re surviving this play in the Midland Basin.”

Following suit

Henry Resources has benefited from infor­mation shared by RSP Permian Inc. and Dia­mondback Energy Inc. on the horizontal side. ConocoPhillip’s technical data on the area south of the Big Lake fault was a particular boon.

“We have to play the cost structure really hard and be a really good follower,” Campbell said. “We don’t have to be a leader in those areas.”

Working hard to get a foothold in the Del­aware, Plantation Petroleum Co. LLC’s focus has migrated from traditional targets to uncon­ventional opportunities in the San Andres, according to Tom Meneley, CEO.

The company, which is backed by EnCap Investments LP and Old Ironsides Energy LLC, started in the Delaware “when there wasn’t a lot of unconventional play going on,” Meneley said. Still, it was unable to acquire adequate acreage to move forward.

As a small company, Houston-based Plan­tation has seen “several opportunities slip past us,” according to Meneley. Now, it’s embarking on a grassroots leasing program to pick up as much acreage as possible. “It’s about the only way we see right now to get a foothold in the basin, and it is in areas that are not as popular with the big players,” Meneley said. He also spies “a bigger opportunity for us, with our size, to purchase or lease” in the CBP.

As part of its plan in the San Andres, Planta­tion began adding acreage about 10 months ago, picking up between 10,000 and 12,000 acres in Yoakum, Gaines and Hockley counties. “Our primary focus now is Yoakum,” Meneley said, where Plantation will spud its first two horizon­tal wells in the first quarter of 2017. The first well is slated to be a 7,000-foot lateral.

Although there are infrastructure challenges on the horizon, the engineers have done a good job with water sourcing and disposal, Meneley said.

Like Henry Resources, Plantation has gar­nered success in the San Andres with the help of some other operators. “Operators are will­ing to share information and communicate. It will be beneficial for everyone.” After all, the San Andres is “less of a land grab; it’s more about how do we get the hydrocarbons out of the ground.

“It’s an exciting opportunity for us consider­ing our size.”

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