After helping to guide Memorial Resource Development Corp. from its launch in 2011 through a 2014 IPO then sale to Range Resources Corp. this past September, Greg Robbins hit the pause button. His family’s growth had mirrored the E&P’s expansion during those years. As one of Memorial’s four original employees, he’d had one child; by the time the merger closed, he had four.

“I was leaving the best job I’d ever had,” he said. “I needed to spend a couple of months in a relaxed situation.”

He also wanted to ensure his priorities were in line and that he could be passionate about his next step. Having had financial success meant he could be selective.

Robbins had served as senior vice president of corporate development at Memorial, which grew to 550 employees and fetched $4.2 billion at sale. Like other alums, he couldn’t sit still for long.

Memorial CEO Jay Graham and others reupped with Natural Gas Partners, the E&P’s original backer, and in December took WildHorse Resource Development Corp. public. For his part, Robbins couldn’t put on the back burner the chance to assemble the “perfect” management group as Memorial employees became available because of redundancy with Range’s organization. He and his business partner, Larry Forney, formerly COO of Memorial and now CEO of the new start-up, knew the odds were remote of finding another point in time to reassemble the band.
“When you find that perfect group, you do everything required to put it together,” Robbins said. “At the end of the day, that’s your edge.”

They named the start-up Grit Oil & Gas LLC, adding four more Memorial veterans: chief accounting officer Dennis Venghaus, vice president of operations Anthony Sayre, vice president of geology Tim Parks and reservoir tech Melinda Montgomery. Grit is initially targeting conventional assets primarily in the ArkLaTex region.

“We weren’t sure yet where we wanted to spend our capital, but we knew we wanted to work together,” Robbins said. “There are real risks in this business, and if you can mitigate one of them, it’s by working with people you trust, communicate well with and who have complementary skill sets.”

They secured a blind pool commitment of just under $100 million from private equity firm Carnelian Energy Capital Management (including contributions from Grit’s team), subleased Houston office space and prepared to hit the ground running on March 15.

Robbins knew Carnelian’s co-founder, Tomas Ackerman, from the latter’s stint at Natural Gas Partners and had a strong personal connection with him. “I’ve seen him in tight spots and have been impressed with how he handled himself and ultimately how various decisions got made. He and Daniel Goodman [Carnelian’s co-founder] are excellent communicators.”

Given its plan to stay private, Grit wanted an equity backer that had fewer management teams and could give the start-up more attention. “We don’t need help with assets as much as we need a sounding board for when we’re reviewing assets, structuring, negotiating, strategizing and for financial-category-type resources,” Robbins said.

The current cost of private equity capital— in fact, the cost of all capital—is cheap, he said. “I’d rather take slightly more expensive PE capital and benefit from the resources attached to it than take cheaper capital that is truly passive money, without the ability to provide perspective.”

As for competing in the current sizzling A&D market, “We’re looking at deals from $50 million to $500 million in value. If we found a $300 million deal that we and Carnelian liked, they have no problem finding direct LP money or other partners, with potentially a lower cost of capital, to get it done.

“Most of Carnelian’s LPs are the same as in larger PE funds, which do sidecar stuff all the time,” he said. “At Memorial, we met many points of capital: direct investors, funds, nonop guys, drilling funds. The industry is capital-rich, deal-poor. We like to say, ‘Good deals get done, period.’”

The start-up is being opportunistic on deals that come in and doing from-the-ground-up technical work in the ArkLaTex. “If we have a lead on a proprietary deal, we’re going to work it. We’ll also look at the Arkoma and Eagle Ford. We have the overlapping experience, Rolodex and skill sets to be competitive in those basins.”

Grit’s focus on conventional assets means there may not be economic PUDs in deals at current prices. “We’ve got to do the cliché: cut costs, get production up, stabilize production if buying an-off-the shelf asset.” Conventional assets will require a longer hold.

There’s a disproportionate premium for assets in areas with PUDs that are economic or at least touted as economic, he said. “If you’ve got a PUD-heavy deal between $100 million and $500 million, you are right in the fairway for a PE team to come in and do the PE two-step—fix it up, raise production, book more reserves and sell it.

“Conventional assets may need a whole lot more time and capital than assumed and may not have economic PUDs today. You’re not depending on prices getting better to make money as much as you are depending on prices to make your upside economic. In this market, we think adding proved reserves to your project is how you exit.”

Today’s commodity prices have fueled a lower-risk, lower-return model and the question is, according to Robbins, does that fit private equity?

“Five years ago, probably not,” he said. “Now, I think it does. In general, investors today are willing to consider lower return assets. For a lower return deal, it is still our job to underwrite it and believe it is proportionately lower risk.

“PE has to make their slice—at least 20% IRR a year, or it’s not worth your time or theirs. Still, at 20% you can underwrite conventional deals without losing upside, by enhancing production and reducing costs. There are assets, with a little hair on them or in the tail-end of their life, in less desirable basins. Many fall into the value-buying bucket. If you are opportunistic, underwrite well and can execute with a lean staff, good returns can still be had.”

Eastern Scoop

Private equity opened doors for expansion to the next stage of growth for longtime Midcontinent geologist and independent Greg Casillas. Last April he formed Casillas Petroleum Resource Partners LLC (CPRP) with a commit-ment from Kayne Anderson Energy Funds to capitalize on a new area of the Scoop play in southern Oklahoma. Kayne and its co-investors have committed a total of $400 million in the past year to fund two acquisitions by CPRP.

Additionally, CPRP has commitments of $150 million for drilling, completions and bolt-on acreage opportunities.

Casillas entered the industry in 1983 after graduating from Oklahoma State University with a degree in geology. He joined a small independent in Tulsa where he gained exposure to wellsite geology, drilling and completions, land, fundraising and more. He then struck out on his own in the commodity-price-challenged days of 1986, forming Casillas Petroleum Corp. and pursuing acquisition, development and exploration opportunities through the 1990s and well into the 2000s.

The company maintained its focus on conventional projects as the industry was transitioning to unconventional resource plays.

Casillas had been through downcycles before, so when the 2014 oil price crash came he recognized it as an opportunistic time to change the direction of the company to the unconventional world. He had a great manage-ment team in place, to his mind one of the best in the industry. As the team discussed strategies, the conversations always turned back to the unconventional plays in the Midcontinent where the group has expertise.

“The Meramec activity in the Stack [in a roundabout way] led us to where we are today,” he said. “The results were great, but the space was extremely crowded. We wanted to see where we could find analogous rock to the Stack Meramec, and where we could build a large operated position while others were focused elsewhere.”

Their search ended in the prolific Golden Trend Field, on the eastern edge of the Scoop. The area is comprised of the volatile oil window of the basin, which is demonstrative of shallower depths and a higher oil yield. Casillas identified an initial acquisition: 12,000 acres from Chesapeake Energy Corp. in Garvin, Grady and McClain counties, Okla. Then came the task of financing the deal.

After reviewing potential candidates, Casillas sat down with the Kayne Anderson team to discuss the opportunity at hand.

“After a deep dive with Kayne reviewing our extensive technical work, we recognized the compatibility of the technical alignment between Casillas and Kayne,” he said. “Kayne agreed with the analysis of this area of the Scoop and the upside of the Chesapeake acreage block, and a partnership was formed.”

In April 2016, with backing from Kayne, Casillas paid $106 million for Chesapeake Energy’s interests in 260 vertical producing wells, 2,200 barrels of oil equivalent per day (boe/d) and 12,000 net acres, all HBP, in Garvin, Grady and McClain counties, Okla.

“As you come updip out of the central portion of the basin, you see the extension of the world-class Woodford and Springer reservoirs that have been delineated in the deeper part of the basin by Continental, Marathon, Newfield and others,” Casillas said.

The HBP component of the Scoop acreage offered optionality on timing with commodity prices, and additionally, Casillas wanted to be in a basin that had extensive drilling activity.

This past October, the start-up bolted on a portion of Continental’s Scoop assets, including net production of 550 boe/d and about 30,000 net acres (90% HBP), for $294 million.

Today, the company has two rigs at work. “We’re extremely encouraged with our results to date,” Casillas said. “We’ve drilled four wells and completed two DUCs that were acquired from Continental, and we are continuing to delineate our position.”

In the central portion of the acreage where it is currently drilling, the well results have yielded 30-day IPs of 6 to 8 million cubic feet per day, 600 to 650 barrels of NGL per day and 300 to 350 bbl/d. The team expects the northern and southern portions of the acreage to have a lower gas-to-oil ratio, with greater oil yields offering exposure to all commodity types.

The company is being more aggressive than its peers in the basin by increasing frack volumes to 2,500 pounds per foot and 3,000 gallons per foot for its completion design. With the well results to the west in the more developed part of Scoop, it is projecting an uplift of 25% in 30-day IPs and a 35% uplift in EURs with the larger completion.

Casillas is planning a 2-mile lateral development in the area for a majority of the prospective reservoirs. It may add a third rig in the third or fourth quarter. At the current pace, it has 25 wells scheduled for this year and expects to invest more than $100 million in drilling and completion activity in 2017.

After multiple sensitivity forecasts, Casillas has concluded that the assets are economic at $30, and at the current commodity strip, the returns today support their original projection of 40% to 80% RORs.

From the vantage point of the recovery now underway, Casillas said the team’s timing was spot on. “The window was closing, and people were starting to recognize the potential. Casillas’ two major acquisitions would have been difficult if not for the lower commodity prices.”

The company plans to boost its Scoop holdings to some 50,000 acres by midyear. Acreage prices are increasing dramatically, and activity is picking up.

“Insofar as long-term plans, all options are on the table,” he said. “But for right now, we are focused on value creation of our acreage and identifying/delineating as many reservoirs as possible.”

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