A background in banking helped Luke Essman prepare for his role as president and CEO of Midcontinent-focused start-up Canyon Creek Resources LLC, which he formed in 2011. He sold the most recent iteration last fall and has several deals in the works to launch Canyon Creek Energy II LLC.

Essman graduated from Oklahoma State University with a degree in finance and joined the Bank of Oklahoma’s management training program in Tulsa in 2002. He spent five years in commercial lending before joining Summit Bank, a small bank focused on oil and gas lending to private companies, which was sold to Commerce Bank in 2013.

As the industry emerged from the Great Recession, Essman saw opportunity in conventional resource development as others chased the emerging shale plays. He partnered up with a petroleum engineer, and they raised equity from family and friends for an acquire-and-exploit strategy in Oklahoma and Texas, creating value and cash flow through behind-pipe recompletions and operational efficiencies on conventional assets. They monetized their investment in 2014 via a series of sales to private equity-backed buyers.

In March 2014, Essman and his partner re-launched under Canyon Creek Energy I, this time backed by a $75 million commitment from ArcLight Capital Partners LLC. They built a company through a lease-and-drill strategy in the Arkoma Basin and sold to a public entity in September.

In a recent interview, Essman described Canyon Creek’s start-up strategy in a downcycle.

Luke Essman

Investor How did you manage to exit last fall despite the industry stress?

Essman The company pursued a grassroots exploration/exploitation drilling strategy. We entered based on a field-extension idea and went through a process of leasing with 20 field brokers across 80,000 acres. After drilling five stratigraphic tests, coring 500 feet of prospective rock and logging about 4,000 feet of pay, we concluded that we had a horizontal development play in three different benches in the Arkoma Basin. We grew the assets to the appropriate size to attract an opportunistic buyer.

Investor Was it a conventional play?

Essman Yes, initially it was a conventional target. We drilled vertically in conventional sands but in the process performed critical testing to put a bigger play together, using our interpretation of 3-D seismic across 40 square miles, just as horizontal drilling in the area was taking off. We focused on the Woodford Shale, which is typically dry gas in the Arkoma, but we were in the liquids window.

Investor As a former banker, what financial structure do you favor?

Essman We were fortunate that we used minimal debt in building our second company. I take a conservative look at funding sources and how we access cash. Funding via pure equity investment sometimes doesn’t look as exciting as using leverage to generate a higher investment return, but we were happy we could build a project during a time of falling prices and not be at the mercy of senior or junior debtholders. Now with a clean slate, we are set up for a great opportunity.

Investor What’s next?

Essman Our strategy is to invest in productive, profitable oil and gas ventures while refocusing on an acquire-and-exploit mentality. With prices low, you can buy in a $30/bbl environment and have the tailwind of upward price movement. You can follow the lower-risk investment thesis of buying production or readily available drilling and behind-pipe potential factoring in the cost of private equity capital and have an outlook for a successful venture. Our focus is to be in an offsetting zip code, so to speak, to current activity, and enter via a producing property acquisition to avoid greenfield ­leasing.

Investor Predictions for an industry rebound?

Essman The silent killer to development profitability right now is natural gas. The Midcontinent region is a strong gas basin, and this recent pullback in pricing is hurting returns due to pricing on associated gas.

On the oil side, I think Wall Street and those flooding the industry with capital don’t fully appreciate the underlying decline curves from unconventional horizontal development. I think we are going to fall off in domestic production and reach supply/demand equilibrium much faster than a lot of analysts think.

In the long term, with the steep decline curves, and the time it takes for a full-cycle development program to come online, I think we’ll be severely undersupplied. Out to 2020, I think we’ll be back up to triple digits for oil prices.

Investor Are there investment structures to pursue from the latest redetermination season?

Essman Banks have propped up E&Ps, and private equity has too, but they no longer want to invest in failing strategies. You see some companies and institutions going in to actually buy loans from banks. In an instance like that, we could buy the debt for a discount and take a senior debt position in a company. We’re not regulated, and we can come in and renegotiate with the management team. It shortcuts the bankruptcy process and allows them to restructure privately out of court. We could be involved in that.

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