Fieldwood Energy LLC has made a big play in the Gulf of Mexico, buying up Apache’s $3.75-billion shelf business and more than 600 platforms. Here’s why.

Since 2010, Apache Corp. had been on a tear, acquiring $17 billion in assets around the world, onshore and offshore. This rapid deal pace included two large Gulf of Mexico shelf trans actions, both in 2010: the $2.7-billion purchase of Mariner Energy Corp. and the purchase of Devon Energy Corp.’s shelf assets for $1.05 billion. Now, in a bid to refocus on other plays and pay down debt, Apache has sold all these shelf assets.

The buyer? Fieldwood Energy LLC, a start-up with only 12 employees, but a splashy track record in the Gulf of Mexico. The people behind it are no strangers to Gulf waters. Chairman, chief executive and president Matt McCarroll has a history of building E&Ps offshore, selling, and coming back for more. This is Fieldwood’s first deal since it was funded by Riverstone Holdings LLC last December, but it is McCarroll’s second E&P start-up funded by that firm; the first was Dynamic Offshore Resources LLC, which debuted in 2008, then sold to SandRidge Energy in 2012 for $1.3 billion.

This isn’t the first offshore voyage for River-stone either, having backed Cobalt International Energy and Mariner Energy, as well.

Fieldwood, a private Houston company, entered the deal scene with $600 million committed by Riverstone and $25 million from Fieldwood management, to acquire and develop conventional oil and gas assets.

About his latest deal, McCarroll says, “We’d been looking at a number of areas, all conventional…but when this came along we dropped everything else. We’ve been working on this for a few months.”

In one fell swoop, Fieldwood becomes the largest producer and acreage holder on the Gulf shelf, managing the largest operated asset base in the Gulf waters to 1,000 feet deep. What’s more, it is now among the top five largest private E&Ps in the U.S. in terms of reserves and production: the deal brings 239 million barrels of oil equivalent (55% oil and 75% developed).

McCarroll says he may eventually expand Field-wood from there, to include Louisiana state waters or deeper water, but for now, he has plenty to do with 630 platforms on more than 500 blocks. Fieldwood intends to retain substantially all of the Apache employees who had been working these assets.

To close this transaction, Fieldwood obtained debt financing from five banks, and Riverstone has increased its equity commitment to the private company.

McCarroll, a Louisiana State University grad, started in the oil patch by buying oil and gas leases in south Louisiana in the early days of the Tuscaloosa trend. We chatted with him shortly after the Apache deal was announced. It was to close this month.

Investor Analysts have said you paid about $41,000 per daily flowing BOE (barrel of oil equivalent). Is that a fair characterization?

McCarroll In our minds, that is really an inconsequential metric. We try and focus on what it costs to get that flowing barrel out of the ground. We look at PV-10 and pay a multiple of cash flow and EBITDA. Looking at proved reserves multiples can also be misleading, because it doesn’t consider operating costs or P&A liabilities. We really look at the cash-flow metrics.

You have to make analogues between different acquisitions, of course…but in my mind, you need to consider how long those barrels will produce and what it will cost.

Investor So many companies avoid the Gulf of Mexico, citing that treadmill. Back in 2008, you said it was an unloved area challenged by high decline rates. That hasn’t changed, but you still like it. Why?

McCarroll Again, we look at cash-on-cash returns. We are not really scared of the re-investment risk in the Gulf that people always talk about. The largest field in this Apache deal, Grand Isle 43, was discovered in the 1950s and it’s still producing, still going strong. So yes, we think there’s a lot more to do out there.

We look at a lot of metrics, but this is rate-of-return driven and it’s about quick payouts. In a lot of cases, we can get our money back in one year or less.

In an asset base as large as this, there are so many opportunities to make money, from re-completions and workovers to more drilling, to farmouts and joint ventures, even to divesting some assets.

Investor The decline doesn’t bother you?

McCarroll No. People in other basins onshore face big declines too, but here, you get your money back quickly…plus, we have already executed hedges to lock in prices as high as $107 per barrel. The treadmill is a problem and it’s an opportunity; we look at it as an opportunity to generate high cash returns.

We love this business and we love these assets, and we’re not going to miss a beat. We have seven rigs running now and we see a bunch of other opportunities.

Investor The scale of this deal is huge for you, even after running Dynamic Offshore and other companies.

McCarroll This asset base is 2 million acres and nearly 1,000 producing wells. Clearly, we are the largest producer on the shelf, the largest private company in the Gulf, and one of the top five private companies in the entire U.S. in terms of reserves and production. We operate 90% of our production.

Keep in mind, this transaction has properties extending from Mustang Island to Mobile Bay, so there are a lot of synergies on operations and scale that we believe are possible.

Including contractors, we have 2,500 people working for us every day! One of the most important parts of this transaction is that we’re getting the entire group of Apache employees who work these assets. We bought the assets, but what we really bought is a business.

Investor How will your approach differ from Apache’s?

McCarroll At Apache they loved these assets, so this sale was about balancing their portfolio toward more predictable production growth. They have tremendous assets around the world, but when you’re a company of Apache’s size, growth is a lot harder to achieve. We’ll be 100% focused on the Gulf of Mexico, which is a huge advantage for us, and it’s being well received by the employees, who already are working these assets and know them well.

We’re going to acquire some new seismic data and we do have an active exploration program. Apache retains a 50% working interest in the exploration blocks and the deeper zones below the producing blocks.

Investor Will that include the deep shelf?

McCarroll The ultra-deep shelf won’t be our focus. We are playing in sands from 1,700 to 25,000 feet. This includes subsalt features, but in far younger sands than where McMoRan Exploration is exploring. Our deep program will target structures in and around salt domes, and is a continuation of the program Apache started.

Our partner, Energy XXI, just announced an exciting discovery on Main Pass 295 that is currently drilling and operated by Apache. So we’re excited about it and the broader potential of the play. [Editor’s Note: In March, Energy XXI and Apache inked a joint venture targeting salt domes across 135 blocks on the shelf.] A lot of what we’ll be doing is utilizing new seismic and reprocessing techniques in the deeper sections, to see things that we couldn’t see even five years ago.

Investor So do you expect to achieve a lot more growth than before?

McCarroll I think so. At Dynamic, we went from 8,000 or 9,000 barrels a day in one year and we doubled that in another year. Now, Fieldwood is going to be, by far, the biggest operator on the shelf. We are the largest acreage holder on the shelf and the largest producer. But we believe that the potential of these assets is tremendous, and we are very optimistic about the future.

Investor Will you be at the next offshore lease sales?

McCarroll Sure, we will.

Investor You said going public might be an option in the future.

McCarroll With all private-equity portfolio companies, there’s always an exit plan. You never know. At Dynamic we had decided to go public but at the last minute, we sold to another company instead. But we are not buying this with a short-term outlook for flipping it any time soon. Fieldwood is the largest private-equity commitment Riverstone has ever made as a firm. This business has generated billions in cash flow for Apache over the years and we believe that it will be extremely profitable for us as well.

As a stand-alone entity, Fieldwood is going to ensure that it has all the people and processes in place required for us to be a public company one day, should we choose to do so. However, we intend to keep all our options open and see what the future brings.

Investor Is there any change planned in capital spending through year-end?

McCarroll Our goal is to drill 35 to 40 wells per year as well as maintain a robust level of other operations projects. This is in line with Apache’s historic activity level. We’ll be spending more than $500 million per year of capital to keep that pace up.

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