Jim Craddock became chairman, chief executive officer and president of Rosetta Resources Inc. in February 2013 after serving as senior vice president, drilling and production operations, since 2011. He joined the Houston-based company in 2008, with increasing responsibility for drilling, completions, production engineering, operations, regulatory, procurement and reserves engineering.

He was a member of the leadership team that has been transforming Rosetta into an unconventional resource player with one of the industry's major positions in the Eagle Ford shale. In May 2013, Rosetta added a strong Permian position with the $824-million purchase of Comstock Resources' Permian assets.

For 2014, that bumps up the expected capex to about $1 billion, and the company now expects production to grow about 30%.

Craddock has more than 30 years of industry experience in exploration and production operations. Prior to joining Rosetta, he was chief operating officer for BPI Energy Inc., a start-up focused on coalbed-methane development. For more than 20 years before that, he held technical and management positions of increasing authority with Burlington Resources, including as chief engineer. He began his career with Superior Oil Co. after graduating with a BS in mechanical engineering from Texas A&M.

Craddock served as a member of the Texas Railroad Commission's Eagle Ford Task Force last year, but he is adding Permian plans to his agenda.

This year, Rosetta is launching Rosetta University, an in-house program where employees, including technical staff such as geologists and engineers, learn to be business-builders across all disciplines.

Investor You have so much running room in the Eagle Ford, why add the Permian Basin?

Craddock The Eagle Ford is a great asset for us, yes. We think it can deliver growth for several years to come. But it looks like it's going to be cash-flow positive this year, so we think our job is to go out and reinvest that. We'd been looking at a lot of other opportunities, including looking at the Permian for two or three years, and then this opportunity presented itself. The data we see is very exciting.

Investor What are your immediate plans?

Craddock We've announced we'll have four operated horizontal rigs running in 2014 in the Delaware Basin, and we already spudded three wells before year-end 2013. There are some nonop positions we have out there so that's harder to predict, and also, we have two operated vertical rigs. It's very gratifying that we're in an area with a lot of good operators. We've got folks all around us, so we see a lot of good data flow. That's a little different than when we were first in the Eagle Ford, which is so expansive that it took us a while to delineate.

Investor Your Gates Ranch Field in the Eagle Ford is turning out to be a great asset.

Craddock It sure is. We have to remind our younger staff members that these wells are tremendous; it's a rare career opportunity to work on wells like these, but for some of our younger folks, that's all they've seen so far!

Our intent is to run four or five rigs in the Eagle Ford and half of our activity is at Gates Ranch, consistent with the pace of 2013.

Investor With such good results, you are not picking up the pace?

Craddock We get that question a lot. We have had great discussions with our investors on capital allocation and pace. We've grown about 40% in the past few years, but there is a pace you reach beyond which the market does not reward. Our goal is to grow in the upper quartile of our peer group, and take the free cash flow to the Permian.

Investor What kind of EURs are you giving to Gates Ranch?

Craddock Between Gates Ranch North and Gates Ranch South, it's averaging 1.7 million barrels of oil equivalent (BOE) per well. These wells pay out in a year or less, depending on the commodity price you use. Our oldest wells there are about four years old, so we're seeing the curve start to flatten out, but, we feel we have 30-plus years of tail production.

Investor How have you changed the fracs over time?

Craddock In general the move has been to increase the amount of proppant, and use a heavier, higher concentration. We use intermediate-strength ceramic proppant—we think the extra cost is worth it. This is an over-pressured reservoir and we are constantly measuring it, testing it. We're convinced ISP gives us better prop-pant conductivity. We've also experimented with more stages per lateral, but there's a point at which the stages start to compete with each other. We typically would do 15 stages in a 5,000-foot lateral.

I am proud of the SPE papers our technical folks have written on this topic, and we'll bring our experience in the Eagle Ford out to the Permian—but of course, there's still a lot of science that has to go into it up front.

Investor How do you think the returns in the Eagle Ford and Permian will compare?

Craddock We haven't published any returns yet on the Permian for horizontals, but the vertical wells there have 26% to 40% IRRs. In general in the Eagle Ford, returns range from 30% to 100%, and at Gates Ranch it is 70% to

“You're seeing a lot of good well results moving north to Andrews and Dawson counties, so Gaines could be next.”

80%—and our asset at Briscoe Ranch is even higher, approaching 100%.

Will the horizontal rates of return in the Permian be better than in the Eagle Ford? We're not ready to say that yet, but we hope they'll be competitive.

Investor Do you have much shut in on the natural gas side?

Craddock We really don't. Obviously the concern is there is lots of new supply coming on from these plays. We're not gas bulls and we don't drill a lot of dry-gas wells right now. About 30% to 50% of our various production streams are hedged.

We have a great marketing group and in the Eagle Ford, it's been a good story from the standpoint of our team getting out ahead of it. We've therefore chosen to stay out of the midstream side of the business and let others bring their capital to it. We've got plenty to work on with our assets in the Eagle Ford and now the Permian, and that's a good enough challenge right there.

Investor For the longer term, have you considered adding a third core area?

Craddock We have. We've looked in other basins; we like the Bakken and certain plays in the Midcontinent, but in the near term, we'll be focused on smaller, bolt-on positions near our current assets. To add something more in a new area, it would have to be something our team is good at.

We have about 240 employees and we are growing—we're adding eight or 10 a month. Some of that's in order to gear up out in the Permian Basin. It's a real challenge to add folks in Midland right now—I stood in my first 20-person rental car line out there recently. It's amazing. I've been going out there for 20 years because I'm from Andrews. I grew up there.

Investor To what degree will you be hiking your budget in 2014?

Craddock Using more operated rigs is a bit of a proxy, but it doesn't imply the same spend necessarily. We're assuming a Permian rig can drill six horizontals a year, whereas an Eagle Ford rig can do 15 or more wells a year.

We're using multipad drilling in the Eagle Ford. If you look at our behavior there, early on we began some pilots on pads to test well spacing, and I would expect we'll do that in Reeves County; it's the place where we have the most data. But we have 13,000 acres in Gaines County too, which is less mature, so I'd love to see the industry do more in the Wolfcamp there. You're seeing a lot of good well results moving north to Andrews and Dawson counties, so Gaines could be next.

Investor Would you call Gaines County exploratory, then?

Craddock We would. We have a group here that does M&A and another that focuses on new ventures, and we would call Gaines new ventures. We allocate about 10% of our budget each year to new ventures. We didn't assign any value to the acreage we acquired in Gaines. Comstock had leased the acreage but had not yet drilled on it.

Investor Speaking of new ventures, what's your take on the Southern Alberta Basin?

Craddock We ration our capital carefully and we're not going to go after that next hot play at $20,000 an acre, but we do look at some new ventures. The Southern Alberta Basin was one of those forays, but they are not all going to work. This industry has a way of humbling us all—I never would have predicted what's happening in the Eagle Ford and the Permian. There's a lot of hydrocarbons out there, so you never know what play is going to be next. But we're not allocating any more capital to the Southern Alberta Basin, and the leases start expiring in spring 2014.

Investor In Reeves County, when will you go horizontal and what will that look like?

Craddock The verticals are Wolfbone but the horizontal wells are Wolfcamp. Just east into Ward County there's quite a bit of horizontal Third Bone Spring activity, so we're very interested in testing the Bone Spring benches on our position horizontally. From the top of the Bone Spring to the bottom of the Lower Wolfcamp, there is about 2,500 feet of gross interval and obviously, one horizontal can't fully exploit that.

The vertical Wolfbone wells accomplish three things for us: First, they are commercial. Second, they provide a lot of data from logs, sidewall cores, microseismic data and so on. The third thing is, they help us hold the acreage. Our technical folks are building depositional models and doing a lot of other work on this as we begin to drill the horizontal wells. Using four rigs and figuring six per rig, that's 24 wells for our operated rigs, and plus, there's a lot of activity around there on the part of our potential partners.

Our preliminary inventory in Reeves County is 611 locations (gross operated), so obviously we have a lot to do there.

Investor Remember when the industry complained that it had no drilling prospects?

Craddock I do. I used to think that myself! It's such a great time to be in this industry.

We are a pretty simple company; we're in two basins and with the type curves we have published, there is a lot of data available. Investors want to see us execute in the Permian and I agree with that. We'll just pay the revolver down and as we turn cash-flow positive in the Eagle Ford, the Permian will consume that capital and more. Certainly we don't like debt and we will keep our leverage on the low end of the range of our peers.

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