South Texas wildcatter Rod Lewis got into the oil and gas business because of bad eyesight. The founder of San Antonio, Texas-based Lewis Energy Group, now the second-largest producer in South Texas, got his degree in criminal justice more than 30 years ago and a job in the district attorney's office in Laredo. His ultimate goal was to join the Federal Bureau of Investigation, only to have nearsightedness dash that dream.

Instead, Lewis snatched up an opportunity to train to be a gauger for Stampede Energy, a Canadian company with production near his hometown of Encinal, near the Texas-Mexico border. Following the snub by the FBI, Lewis had retreated to his family's ranch to ponder career options, and his engagement to Kim Spicer motivated him to find work—any work. He took the first job available. As they say, the rest is history.

Driving two hundred miles daily across the South Texas desert servicing wells appealed to the young Lewis. Four years into his new career, in 1982, he came across an opportunity to buy a gas well that was to be plugged due to its distant location and dilapidated condition. "It was a four-hour round trip," he remembers. "It was so remote that the guy taking care of it ahead of me just wasn't doing a good job."

“It’s not solely the Eagle Ford that we’ve ramped up. We hold the heart of the watermelon in the Escondido,” says Lewis Energy founder Rod Lewis, with 10 company-owned rigs running, going to 13. And, “I think the Olmos is going to be the next big play.”

Together with his father, Lewis put together all of his savings and bought the Williams & Williamson #1A for its salvage price of $13,000, he holding 60% interest. Lewis reworked the well with his knowledge as a gauger, got it producing, and it eventually paid out. His 12- to 15-hour days servicing the well laid the foundation as an upstart operator.

The father-son corporation with the moniker Lewis Petro Properties soon brought in a 40% heads-up partnership with the Harte family and, together with bank financing, began buying production, a model he's followed through the years. For years the company was small and family run: his wife Kim ran the office, and his kids rode shotgun and opened gates.

Today, privately-held Lewis Energy Group operates out of three regions and employs 730 people in South Texas, with several hundred more in its operations in Mexico and Colombia. It manages 1,400 operated producing wells, with current production of 230 million cubic feet of gas (MMcf) per day, going to 320 MMcf daily by year-end. Annual capex is $570 million.

Following a joint venture with British major BP Plc last year in the Eagle Ford shale, Lewis Energy flew onto the radar as an influential operator in one of the nation's most desired plays.

Eagle Ford hunter

Rod Lewis likes to drill in his own backyard. Over three decades he has targeted natural gas in Webb, LaSalle and Dimmitt counties in South Texas, with all of the company's operations within a 70-mile radius of his ranch in little Encinal. Legacy production flows from the rich Olmos and sour Edwards formations, but now Lewis Energy sits on 430,000 net acres ripe with stacked pays, foremost the Eagle Ford shale, as well as Lewis' own favorite new horizontal target, the Escondido.

The introduction of modern horizontal drilling and shale-busting completion technology to the play has redefined and supercharged the company, putting it on an unprecedented growth trajectory. In just 21 months, production has quadrupled and is still growing. The company has 10 rigs homed in on these two newly targeted formations, all of them now drilling horizontally. Three more purpose-built 1,500-horsepower rigs are scheduled for delivery by the end of June.

"We could have 20 to 30 rigs running right now, but we can't handle that. We want to grow under control," states Lewis.

The advent of the Eagle Ford shale shifted Lewis' paradigm. The entrenched local operator had vast experience drilling multilateral open-hole completions in the Edwards trend, and even unsuccessfully tested the Eagle Ford with similar completions.

Lewis Energy drilled its first horizontal well into the Eagle Ford shale formation in 2003, long before the spotlight was shone on the play. Having previously drilled 50 wells through the Eagle Ford targeting the Edwards formation, Lewis knew the zone showed gas, but it mostly it was an obstacle on his way to the Edwards.

"Every time we drilled through the Eagle Ford, it would kick the heck out of us. It was a troublesome zone," says Lewis. "The wells were hard to control and a few got out of control. We thought of it as a high-pressure, low-volume zone. We didn't think it would produce much gas."

Nonetheless, having had success in the Edwards with horizontal laterals, he decided to test the Eagle Ford. Choosing a disappointing Edwards well with three slimhole-completion laterals, Lewis came uphole 300 feet to the Eagle Ford and drilled a fourth 4,000-foot open-hole lateral using 2 7/8-inch tubing with a slotted liner. And it was a bust. The liner plugged up right away, and the well produced just 38,000 cubic feet per day.

Over three years he tested others, both vertical and horizontal. In all, Lewis Energy spent $25 million by 2005 trying to make the Eagle Ford work, a fortune to the still-small operator. Multi-stage hydraulic fracturing in horizontal wellbores drilled into shale rock was still an emerging technology in the early 2000s. The company met with Schlumberger in 2005 to diagnose an Eagle Ford well log, and the company recommended a newfangled Barnett shale-style completion. The price: $3.5 million.

"You've got to be kidding me," Lewis recounts. "The whole well only cost $1.8 million, and they want $3.5 million to frac? We blew that off. Sure enough, they hit the nail on the head; that's what we should have done."

But he kept an eye on the play and the developing technology, believing the Eagle Ford or Escondido held great horizontal-drilling opportunity—and he continued gathering leasehold position. Then Petrohawk Energy Corp.'s South Texas Syndicate #241-1H well targeting the Eagle Ford came bursting online in October 2008, breaking open the play.

"Petrohawk came to the dance with the right ingredients. They had experience in other shale plays and the capitalization that we didn't have. They proved this was a viable formation," he says.

Now, Lewis was ready to act. Sitting pretty on more than 230,000 acres prospective for the Eagle Ford shale, the company's land team, already cozy with South Texas culture and mineral owners, went to work doubling the size of its holdings.

And the Eagle Ford worked better than he imagined. "There was no thought at the time we were leasing that the play would be as big as it is today."

Since mid-2009, Lewis Energy has drilled 61 horizontal wells into the Eagle Ford, with 18 waiting on completion. Current production is 99 MMcf per day. The company is completing the wells with 5,000-foot laterals with 14 to 17 frac stages and pumping slickwater and sand. Initial production (IP) rates in the dry gas zone, in which 60% of its position lies, average 5 MMcf per day. In the rich-gas window, 3- to 4 MMcf per day with 250 to 400 barrels of liquids is the norm. Estimated ultimate recovery (EUR) is 5- to 7 billion cubic feet (Bcf) for lean wells.

When the Eagle Ford shale bandwagon came to town, including its many well-capitalized suitors, the company partnered with BP on 100,000 acres split 50-50, with BP putting up more than $200 million (although the exact amount remains undisclosed). It was a heads-up deal for Eagle Ford rights only, with no drill carry. "I'm not one of the lucky guys who get free wells," Lewis jokes.

But he does get control. In January, the British international oil company handed over all operations in the joint venture. It remains active in leasing, geology and engineering roles.

"It was about well costs," explains Lewis. "We were drilling wells side by side to them on our 100%-owned acreage and sharing information." And the difference in costs was painful to the traditionally low-cost operator, as the BP wells were significantly higher.

Eagle Ford shale technology has transformed Lewis Energy. Founder Rod Lewis, who owns and pilots a vast collection of WWII fighter planes, sits on 430,000 South Texas acres ripe with stacked pay.

Having its own service company, rigs and frac spread certainly helps Lewis cut costs. Lewis, who believes in being self-sufficient, has owned his own rigs and service company for 20 years to keep costs low and weather volatile periods like now. Facing relentless price increases and waiting periods, Lewis added his own dedicated frac spread in October to gear up activity, and is adding another in July this year. All of Lewis Energy's 28 wells currently waiting on completion will roll off by November.

And in spite of BP's role in the subsequent ill-fated oil spill in the Gulf of Mexico, Lewis is immensely pleased to be partnered with BP. "We're very happy with the relationship."

Beyond the Eagle Ford

But Lewis is not pinning his aspirations solely on the Eagle Ford. He sees stacked pay on his acreage with many formations ripe for modern hydraulic fracturing technology. In fact, the company has been aggressively leasing and drilling the Escondido formation, of which approximately 300,000 acres is prospective, overlapping its Eagle Ford activity.

"We hold the heart of the watermelon in the Escondido," Lewis says.

Maybe surprisingly, the horizontal Escondido play contributes nearly half of the company gas volume today, another 92 MMcf per day. "It's not solely the Eagle Ford that we've ramped up," he says. "It's the Escondido and the Eagle Ford." On average, the company keeps about five rigs seeking Escondido.

So is the Escondido comparable to the much-ballyhooed Eagle Ford shale?

"The economics are better," he claims. "It's rich gas and it's shallower."

A Lewis Escondido horizontally completed well produces 3- to 4 million cubic feet of gas per day, but with just 50 barrels of condensate. However, the gas is richer at 1,100 Btus, vs. 980 Btus for Eagle Ford gas. The biggest difference is depth: an Eagle Ford well at 10,000 feet costs the company $6 million to drill; an Escondido at 6,000 feet costs $2.5 million.

"We don't get the big kick of condensate that you get in the Eagle Ford in the liquids-rich zone," he says, "but we're drilling the Escondido in the lean-gas areas of the Eagle Ford. We don't have to drill a lean Eagle Ford well if we've got a rich Escondido well that we can drill in its place on the same acreage. At these gas prices, we'll drill those all day long."

The company has drilled 67 horizontal Escondido wells, of which 13 are awaiting stimulation. Lewis estimates EUR for an Escondido well is 3- to 4 Bcf, paying out in less than a year.

The Olmos, too, holds great promise, he believes. "I think the Olmos is the next big play," he states unequivocally. "It could be better than the Escondido. We could get into some areas that are very rich—1,200 Btus plus—and produce the condensate that we're getting out of the liquids-rich Eagle Ford."

He estimates 300,000 acres of the total to be prospective. "We have high hopes for the Olmos. We're drilling some of those now."

Similarly, the Edwards, Austin chalk and Pearsall shale hold vast upside potential considering today's frac technology.

An old favorite target of Lewis, the Edwards, is a viable formation for new applications, he asserts, but it produces lean, sour gas, needing a higher natural gas price to be economic. The company has yet to drill and complete the Edwards with Eagle Ford techniques, but "we're maintaining our acreage position because some day the Edwards is going to be good."

Similarly, he believes the Austin chalk holds a liquids-rich component. Then there is the deeper Pearsall shale at 16,000 feet.

"This isn't just a one-zone play for us. These stacked zones have a tremendous amount of upside," he says.

Mexico first mover

Moving a rig to the other side of the Rio Grande River was not a significant jump geographically, but when Lewis Energy won one of five master service contracts offered by Mexico's state-owned oil company Pemex in 2005, it marked the first time a U.S. company has produced natural gas in Mexico. The 80,000-acre block across the river from Lewis' operations in Webb County was the only 100%-exploration block offered in the round, and the terms were turnkey: drill, complete, build infrastructure and operate.

The Mexican constitution allows no foreigners to own equity in their reserves, so payment was based on a payout schedule tied to production. Lewis Energy was to pay all costs.

"Our block had nothing," says Lewis, "except an idea that we had—that these formations, the Olmos and Edwards, were across the river as well as on the U.S. side."

The approach in Mexico was different than a U.S.-operator model. Pemex required Lewis Energy to derisk the block one well at a time, then wait for results. The U.S. company drilled six each Olmos and Edwards wells, but results were spotty. Using natural open-hole completions with no stimulation, they tended to come on strong and play down quick.

"We were basically drilling exploration wells to identify what was on the block, rather than focusing on and drilling 20 Olmos wells. Pemex is learning now that you can't drill one well and sit and watch it, then go five miles away and drill another. But, he says, "The approach we're taking now is much different."

In the near term, Pemex and Lewis Energy plan to rework four of the Edwards wells, coming uphole to complete vertically, and drill one more well in a liquids-rich area, all at Pemex's expense. Lewis anticipates a flow rate of 1.5 MMcf per day per well, boosting Mexican production to 10- to 15 MMcf per day.

Lewis believes the Eagle Ford will be the ticket for success in Mexico. Pemex wanted the privilege of drilling the first Eagle Ford well in Mexico, and considering the contracted pay structure and the cost, Lewis Energy stepped aside and let Pemex drill on the block. "It wasn't economically viable for us to drill the first experimental well," he says. At an estimated cost of $20 million, the Emergente #1 IP'd at 4 MMcf per day and was flowing 2.2 MMcf per day after 45 days online.

"It's a solid lean-gas well, and not all zones are open. Considering there were problems with the completion, I'm very happy with the results. I think Pemex is too. It proves the Eagle Ford is a viable formation there."

Lewis will now move in a rig and frac equipment and focus on drilling the Eagle Ford solely, and will again resume responsibility for all costs going forward. "Once we get our vertical integration in place, I think it's a viable play again in Mexico. We can now drill one well after another and not have to wait six months after drilling to see how it does."

Mexican Eagle Ford wells will cost $10- to $12 million apiece, he anticipates. He plans to drill 20 to 30 a year over the remainder of his 15-year lease. Mexican capex this year will be about $150 million. The company has laid two 12-inch pipelines under the Rio Grande, and sells all the gas from Mexico into its own infrastructure in the U.S., more than 1,000 miles of pipe.

"Mexico is potentially a big growth area for us and, as it's just across the border from what we do in the U.S., in the next three to five years it's going to be important to our company."

And if the Mexican government ever changes its constitution regarding minerals ownership, "we'd like to be there."

Big targets in Colombia

Operating in Colombia can be a real quagmire. The rainy season lasts for months, and when it's raining, water covers roads by a foot or two, and bulldozers get buried in mud over their tracks. "It's a swamp," confirms Lewis. "You try to build all-weather roads. Once you build those, you're in pretty good shape."

The prize is worth the inconvenience. The company is currently producing 6,000 barrels a day of heavy crude out of the Llanos Basin 150 miles east of Bogota, with a 2011 exit rate estimated at 10,000 barrels. And while not every well hits pay dirt, the ones that do gush at 1,000 to 5,000 barrels a day.

"We have high hopes for Colombia," Lewis says. "Unlike Mexico, Colombia allows you to own the molecules of the product, so you've got a better chance of making big profits there."

Lewis Energy entered Colombia in 2001 via nonoperated interests, and by 2007 Lewis had grown into an operated position of 50% to 60% interest in 11 new blocks. This year the company has drilled five deviated wells at a cost of $3.5 million per well, with two more planned. "It's like drilling post holes," he quips. Its operating budget is $100 million.

The bilingual Lewis, who personally flies in once a month, has 200 local employees in Colombia.

The challenge in Colombia, however, is infrastructure. Takeaway capacity is limited, forcing Lewis Energy to choke back its biggest producers. "Even though you have the oil to produce, it doesn't necessarily mean you're able to produce all the oil you're capable of because of a shortage of pipelines and trucks."

Being self-reliant in Colombia is critical, and as in Texas and Mexico, Lewis is looking to be vertically integrated. The company already employs its own rigs and dirt-moving equipment for building roads and drilling locations, and is looking to build pipelines and buy transport trucks for moving oil over the mountains.

Lewis has also strategically partnered with Hocol, a subsidiary of Colombia national oil company Ecopetrol. Aside from advantages such as excellent management and technical staff, "They can generally find a way to market their oil," he says.

Lewis Energy’s Rig #4 drilling the Eagle Ford shale in Webb County, Texas.

Gas man

Having drilled for gas his long career, Lewis remains a proponent of the beleaguered commodity. "We're gas guys," he touts. "I'm 100% for drilling gas right now."

And while he plans to eagerly continue drilling his liquids-rich acreage, he has no plans to scuttle dry-gas drilling. The reason: he's stockpiling.

"Our volumes of gas will be substantial in a short time. I'm bullish. When this gas price turns, we're going to be sitting on a lot of a volume to sell at a much better price."

Can he drill dry gas economically? "I wouldn't be drilling if it weren't." His vertically-integrated business model helps immensely in turning marginal wells profitable.

But Lewis assures not all of the company's production is dry: 55% by volume is rich gas from the Eagle Ford, Escondido and Olmos. "We've got plenty of rich gas producing today."

Lewis Energy today is well capitalized with solid cash flow. In addition to partners such as BP, it recently closed a $750-million credit facility with a group of 15 banks, led by BNP Paribas. Looking forward, he anticipates adding yet another two rigs by year-end, and he foresees domestic production climbing to 500 MMcf per day by year-end 2012—doubling in growth yet again.

Is he still disappointed that the FBI opportunity didn't materialize?

"It turned out OK," says Lewis, always humble. "I'm enjoying what I'm doing and I don't know that I'd want to do anything else."

The Aviator

Look up into the azure South Texas sky and chances are the World War II fighter plane buzzing by is Lewis Energy president and chief executive Rod Lewis exercising one of his vast collection—or checking out the competition with pizzazz.

Born to an Air Force fighter pilot and having been around planes all his life, it’s not unexpected: Lewis loves to fly. And flying defines his business as well as his personal passions.

Aviation plays a crucial role in Lewis’ operations. “We use helicopters like pickup trucks,” he says. He and his management team, all proficient pilots, employ four helicopters to maneuver around the remote South Texas well sites, much like an offshore operation. “In one hour we can see a full day’s worth of what it would take you to drive around and see.”

Likewise, the company deploys four other aircraft, including two jets and two single-engine turbine planes, for making deals, getting in front of bankers, and overseeing its newbuild rigs.

Living on the ranch in Encinal with his family in those early years, covering vast distances for business and being back at home by nighttime to spend with his family was his first motivation to buy a plane for business. Now, living in San Antonio 100 miles north, the plane allows him to be on the ground in Encinal in 45 minutes.

“Bankers thought I was blowing money on airplanes,” he recounts. “They didn’t realize what advantage that aircraft brought us. We lived in the middle of the action, and we needed to get out of the middle of the action to make our deals or talk to our bankers. We were able to do that without spending a lot of time and get back to work. It gave us a big advantage to others.”

The culmination of his passion, though, is his warbird collection. Lewis owns 30 mostly American World War II fighters, all immaculately restored and kept in top flying condition. And Lewis himself is trained to fly them all, having logged 10,000 hours of flying time.

“I feel very comfortable in any aircraft,” he says.

He’s owned two since 1995, but it was a bout with throat cancer in 2005 that motivated his buying spree. “I started off naming American fighters that I would like to own.”

A P-51 Mustang. F4U Corsair. Grumman F7F Tiger Cat. Lockheed P-38 Lightning. Grumman F8F Bearcat. And others.

And he began buying, restoring and training on each. He has trouble settling on a favorite, when asked. The Tiger Cat, he notes, “is fun to fly fast and low.”

He has a soft heart for Glacier Girl, a famous P-38 with a twin-boom design. Glacier Girl was rescued from underneath 268 feet of ice in Greenland in 1992, having crashed-landed on a cloud-shrouded mission from Maine to Scotland during the war. Lewis bought the previously restored plane conditional on taking a package of five total warbirds, and has since restored the others.

“That’s what got me in the middle of collecting these World War II fighters, which I love and fly all the time,” he says. “I enjoy owning them and honoring the guys who flew these to fight for our country.”

Lewis keeps a rotation of four planes in the air regularly, and brings in specially-trained pilots to exercise them all once a quarter. Once a year he holds a fly-in at the airstrip at his Encinal Jardin Ranch, where over a three-day period he puts all of them in the air as well as guest planes. He also joins four airshows a year, typically in Houston, Reno, Nevada, Oshkosh, Wisconsin, and Chino, California.

When not in the air, he houses them in a 20,000-square-foot hanger next to his office at the San Antonio airport, and at the ranch. For information, go to www.LewisAirLegends.com, or email pr@lewisairlegends.com.

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