Jordan Blum, editorial director, Hart Energy: I'm Jordan Blum, editorial director of Hart Energy. We're here at SUPER DUG in Fort Worth. I'm joined by Gene Shepherd, the founder and CEO of VTX Energy Partners. So y'all just bought into the southern Delaware Basin.

Gene Shepherd, founder and CEO, VTX Energy Partners: Bought back in.

JB: Bought back in, exactly, dating back to the Brigham Resources days.

GS: Absolutely.

JB: Can I get you to just talk a little bit about how this deal came about and also the [asset], I think [is] nicknamed the Red Bull asset. Kind of how it was something you've had your eyes on going back eight years ago.

GS: Yeah, well, so we sold a business that was Brigham Exploration, that was Williston-focused, and then reconstituted as private equity-backed and went to the southern Delaware. And at the time, the southern Delaware was this vertical wolf bone play that was not working out. And so we got some financial backing from Warburg, built an acreage position there, and grew it successfully over time. I think we amassed 80,000 net acres and drilled 57 delineation wells across the acreage position. That was back in 2014 and [20]15 and [20]16. But in parallel, we were having conversations with Delaware Basin Investment Group about their asset that was immediately to the west of us. And in our efforts to try to grow the position that we had primarily in Pecos County, we had conversations with Delaware Basin [Investment Group] about the opportunity to put the two businesses together.

We actually filed a registration statement in 2016 to take Brigham Resources public. And fortunately, or unfortunately, we weren't able to convince them that it was a compelling proposition, which probably worked well for us because we ended up selling our position to Diamondback in 2017 and then went down a different path. But it's funny how, but in addition to drilling these wells and collaborating with them on a whole host of operational issues, we were talking to them about a combination. And so it's funny…and we continued to stay in touch and we got backing from Vitol back in February of last year—that was at the top of the list. And so had some conversations with the CFO of Delaware Basin [Resources] about what their plans were. And he said, “well, the end of [20]22, we're going to grow production.” They had four rigs working. “We're going to grow production and then probably sell the business.” Blackstone wanted to get out of upstream and so [investment banking firm] Jeffries launched the process and, fortunately because Vitol is an all-cash buyer and can move quickly, we were successful.

So, it's sort of funny, it feels like we've come full circle. After we sold Brigham Resources to Diamondback, we went to some other basins, and then here recently we've come full circle back to the Delaware, which it's a great basin, a great opportunity because it's not as consolidated. There's not, at the present time, a real active consolidator in the southern Delaware. So I think we'll be able to hopefully take this position as sort of foundation and be able to add to it over time.

JB: Is the goal kind of to get more of a contiguous, bigger position?

GS: Well, that would be a good…the answer's yes.

JB: But that's easier said than done.

GS: Yeah, easier said than done. I mean, well, I think, realistically, we'll have…Delaware Basin had four rigs running, we're going to drop a rig, we'll have three rigs. We've modeled really two rigs is what we anticipated, but it might be that we keep that third rig working sort of subject to maybe getting traction on some other opportunity. Ideally, it would share a lease line, but as long as it's in the southern Delaware and you know, ideally, you know, more or less the same operational opportunity, then I think it doesn't have to share a lease line. So I think the plan would be Delaware Basin was skewed more towards proved, developed, producing [PDP]. They had a nice inventory of drilling locations, but on a relative basis, it was a smaller percentage of the transaction than maybe what we would've liked. So any future opportunity we capture I think is going to need to be skewed towards capturing incremental, undeveloped.

JB: Very good. Is it kind of a double-edged sword in the southern Delaware where it's maybe the best place to be, but the fragmented nature kind of hinders a bit?

GS: Yeah, I mean I think the Permian's great and the southern Delaware is competitive. It's just in the southern Delaware, we don't have… Right now, Diamondback seems to be they have a big position in the Delaware, but they're focused more heavily in the Midland Basin. And then you have Pioneer in the Midland Basin. So those are two formidable competitors. And so the fact that we don't, right now at the present time, as I said, there's not an active consolidator. Permian Resources is active, Continental has moved into the basin and I would guess that those companies will compete for opportunity. But we'll see. It's plenty of opportunity and the Permian is competitive, but the southern Delaware may be not quite as competitive as other places in the Permian.

JB: Gotcha. Now obviously you want to grow in that contiguous nature, but are y'all looking at like say northern Delaware as well or can you kind of compare and contrast.

GS: Yeah, I mean we would, and we have looked up there. It's a little different regulatory environment, but because we haven't operated in the northern Delaware, it's probably not as ideal. There is the nature of those rocks and some places actually superior to where are, so they're offsetting pluses and minuses. The answer is yes, we would, in a perfect world, we'd love to take advantage of the operational expertise we have where we are and just, you know, drill across the lease line. We'll have to see how that works out for us.

JB: Not looking back at the Bakken again, are we? Not that full circle a second time?

GS: Well, no, you never know, right. But there are some opportunities in the Bakken that would be of interest to us and that have size. Bakken feels like maybe a little more mature and there are very active consolidators in the Bakken, and so, you know, you'd never know. I'm sort of surprised we got traction on Delaware Basin and it's always, when you go into these competitive processes, you have a hard time handicapping what your chances of success are going to be. But the fact that Vitol that they're all cash and at close, we did $100 equity transactions. So they are a unique funding source for us. I mean, there are probably few parties out there that have the depth of understanding, combined with the financial resources that Vitol has. I mean, they're probably one of the more sophisticated groups in our industry in terms of understanding the outlook for the commodity. And so right now I think they're very constructive on the outlook for oil prices. Maybe not in the very immediate near term, but that sort of underpins this investment that they have that's driving their investment through us.

JB: But hopefully more cash deals to come.

GS: That's the plan. Counting on it.

JB: Very good. Well, no, thank you so much for taking the time. Thank you for joining us here at SUPER DUG. For more information, please read and watch online hartenergy.com.

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