Gene Shepherd: “…The resource-play phenomenon was slow to come to the Permian…We latched onto that as an opportunity….”

Why not return to the Williston Basin? Gene Shepherd, chief executive officer of Brigham Resources LLC, was asked this in a DUG Permian 2014 post-presentation Q&A session in Fort Worth in May. Bud Brigham, Shepherd and other Brigham Exploration Co. leaders sold the Bakken-focused company in 2011 to Statoil ASA. Their new company, backed with some $650 million of private-equity commitments, is focused initially on the Permian and Illinois basins.

“When Bud Brigham and I left the company, after we sold, we didn’t have a non-compete,” Shepherd said, “but we felt like we had 100 employees who stayed behind, so we morally elected not to go back into the Williston Basin.

“And, frankly, as for the working-interest opportunity, that train had left the station. It got really expensive, particularly for a private-equity-backed company. It was getting more expensive as we were preparing to monetize Brigham Exploration.”

Mike O’Shaughnessy, chief executive officer of Bakken-interest-owner Lario Oil & Gas Co., said, “Gene, we miss you up in the Williston. We enjoyed doing deals with you guys.”

Shepherd joked, “Would you sell us some acreage then? But at a reasonable price?”

O’Shaughnessy replied, “I don’t think the word ‘reasonable’ is being used there.”

Shepherd quipped, “That’s right; it’s not in your vocabulary.”

If not the Williston, then, the other attendee asked Shepherd, why has the new Brigham chosen the Permian Basin as part of its initial portfolio than, for example, the Eagle Ford?

Shepherd said, “Bud is from Midland and I started my career with Amoco (Corp.) in West Texas. We have lots of relationships out there. What we saw was the resource-play phenomenon was slow to come to the Permian. It is really remarkable to me that the Permian would be behind the Marcellus, the Williston and the Utica, given its stature in North America. We saw that opportunity. All of these independents were happy with drilling vertical wells. We latched onto that as an opportunity and it’s worked out for us.”

The team is continuing to push how shale plays are made. In the Bakken, Brigham Exploration had stepped out of the box—albeit at a much higher, initial cost than other operators—by being the first to push fracture stages beyond fewer than a dozen to 18, 24 and 30 and, ultimately, 38 before selling to Statoil. In the deepest part of the basin, west of the Nesson anticline, it also used higher-cost, ceramic proppant exclusively to assure well life against crushing. Except for old-fracturing-technology trials in the company’s first 11 wells, its next 150 wells IPed with more than 1,000 barrels upon its sale to Statoil.

Now, in the Permian Basin, Shepherd said, the new Brigham is investing upfront in casing, for example, setting the stage to return to its wells to re-enter with more laterals and in multiple formations. “We’ve run a lot of our casing program to allow us the flexibility down the road to come back and put a hole in it,” Shepherd said. “We’re not initially (drilling multiple laterals), but we’re creating the flexibility to do that down the road.”

Another attendee asked how the company chose, within the Permian Basin, to lease in the Delaware Basin and not the Midland Basin. Shepherd said, “We have tried the Midland, but it is more competitive. We tend to gravitate toward plays that are slightly more early-stage...It is about six to 12 months behind the work in the Midland Basin.”

And, Midland Basin competitors for leasehold are well moneyed up, he noted.

“(Pure-players) RSP (Permian Inc.), Athlon (Energy Inc.) and Diamondback (Energy Inc. shares) are trading at about $35,000 an acre. You have this big gap in the A&D market and the equity market. There are (more) companies in the pipeline that will be going public in the next 12 months and that will continue to close that gap…

“Right now, I hear institutional investors are shorting the Williston and want to go long in the Permian, as they perceive there is more (formation) optionality in the Permian. That is, sort of, driving the valuations. There just isn’t enough market cap for them all to pile into.

“That has created an uplift in valuations and those public companies, in turn, get to use that currency directly or indirectly to buy acreage: They can use cash and go to the public markets and sell common stock (to fund it) or they can give somebody their common.

“So, when those guys show up and want to own something, we’re not in a position to compete.”

In a separate Q&A session, members of a play-economics panel were asked if the Permian is peerless in North America in its areal or productive extent.

Darrel Koo, senior associate, energy research, for ITG Inc., said, “In the Lower 48, in terms of resource potential, it is certainly one of the biggest plays out there. The stacked-pay opportunity is one of the biggest drivers. For example, the Bakken (play) is, essentially, just the middle Bakken and, in some cases, the Three Forks; whereas, in the Permian, we have seen successful tests in (Wolfcamp) A, B, C and in the Cline, and we’re starting to see some encouraging results from the middle- and lower Spraberry…

“So, the resource potential is quite significant. It is probably, arguably, the most significant in the Lower 48.”

Benjamin Shattuck, upstream analyst, Lower 48, for Wood Mackenzie, said, “I wouldn’t say it is peerless; it is different than the other plays in the Lower 48…There is a lot of heavy lifting to be done with a lot of running room and it certainly stacks up favorably….”

Raphael Hudson, director, upstream research, for Hart Energy, said, “Its difference is it is a more forgiving environment. If you look at the sweet spots of the Eagle Ford, for instance, it is a very narrow band. If you’re EOG (Resources Inc.), you’ve hit pay dirt. But, if you’re Forest Oil (Corp.) just to the north, you’ve lost 80% of your market cap in only a few years’ time.

“The areal extent and number of horizons you have in the Permian allow you greater opportunity for repeatability. That’s what I would say is more unique about it: It’s more forgiving.”

–Nissa Darbonne, Author, The American Shales; Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.com, UGcenter.com. Contact Nissa at ndarbonne@hartenergy.com.