Private E&P is Evaluating $500 Million to $1.5 Billion Opportunities in the D-J, Permian and Utica

Exclusive Interview with Oil & Gas 360

Fifth Creek Energy is a private E&P company, formed by Michael Starzer and Patrick Graham, the founders of Bonanza Creek Energy (ticker: BCEI) and its predecessor companies. Last week, Fifth Creek and Natural Gas Partners (NGP) announced a private equity funding commitment from NGP Natural Resources XI and other investors. Fifth Creek is one of the early investments in NGP’s eleventh fund, NGP Natural Resources XI, L.P., which closed in January with total commitments of $5.325 billion, according to NGP.

Oil & Gas 360® spoke with Pat Graham in this exclusive interview in which Mr. Graham details the formation of Fifth Creek Energy, its business and growth strategy, its recently announced private equity partnership with NGP and the target areas being prioritized by Fifth Creek.

OIL & GAS 360: How did Fifth Creek come about?

PAT GRAHAM:  Mike Starzer and I started Fifth Creek late last summer. We have known each other going back to the late ‘80s and started working together at Berry Petroleum in ’95 leading the acquisition team. [Editor’s note: Berry Petroleum merged with Linn Energy in 2013].

In the late ‘90s a group of Berry family members, Fred Holmes, management and others funded a new growth-oriented company: Bonanza Creek Energy. From the early 2000s to last year, Mike and I held management positions at Bonanza Creek. When we departed, we felt like we had placed Bonanza Creek in a very good position bringing together a quality team who can and will take Bonanza Creek to the next level of growth. We had accomplished our mission, so to speak, and we both retired from Bonanza Creek last year.

So that’s when Mike and I got together and formed Fifth Creek. We spent late last summer raising capital and reviewing assets. Everything came together in the last couple of weeks with the funding commitment from NGP.  We were thoroughly impressed with the NGP team and saw the combination of NGP and Fifth Creek as a really good fit of management styles and culture.

OAG360:  You and Mike have a tremendous track record with your previous companies; what are the similarities you see coming together at Fifth Creek?

PAT GRAHAM:  We see a lot of similarities. First, we’re taking what we have learned over the years in several basins—the things that worked, and what didn’t work so well—and applying our knowledge base to Fifth Creek. Mike and I have honed the technical assets that we are best at—our knowledge base is the most strong in multi-stage horizontal fracs. But we’re looking at vertical wells in certain plays too.

We have thus far focused on bringing together a team of people with strong technical knowledge, including Bill Irwin, our vice president of operations and John Smith, our completions manager, and accounting expertise in Cliff Linhardt, our Chief Accounting Officer, to move Fifth Creek forward, much the same as we did at Bonanza Creek.

OAG 360:  What are the plans for Fifth Creek – your presentation paints a shale play picture for the company – “horizontal drilling and fracture stimulation in areas of low uncertainty and high return potential.”  Could you talk about the areas, the geologies and plays that Fifth Creek is targeting?

PAT GRAHAM:  We mainly look for two things:

  1. Mature basins, predictable and repeatable development targets with low geological risk;
  2. Infrastructure in place.

When operating in a mature basin, you’re limiting the geologic risk primarily through vertical well control but also utilizing 3-D seismic which we feel is critical particularly in resource-type plays. We also prefer areas with mature infrastructure meaning oil and gas takeaway capacity which can be expanded as development in the basin increases, as well as plenty of service providers.  When you consider the Wattenberg, the Utica and the Bakken, for example, the base takeaway infrastructure is in place in those basins which can be expanded as development increases.

We intentionally didn’t geographically constrain ourselves. We believe we can take our knowledge base and apply it to any number of plays.

OAG 360:  Which areas and basins in particular are you looking at right now?

PAT GRAHAM:  The Wattenberg, the Permian going north into the Texas Panhandle, kind of combining those, and the Utica. These are all areas that have the size we want and offer a slate of assets that we want to build for Fifth Creek—the $500 million to $1.5 billion asset range. Those areas have the mass we need in order to get to where we want to be.  The goal is to monetize the company in about five to seven years—whether through a cash sale or an IPO, or whatever form it takes.

OAG360:  How will Fifth Creek deploy this recent infusion of capital – what’s the overall plan and timeline for the use of proceeds?

We’re striving to deploy that capital over about 18 months, and that’s on the long side. We’re reviewing assets now—hopefully by yearend we’ll have a substantial asset acquisition completed.

We are operating an asset now called Mustang Creek in the southern D-J Basin. There are very few wells drilled so far in the area. We are shooting a seismic survey which we expect to have completed in about two weeks. We plan to drill two wells by yearend. It’s laying out to be a nice play—like the Niobrara was five years ago. There’s a bit of geologic risk but we’re reviewing a lot of data and incorporating the seismic as it is analyzed. It’s a combination structural play with the potential for a larger resource play. We plan to deploy a portion of the capital in Mustang Creek within nine months and are reviewing larger acquisition opportunities which we would like to complete by year-end.

OAG360:  Pat, recent crude price swings have made deals difficult to get done. When you formed Fifth Creek, oil prices were north of $90, $100 a barrel in the late summer. Today we’re looking at about $50 a barrel.  How do you see the price of oil today affecting what Fifth Creek is doing at this early stage in the company’s development?

PAT GRAHAM:   With respect to the timing, it’s relatively early in this price drop. In other words, we haven’t seen too many distressed assets coming to market yet, but we would expect to see that by mid-year.

In our case we have redirected our efforts. In the higher price environment we were reviewing primarily joint ventures or drill-to-earn type of structures.  With the price drop and NGP’s financing, we are looking at a more developed type of asset—but not a fully-developed asset—we still prefer significant upside potential in an asset where we can utilize fracturing and horizontal drilling techniques. We believe in this price cycle we will be able to identify developed assets with the opportunity for upside potential.

OAG360:  As a seasoned energy investor and company starter, you’ve been through a few industry ups and downs. How do you see the further evolution of the North American shale revolution going forward, what will the oil shale landscape be during the next decade—what will the companies that thrive look like? 

PAT GRAHAM:  The companies that thrive will be:

  1. Low cost operators, and
  2. Tech-savvy operators willing to try new technologies.

The technology opportunities that we have today need to be fully understood and defined basin-by-basin. As an example, can the technologies used in the Niobrara be applied in the in the Bakken or optimized to fit this application?

As far as being the low cost operator, drilling and completion technology plays into that in a big way. There have been a lot of advances in the past five years. How do you approach a multi-stage horizontal frac in a certain location? How can you optimize those technologies that are out there and still evolving? The successful companies will take multi-basin knowledge and apply techniques that have been modified to work best to each individual play.

NOTE: additional details about Fifth Creek Energy and the company’s plans and business model may be seen on the company website.    

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