From Forbes

Retirement was boring. So Steve Chazen is spending his golden years building a new company with a bulletproof balance sheet to drill the sweet spots of the south Texas Eagle Ford shale.

Steve Chazen left his job as CEO of Occidental Petroleum in 2015 upon breaching the mandatory retirement age of 68. But retirement was boring. There was only so much time he needed to spend with his dogs or working on his book about the early postal history of Tibet (no joke). And he’s long been in the habit of swimming an hour a day in his backyard lap pool, so it’s not as if he needed to get out and be more active. “I traveled plenty before, never learned how to play golf,” he says. Thinking of going back to work, Chazen talked to some deep-pocketed friends, and a year ago Texas Pacific Group, the private equity giant run by billionaire David Bonderman, backed Chazen in a startup dubbed TPG Pace Energy Holdings. In May 2017 it raised $650 million in an initial public offering. It was a big vote of confidence in the staying power of old oil men that TPG Pace Energy started off with no assets besides the experience and wisdom of its well-seasoned chief exec. 

Chazen spent the next nine months on a kind of Goldilocks quest, scouting for just the right oil field to buy—not to hot, not too cold. He dismissed the so-called Scoop/Stack play of Oklahoma as overrated, unpredictable and “gassier than people think.” Meanwhile, the red-hot Permian basin of west Texas and southeastern New Mexico had simply grown too expensive at more than $70,000 an acre, and with the downside of insufficient pipeline capacity to get oil to market. 

Finally a deal came along that was just right. TPG Pace Energy announced earlier this year that it would acquire 360,000 acres in south Texas, in the Eagle Ford and Austin Chalk plays, for $2.66 billion. When the deal closes, likely in July, the seller, debt-strapped privately held oil company EnerVest, will get $1 billion in cash and 51% of shares in the company, which will be renamed Magnolia Oil & Gas (NYSE:MGY). 

The Eagle Ford is a somewhat contrarian niche. The swath of south Texas oil shale was an early focus of America’s oil fracking revolution—growing from virtually no oil production a decade ago to a peak of around 1.7 million bpd in 2015. EnerVest in 2016 had paid $1.3 billion for just a portion of its Eagle Ford position. When oil prices collapsed, drilling dried up in the Eagle Ford, and volumes collapsed 40% to 1 million bpd in 2017. Enervest is now in Chapter 11 restructuring. There’s still a lot of oil there. Last year EOG Resources drilled a well in Karnes County targeting the Austin Chalk zone that boasted a 30-day average production rate of 7,700 bpd.

Chazen felt the longer-term potential of the Eagle Ford was being ignored in the mad run in favor of the Permian. Besides, for him, the Permian was been-there, done-that. Upon joining Occidental in 1994, Chazen’s primary remit was to create value in Oxy’s sprawling U.S. operations. He was happy to stay out of the way of imperious CEO Ray Irani, who gallivanted the globe prying open access to oilfields. In 2005, when the international community withdrew sanctions against Libya, Irani was first in line at Muammar Qaddafi’s tent to negotiate the terms of Oxy’s return to the country. Chazen was content to stay closer to home, and he became convinced that the best place to look for more oil was where it had been found before. So he spearheaded Oxy’s 2000 acquisition of Permian-focused Altura Energy (a BP-Shell JV) for $3.6 billion. What Oxy paid for was just a collection of old depleted oil fields. What it got for “free” was an option on all the other, undrilled layers of oil-soaked rock deeper down. Chazen bet right that technology would unlock new tricks to crack those tough rocks. Oxy has sold myriad international assets in recent years to reinvest in the Permian, where it is the biggest producer at 300,000 bpd. 

With Magnolia, Chazen sees a shorter-cycle opportunity in the Eagle Ford of south Texas. Magnolia’s core acreage in Karnes County and the Giddings field is surrounded by successful wells drilled by some of the best in the business, like EOG Resources. They know what’s down there; there should be no geological surprises. Chazen says that in contrast to the wildcatting oil business of yesterday, this is more like manufacturing. 

The operations are already highly profitable, generating $66 million in free cash flow on $193 million in revenue, at a time when oil averaged $63 per barrel. The second quarter will look even better, with crude benchmarks now firmly above $70. “I want to be the low-cost producer,” he says. “The profits will drive the stock.” 

Chazen has an unassuming office in an unassuming office building in Bellaire, on the southwest side of Houston. He likes to eat at Cleburne Cafeteria over on Bissonnet, especially now that they’ve rebuilt after the latest fire. He and his wife used to live around here before his stint at Occidental, which mercurial founder Armand Hammer had headquartered in Los Angeles from the start. Chazen, amid a restructuring that included the sale of non-core oilfields in complicated locales like California, relocated Oxy to Houston. They were happy to trade Pacific Palisades to be back in Texas. 

If he had known beforehand what awaited him during his service with the U.S. Army’s canine corps in Vietnam, Chazen says he would have fled to Canada. He earned a Ph.D. in geology at Michigan State. He managed a moon rock repository for NASA, worked for a natural gas company, then headed up oil company M&A at Merrill Lynch for years. For decades Chazen has been a world-class philatelist, specializing in the earliest stamped and addressed envelopes or “covers” mailed via the earliest postal services of China, Tibet and Mongolia. He also collects letters and documents from the days when Texas was a republic; a prized specimen is one of two known letters mailed from the Battle of San Jacinto. He writes scholarly articles about these things. 

Over the past decade Chazen has enjoyed a ringside seat as the Great American Oil Boom has more than doubled domestic production from 5.1 million to 10.7 million barrels per day. And yet he dismisses predictions from the likes of Continental Resources CEO Harold Hamm that the industry can double output again. “We’re not going to get to 20 million barrels per day,” says Chazen. “It’s just too hard.” That’s because of the “treadmill effect” where  the rapid decline rates of so many new unconventional oil wells require more and more drilling just to keep a steady flow, let alone grow on top of that. The law of big numbers will be a significant impediment, he says. 

But not for a small fry like Magnolia. Starting off with two drilling rigs, Chazen expects production volumes to grow 6-10% a year from a current 46,000 bpd. Chazen has personally put up $16 million to buy TPG Pace/Magnolia shares around their offering price of $10. The stock (TPGE now, becoming MGY this summer) spiked to $10.75 in mid-May with the oil mini-spike. Market cap is about $1.3 billion against $300 million in net debt. 

He isn’t the least bit interested in making other big acquisitions. Chazen says Magnolia has enough acreage to keep it drilling for about 10 years, and there’s no sense in looking out any farther than that. Chazen says he can continue to improve the economics of their south Texas acreage by systematically buying royalty interests from the landowners from whom the land is leased. In Texas it’s standard for the owners to receive royalties, free of cost or encumbrance, of 25% off the top of any oil or gas produced from their land. Buying even slivers of royalty interests can dramatically improve the economic life of a field. “If you pay a reasonable price they’ll sell,” says Chazen. “If not, I won’t drill there.” 

He’s got a little friendly competition. Chazen is not the only silver-haired oil boss looking to make another go of it in the Great American Oil Boom 2.0. Jim Hackett, 65, former CEO of Anadarko Resources, came back to run Alta Mesa Resources, which is down 30% in the past year after making acquisitions in the Scoop/Stack. Then there’s Mark Papa, 71, who built EOG Resources and is now running Centennial Development (up 20%) with a big position on the western edges of the Permian. Joe Jaggers, 64, former CEO of Bill Barrett Corp., launched Permian-focused Jagged Peak Energy in 2013 with backing from Quantum. Jaggers announced in February that he’s retiring this year. T. Boone Pickens “retired” last year; he just turned 90. 

Chazen cherishes a low profile—he hopes, for example, that no one expects Magnolia to have a public stance on global warming. He says he “can accept the idea” that transitioning to a lower-carbon economy is “necessarily a good thing” that can be accomplished via the use of more natural gas in place of coal. He’s not concerned about the danger of peak oil demand brought about by electric vehicle advances. The world is currently using a record 100 million barrels per day. “Oil is still important. If people move from farms in China to the city they won’t allow themselves to be held back by people saying they won’t let you use more energy.” 

He doesn’t romanticize it: “I think about oil as just money in the ground.” The challenge is in getting it out as effectively as possible. And that’s a better brain-trainer than doing Sudoku. Chazen says he’s not building Magnolia to make a big score, although he has personally put up $16 million to buy shares. Once you’ve got what you think is the right land and the right plan, he says, it’s a lot of fun drilling wells and turning oil into money. “If I’m not aging well, somebody will tell me.”


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