How Do You Start a PE Backed E&P Company? A Panel Q&A

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On November 9th, I had the opportunity to be a part of an SPE Panel on Entrepreneurship and Innovation in the Oil and Gas world, specifically on starting a Private Equity Backed company.

Mark Bahorich of Q Engineering, a data driven technology solution to oil and gas decisions, was the moderator for the discussion.

Along with one of my partners at OneEnergy Partners, we answered his questions about what we did, what we learned and what we would pass on.

MB:  What Makes a successful team?

DRW:  Flexibility.  We were funded in part because of our ability to evaluate deals of every kind in every basin and find the best ones that matched with our sponsor’s desired exposure at the time.  We looked at debt, Bakken, Eagleford, Midland, non-op, JV’s and operated and bid on deals in all those spaces.  We didn’t have an office, so we built technology solutions to allow us to video conference from wherever we were in the world using only our computers and track our conversations in a CRM system.  And when we sold- we sold in pieces because that’s what the market told us to do.  We broke all the rules of conventional PE teams, but had success because we didn’t feel like we needed to fit in a box.  That was very sponsor specific, but also why we went with them.

MB:  What does the relationship with your capital providers look like?  How do they help you compete? LP vs PE investments?

DRW:  At the stage of our sponsor as a fund, we made a lot of sense together.  We both had flexibility that may be hard to replicate specifically, but it was the people at the table that made it possible.

MB:  How does your advice to those thinking about raising their first dollars differ from your advice to those who have exited a company and are looking to reload?

DRW:  Rule 1- is about picking up the phone.  Your first dollars are the result of your professional reputation and your network.  The team composition really matters- you need someone who understands “the money”, someone who understands “the commercial” and someone who understands “operations”.  A technical team without the other 2 elements isn’t fundable.

When you reload, you have the opportunity to have built some additional skills during your first success and roles can change, relationships can change and you can really hone in on what makes a successful working relationship over 10-15 years.  Shared vision, complimentary skills.

MB:  What do you think is different about starting a company now from when you first did it?

DRW:  I didn’t understand what raising capital was in 2012 when I first started and we didn’t raise money.  As that was failing,   I wrote a book about what I was observing and my learnings and re-reading it now, they are all exactly the same today.

The learnings the core attributes of raising money, building a company and selling one are the same, it’s just the details that differ.  To be sure, there is a lot of capital chasing deals now and I believe that we have moved to a “Drill your return” model for the foreseeable future which is different than some of the Land flipping success of the past- and I would include OEP in that.  We knew to make money in an investment in the Permian today will require a full drilling program and a 5-7 year time horizon so that’s where I think the next 2-3 years will head with private capital.

MB: What is the most helpful book/periodical/blog/website you have read on starting a company?

DRW:  I’ll pitch mine I guess- primarily because it was the result of losing $2.4 million of investors capital in 2012 to learn all the things I did that then allowed me to partner with the right people and sponsors in the last 5 years and have success but beyond that….

I’d say for oil and gas, there are a lot of people who are way smarter than me that have been able to do it- so talking to the people on this panel, understanding their ideas and then trying them out is pretty important.

MB: What do you wish someone had told you before you started?

DRW: Just because you are really good at your job, doesn’t mean you will have success.

Just because you have success, doesn’t mean you are good at your job.

Luck and timing plays a huge role in what we do because we are in a cyclical business.  So judge yourself by the process you have, the group of people you have put together and do the right thing.    Over the long run, those things will lead to a successful outcome.

MB: What advice did you take for gospel that turned out to not be so true?

DRW:  To be honest, the best analogy I have on this is it’s like having kids.  I heard the stories from my friends about it- but I didn’t believe them.  My experience as a parent was going to be different than theirs…. I was going to travel and eat out and be a cool parent who dragged my kids everywhere.  Then I had kids and I realized they were right and everything I thought would happen was wrong.

MB: What major discipline gets the most overlooked?  Geo/Eng/Land/Finance/Accounting/IT

DRW:  The one that “you aren’t”.  I meet groups of just technical folks or just finance folks and they say “I want to raise money”.  I tell them- you aren’t fundable.  You need balance.  It’s a question of how you leverage what you have but you need technical and commercial together.

I wouldn’t say IT is overlooked, but using data to understand the value proposition is your competitive advantage- so understand what your teams advantage really is.

MB: A Geologist, an Engineer, a Landman and a Banker walk into a bar.  some time later, oil gushes out.  What happened?

DRW:  If they all like each other, trust each other and do their job, they made a great team, made an acquisition and drilled some “risk adjusted wells”.  If they all think they know better, they are talking about all the deals they missed.

MB: How much of your final team do you have on staff before you close your first deal?

DRW:  I’ll say that broadly “It depends”.  The higher the G&A, the shorter the runway and the less flexible you can be.  When we closed our first deal, we had the same 3 folks we had day 1.  Then we built out the team to meet the organizational demands.

What is the first thing you do when things don’t go as planned during your investment?

DRW:  Assess why.  Is your thesis correct?  Are your bids correct?  Is your technical correct?  There isn’t a straight line between starting a company and shutting it down.  Focus on the process and the “why” of the thesis and evaluate how to get back on track.

MB: What is the first thing you do when things are picking up and your value starts to break even or hits a 2x?

DRW: The reality is…. You don’t really know if you are a 2x most of the time.  Something can be going great and the M&A market may be horrible- like it is right now- and no matter how good the asset is, you can’t sell it at a price that’s close to the value.  Other times, the investment may be going really poorly but the offset owner has a need to “do something” and writes you a big check and may ultimately look like “dumb” money.  To me, if you have accomplished your objectives for the asset and are in a place where you can’t generate significant incremental returns relative to the “working value” of the asset- you sell.  Now, if you told me you had a 3-4x and it was 6-12 months…. You cash in and go figure out what to do with round 2.

How do you manage things at home while building?

DRW:  When stuff is going bad, they are the people you go home to.  When stuff is going good…. They are still there.  I have coached my kids hockey teams, volunteer on the PTA at school, MC the auctions and been around.  At they end of the day, they are what matters most so don’t excuse absence as a necessity.  It isn’t.

MB:  How do you manage stress?

DRW:  Best way is exercise.  Worst way is drinking.  I’ve done both.  Exercise is better.

MB: What is the best way to handle conflicts in your team?

DRW:  Short term- ask the question “Can you live with it?” Most people can live with a 70 or 80% answer that looks like what they want.  Long term- work with people you’ve worked with before and keep the ones you work well with on the team with you.  A team that works together might have disagreements but they always get resolved.  It’s interpersonal conflicts that lead to problems on teams in my opinion- when people don’t respect each other any more.  Respect is built over a long period of time.  We have a pretty hard rule- everyone on the team has to have worked with a person we are hiring- or worked really closely with someone else who has.

MB: What is more important – ROI or NPV?

DRW:  It depends.  NPV includes time and the PE model is all about duration.  ROI for private balance sheets and public companies.  But both are important.

MB: Capital discipline has been the buzzword for over a year in the public markets.  Has this changed the game for you?

DRW:  Public companies are chalk full of a) huge inventory b) high debt or c) poor assets.    I think this combination has made the M&A market overall slow- though in the last week we have started to see the beginnings of deals we would expect which are public public nearly all stock mergers to fix problem b, detract from problem c but doesn’t solve a.  So I think assets are available to transact from publics but the exit is much harder as there isn’t a willing market right now for more inventory.  I think the next cycles for PE are going to be longer times, bigger teams and commitments, lots of drilling and lower ROI’s but on bigger capital deployed.

MB: What development technologies are you excited about?

DRW:  Our industry innovation generally.  I remember when I started in the Bakken- we had 11 mm wells, 300 lbs/ft ceramic fracs with 400’ stages and it took 35 days to drill a well.   Now….. man, some of the numbers I hear blow my mind.  I think each basin/play has a 5 year life from infancy to full development and during that time costs come down, productivity goes up and the cream rises to the top.

MB: Do you have a mentor?  How often do you meet?

DRW:  I have lots.  It’s less about how often I meet them, but when I do… I try to listen.

MB: What industry trends are you most excited about?  Which ones make you nervous?

DRW:  Excited- water management and recycling water are going to be the most important parts of development in the next 10 years in my view so excited to see that become really a core skill set.  Nervous- I wouldn’t say nervous but electric cars are coming; renewables are coming.  There is a supply demand equation on the natural gas and oil side globally that I don’t have a handle on but in 10 years when we look back – it will all make sense.  Just like the financial crisis of 2008 viewed in 2018.  We know how we got there and what we did to come out of it.

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