Gary C. Hanna is a self-styled motor-head. He enjoys tinkering with machines—cars and motorcycles—and when he gets some free time, he's out in his garage “working on things.”

The ability to coax best performance has been useful during his 30-year career as an oil and gas executive. Today, he is chairman and chief executive officer of EPL Oil & Gas Inc., previously known as Energy Partners Ltd., which emerged from a reorganization in 2009. He hadn't planned on heading up a public E&P, but after studying the company's shallow-water, central Gulf of Mexico holdings as an advisor to the noteholder during the restructuring, he saw value in the oily assets and thought the timing was good.

Six months after he'd taken over, the notes were fully paid off, and EPL was on the move. He spent the next year restructuring employee and business processes.

The E&P's engine runs on a blend of acquire-and-exploit and organic growth, having made the switch from natural gas to mainly oil production. The company has tripled its reserves and oil production in just three years. This year it moved its corporate headquarters after transitioning its geosciences and engineering teams from New Orleans to Houston.

Hanna spent the decade before he joined EPL managing offshore service companies. He started up Admiral Energy Services and served in various capacities at international services company Tetra Technologies Inc. and its affiliates, Maritech Resources Inc. and Tetra Applied Technologies Inc. From 1996 to 1998 he led offshore-focused Gulfport Energy Corp., long before it drilled in the Utica shale. He began his career in the Midcontinent, first leading Hanna Oil Properties Inc. and then DLB Oil & Gas Inc., after graduating from the University of Oklahoma with a degree earned in economics.

One of the biggest concerns for EPL early on was asset retirement obligations—but this was a business Hanna knew. Over the past four years, EPL has plugged 500 wells and taken out 150 offshore structures on its assets.

Two major acquisitions transformed EPL. It bought Anglo-Suisse Offshore Partners' central Gulf assets for $200 million in early 2011, gaining three main complexes and field areas. The fields, approximately 90% oil producing, were in the vicinity of EPL's existing South Timbalier and East Bay operations.

EPL doubled those reserves and production in its first year of ownership.

Then, late last year, another big step: the acquisition from Hilcorp Energy GOM Holdings LLC for $550 million of more shallow-water shelf interests. The assets were producing about 10,000 barrels of oil equivalent (BOE) per day, about 50% oil, at the time of the deal. Estimated proved reserves were about 36.3 million BOE.

The deal nearly doubled EPL's proved reserves to about 77 million BOE and was expected to drive production to more than 20,000 BOE per day. In early August, in a second-quarter 2013 earnings call, Hanna said production had risen 91% to 23,940 BOE per day, revenue was up 85% to $184 million, EBITDAX had climbed 84% to $132 million, and net income for the quarter was nearly $70 million, or $1.75 per diluted share compared with $35.4 million for the same period a year ago.

Based on these strong results, EPL increased its guidance for total 2013 production to 22,750 to 24,750 BOE per day, moved EBITDAX from $500 million to $550 million, and shifted capex to $330 million from $300 million. Hanna said he still expects free cash flow for the year to be “very strong, in excess of $100 million.”

Believing its stock doesn't reflect the value of its 2P and 3P reserves, its long-lived oil assets, its upside potential and financial discipline, EPL has, over the past 24 months, repurchased nearly 5% of its outstanding shares. It plans to continue buybacks.

In a recent interview, Hanna discussed EPL's strategy and the time line on development of its deeper prospects—the next catalyst for transformational growth.

Investor Many E&Ps could be considered overlevered; you've said EPL is underlevered, if anything.

Hanna Yes. We tend to throw off a lot of cash, so we accumulate liquidity going into each transaction. For instance, we essentially financed the Hilcorp deal by taking out senior notes, as well as with some cash, but we came out very quickly in an underlevered position, in under six months. At the high point our ratio of debt to EBITDAX was 1.6 times; today it is 1.1 to 1.2 times. We are conservative by nature.

Investor You also keep your spending below cash flow.

Hanna Our spending is by design under our cash flow. The central Gulf is one of the best cash-flowing basins—it's oily and flush production. We are oilier than the oil shale plays themselves, with 78% oil production. Also, we enjoy very good, premium pricing versus other plays, so our cash margin per barrel is higher.

We could outspend cash flow, but we don't believe it would be efficient from an activity level. We optimize growth and efficiency, which gives us time to do the science work we need to do.

Investor What eventual size would optimize efficiency?

Hanna I think we can double the size of the company and remain very efficient.

We typically drive down costs on the acquisitions we make. With the Anglo-Suisse deal, we cut 15% off the lease operating costs in the first 60 days. We did the same with the Hilcorp deal—these efficiencies are around transportation, vessel costs, chemicals, labor. We can drive costs down at the field level.

Our general and administrative costs are up less than 50%, yet we've tripled the size of the company. On a per-barrel basis, our cash G&A had been $3.50; this year we'll drive that to $2.75. That's the efficiency and scale of having more mass. We're not there yet in terms of optimal size; continuing our prudent growth will drive more efficiencies.

The question we sometimes get asked is, will you saturate your basin, become too large a fish in the pond? But the wild card for us is our opportunity in deeper sections of our existing production areas, around the flanks of salt domes.

These are prospects at depths of 12,000 to 20,000 feet—not ultra-deep, but straight-up, flank-type plays where we own prime acreage.

Investor What are the economics of the central shallow-water Gulf of Mexico wells?

Hanna We have concentrated on oil wells, and the economics are stout: the shallow Gulf shelf is one the highest-return basins due to low-cost drilling, high EURs (estimated ultimate recoveries) and production rates, readily available infrastructure, and premium pricing of our crude oil. We have done well in controlling our costs and marketing our product, leading EPL to have one of the highest cash margins, roughly $63 per BOE or $10 to $20 dollars higher than our shelf peers and oil-shale players.

A typical well costs $7 to $10 million to drill and complete, with payout under a year for most oil drill wells. Per-wellbore EURs range from 250,000 to more than 1 million barrels of oil.

For example, in our newly acquired Ship Shoal Field, the average prospect size is currently 1.3 million barrels of oil. Many wells are long lived at 10 to 15 years or more.

Investor What is your strategy with the deeper sections?

Hanna We made a clear decision about two years ago to be leaders in the science of this deeper play. We started a large regional 3-D survey, acquiring millions of dollars of 3-D, reprocessed it over our key assets, and have been able to also look regionally at what's going on. We're starting to see fruit from that.

Last year we drilled several wells with Apache Corp. at Main Pass to begin to test our theory. These were on the shallower end, at 13,500 feet, but highly successful wells—four out of five were successful. We'll continue this type of exploration with a very controlled burn, continuing to drill and learn.

Typically the cost of these is $15- to $20 million, while our typical well at about 7,000 feet is about $7- to $10 million. So, on the deeper horizon wells we will look to take a third to a half, either through a joint venture partner or a financial partner we can promote.

Investor You mentioned proving your theory on the deeper potential. What is that theory?

Hanna That significant resources exist within EPL's shallow-water acreage in depths from 12,000 to 20,000 feet, which is just below our current producing field pays. Recent technological advances now exist to allow us to capture high-quality 3-D seismic data at reduced costs. The bottom line is that through imaging the prospective resources better, we can reduce the risk profile of this play, which will allow for an expansion of exploration on the shelf.

Investor What is the time line?

Hanna We look at it as a three to five-year process. We've got 350,000 leasehold acres in the play, and we'll continue to add to that leasehold—we tacked on 40,000 in the past year. We're in a period where we can accumulate acreage for a reasonable cost, consolidate over the next year, enhance our position and break that code. It's always about de-risking to the point we can consistently drill these wells with material reserve additions and a high degree of success.

Investor How has technology changed to move this deeper play forward?

Hanna There's been a complete shift in the 3-D technology—in the cost and speed of reprocessing, the quality of the algorithms being written, and much more. Additionally, new 3-D acquisition costs have been driven down as the technology the majors were using in the deep water migrates to the shallow water, and we can now apply it on the shelf.

We can put billions to work over the next 10 years with high-impact-type projects—we have a long time to run in our basin.

The other factor is, with a lot of the majors leaving the area, we've been able to pick up very experienced oil finders, and we have a deep bench of geoscientists who understand how to use the data to give us an uplift.

Investor Are you also reprocessing seismic data over the Hilcorp properties?

Hanna Yes, in just two months' review, we have seen our total company 2P drilling inventory in the shallow depths expand to 79 projects, up 36%. This ramps the reserve estimate on our shallow drilling inventory to 65 million BOE in addition to the 16 million barrels equivalent on the base legacy assets.

Investor What do you anticipate your capex will be next year?

Hanna We anticipate it will go up methodically, the way it has over the past three years…to something north of $400 million for 2014. We're still developing and highgrading a lot of prospects off of the Hilcorp acquisition.

We anticipate we'll have free cash flow yet again, and we are deciding how to spend it—whether to return it to shareholders, or invest in technology. Thus far we've used it primarily for acquisition funding or to build liquidity. That's part of the fun of what we do and what makes it interesting.

Investor What's the best decision you've made since taking over EPL?

Hanna The best thing I've done is put the right people in the right places and allowed them to do their jobs. We are a very flat organization. We don't have a chief operating officer—the people that run the groups and TJ [chief financial officer TJ Thom] and the production teams report directly to me—that's it, from there, you're in the field. Beyond that I steer, and I spend a lot of time on capital allocation.

Investor What's the question you get asked most often?

Hanna What are you going to do with all that money, all that free cash? We've set it up so we have a good use for it going forward. We tell everyone to be patient; we try to put that discipline into the everyday running of the company. You can't succumb to the pressure of letting it burn a hole in your pocket.

“We made a clear decision about two years ago to be leaders in the science of this deeper play.”