The recent commodity cycle forced many, if not all, exploration and production companies to reduce capital expenditure budgets, de-leverage balance sheets, enhance liquidity and reconsider their pace of development. After all, as price-takers in a commodity business, E&Ps must adapt to these cycles to endure and prosper.

Caerus Oil & Gas executives, left to right: Mike Vieau, director of corporate development, Jeter Thomas, CFO, David Keyte, chairman and CEO, and Matt Wurtzbacher, president and COO.

The last three major market cycles showed us companies can emerge better and stronger, however. Companies that leverage their strengths to eliminate corporate constraints and, more importantly, take advantage of opportunities in order to grow value for stakeholders, are the ones that succeed.

After speaking with a few private company executive teams, we quickly realized that some of them are very optimistic, bucking common sentiment, and are doing what they know best to thrive in the current market.

“It’s an auspicious time in the industry right now,” said David Keyte, CEO of Caerus Oil & Gas LLC, based in Denver. “The private oil and gas company world is doing notionally better than the public world because, for the moment, we have better access to capital.”

Keyte was quick to admit that this is a phenomenon that doesn’t happen very often.

He’s right. Public companies can and have accessed Wall Street’s deep pockets to fund extensive exploration and development programs. But public equity and debt investors have been burned by the drastic decrease in oil prices and have become a little more risk averse in their energy investments.

This has opened the door for private equity firms and other nontraditional sources of capital to fund attractive investments in private companies looking for growth capital.

Keyte said the private capital markets are definitely taking market share from the public capital markets right now.

Conventional thinking

Caerus was founded in 2009 with an eye toward acquiring conventional oil and gas assets that were being divested by public companies seeking to move as quickly as possible into shale plays.

The deal flow provided to Caerus by the “shale-rush” in 2009 is eerily reminiscent of the opportunity set being afforded to the company today, driven by companies needing to sell assets to improve liquidity or sharpen their focus.

In February 2013, the Caerus team entered the Northeast Wattenberg Extension area of northern Colorado by purchasing acreage from PDC Energy Inc. At the time, public companies like PDC were more focused on the core Wattenberg area in Weld County. Since then, Caerus has built its position in the Northeast Wattenberg extension area with more than 100 leasing transactions on 26,000 net acres with control over 27, 1,280-acre drilling units, and is looking for more.

“We don’t chase hot plays,” said Keyte. “We have an experienced management team with significant experience that, in this case, was able to identify an attractive asset before activity in the extension area started to ramp up.”

The industry has since come around to Caerus’ way of thinking. Today, Caerus’ acreage is surrounded by the likes of Noble Energy, Whiting Petroleum, Bonanza Creek Energy, Synergy Resources, Bill Barrett Corp. and others.

“We’re seeing very good results from other operators around our acreage, but we don’t anticipate seeing the kind of EURs that have been publicly announced,” said Keyte.

At current prices, Keyte believes wells with one- and two-mile long laterals drilled in the Northeast Wattenberg Extension area can generate internal rates of return ranging between 20% and 30% respectively at prevailing commodity prices.

“Last December, and again in May, we looked at raising $100 million to kick off our Wattenberg project,” he said. “The timing was poor, and that’s being kind. When prices improve, we’ll hit the pavement again and we’re confident we’ll receive the funding to support our first 200 wells.”

Unlike public companies, Caerus, as a private company, has the luxury of waiting for a slight rebound in commodity prices before embarking on its drilling program in the Northeast Wattenberg Extension.

Caerus’ foundational asset is its 310,000-net-acre stake in the Rocky Mountain region, where it produces about 75 million cubic feet of natural gas equivalent per day (MMcfe/d). Year-over-year at June 30, 2015, the company grew production 53%, driving revenues and Ebitda up 33% and 34% respectively over the same time period. It also reduced debt in that time frame and has had no new equity investment since 2013.

Caerus Energy, a new subsidiary of Caerus Oil & Gas, has recently been reloaded with a fresh equity commitment by Caerus’ equity investors and is looking for additional deals, focusing primarily on oil and liquids-rich gas.

“Our view is that things will recover, and as an investor in the space you have to work within the piece of the cycle that is presented to you. It is a bright green Buy signal now. Our capital structure is strong, with a debt to Ebitda level of two to one, and we are 80% hedged through 2017 on all products,” he said.

“We’ve been built for this kind of situation, and we hope to exploit it to emerge stronger in some form or fashion.”

Felix Energy team members from left to right: Skye Callantine, CEO, Megan Walerius, landman, Andy Dunleavy, land manager, and Michael Horton, vice president, land.

Eye on the prize

One private company that seems to be gliding atop commodity headwinds is Felix Energy, a Denver-based E&P currently focused on the Stack and Cana Woodford plays in central Oklahoma.

Despite the current macro environment, Felix has grown production to more than 8,500 boe/d and continues to report project economics that rival the best-known resource plays in the U.S.

Since its founding in 2013, the company has quickly built one of the largest operating positions in the play and is leading the industry effort to reduce costs and increase production performance. The company has a proven management team of top-tier technical talent that is focused on value creation for its stakeholders in a unique way.

“We’re focused on commercialization,” said Skye Callantine, Felix’s chief executive. “We go into identified resource plays and work on both sides of the margin—cost and production rates. Then, once we’ve made the play commercial, we sell it to someone who wants to fully develop the project.”

To Felix, the Stack and Cana Woodford are interchangeable terms. It believes the core area is more than 750 square miles with a pay horizon that’s more than 1,000 feet thick. In two years, the company has aggregated 80,000 net acres in what it thinks is the sweet spot.

“The Oklahoma Stack play is much like the multizone, stacked pay stratigraphy of the Permian Basin,” said Callantine. “There are up to six individual benches in the 1,000-foot column we’re pursuing—two in the Meramec and two in the Woodford, as well as the Hunton and Osage.”

Callantine said the Meramec and Woodford are the most well-known but the Hunton and Osage are both productive, saturated and provide near-term upside potential. Using today’s price and cost assumptions, Felix believes it has an inventory of more than 1,000 operated locations in the Meramec and Woodford alone.

Callantine explained a large misconception about the Stack and Cana Woodford plays. Many industry followers believe the seven or eight companies operating in the play are still in de-risking and exploration phases.

“The opposite is actually true,” he said. “We’re in development mode out here. There are 28 rigs running in the entire play and the consistency from well results coming from the industry shows the true sustainability and viability of this play.”

Felix is currently running three rigs of its own and recently drilled its 25th Meramec well. It also has working interests in more than 75 Stack wells. Backed by EnCap Investments and a J.P. Morgan-led credit facility, Felix has strong capital partners to support the company through its commercialization efforts.

One challenge Felix continues to confront is educating nonbasin players about the play. Public operators successfully drilling the Stack are reporting EURs of more than 1 million barrels per well.

“New play economics are always scrutinized,” Callantine said. “But even at today’s strip prices, depending on where and what we drill, our Felix wells are generating greater than 40% rates of return and outperforming our 1.4-million-barrel type curve—these aren’t forecasts, these are producing wells using actual drilling and completion costs.”

Felix and the industry are concentrating on four main aspects of the drilling and completion phases to boost production performance: the lateral placement, stimulation design, lateral length optimization and flow-back procedures.

The successful efforts of these initiatives provide a boost to the project economics.

“We’ve seen a 50% increase in productivity in the last 12 months,” he said, “and reduced our costs by 40% in the last 12 months—this has all been done against the tidal wave of bad news with commodity prices.”

While maintaining its focus in the Stack, Felix is also actively looking for new partners to work with on new projects. The company has been re-funded for a second entity that will have a similar focus to what it’s done in the Stack and Cana Woodford plays in Oklahoma.

Brian R. Brooks is an associate director at EnerCom Inc. with more than six years’ experience providing strategic communications consulting to global E&P and oil service management teams.