Executive Q&A: Midcontinent Move

But in March 2011, he left the security of a mega-independent to take on a new challenge as the chief executive officer and president of a small-cap producer, Midstates Petroleum Co. Inc. The Houston company went public about a year later, in April 2012, under the symbol MPO. Crum has assembled a team experienced in the buy-and-build business model, and is applying the technologies so successful in unconventional plays to conventional ones.

Formed in 1993, Midstates had focused on the traditional oil-prone Tertiary Wilcox play in central Louisiana, perhaps considered sleepy by some in comparison to the buzz-worthy shale plays. But this past August, under Crum, the E&P vaulted into the burgeoning Mississippi Lime in Oklahoma in a big way, in a deal that established the first public valuation of the play’s potential. It did so by acquiring all the assets of one of the Lime’s first-movers, privately held, Riverstone Holdings-backed Eagle Energy Production LLC of Tulsa. Midstates paid $650 million, half in cash and half in convertible preferred stock.

After the IPO and the Eagle deal, on a pro forma basis, First Reserve Corp., which had originally funded start-up Midstates, now owns 28% and Riverstone and the Eagle management team own 31%.

The acquisition greatly diversified Midstates’ asset base, and moved it into one of the country’s fastest-growing plays with an estimated 600 gross well locations. A recent private placement of $600 million in senior unsecured notes covered the cash portion of the transaction and will help fund the company’s 2013 budget, which will be allocated half to the Mississippi Lime play and half to the Wilcox assets in Louisiana.

We talked with Crum to see what he expects at Midstates—and to learn whether the high-pressure Wilcox will respond to horizontal fracturing the way other conventional plays have. It could be the next big thing to be revived by shale-style drilling.

Investor When you joined Midstates, was the intent to go public?

Crum No, not initially. This was a company founded by Steve McDaniel in 1993. First Reserve Corp. made their investment in 2008. They originally expected to grow it to a certain level and then sell to a larger company. But at some point in mid-2011 we started talking about going public in order to grow.

Investor What is your vision for the company?

Crum We need to take good care of what we’ve taken on and deliver on the assets we have in Oklahoma and Louisiana. It will take us about a year to put everything together and feel we’re hitting on all cylinders.

We believe we have assembled a pretty salty leadership team here at Midstates and we think we can really grow the company. Like everybody else out there, we’re trying to recruit more young people and so, we have to have a message that we are here to stay and here to grow. I think there is going to be some more consolidation in the industry. We’re pragmatists about it, and if the right opportunity came along, we’d have to look at it.

On operations, as far as I’m concerned, we need three legs on the stool and we have two.

Investor For the third leg, what are you looking for?

Crum We’ve put together the kind of team that can operate anywhere. Our business development team was going through lots of opportunities last year when we were looking for our second leg. We started considering the Permian Basin because most of us here at Midstates

know a lot about it, but it turns out lots of other companies had noticed the Permian too. The competition was getting pretty heated. We continue to look at multiple opportunities throughout North America.

Investor So for now, you’re balanced between the Mississippi Lime and Louisiana.

Crum They are pretty close to the same size operations, with similar well counts and similar potential, so it feels good. The easiest thing to do is to expand where we are.

Investor With the closing of the Eagle Energy deal behind you, what is your new budget like?

Crum For 2013, we’ve guided to $400- to $450 million of capital and we’ll probably allocate half in Oklahoma and half in Louisiana. We do have some acreage in Kansas as well that we’ll be testing that could turn into additional drilling opportunities. We plan more than 50 Mississippian wells in 2013.

And one of our big goals is to get our debt metrics back in line. We are about three-to-one on debt-to-EBITDA and we’d like to get that back to two-to-one. Tom Mitchell, our chief financial officer, is focused on accomplishing that goal.He joined us in late 2011 from Noble Corp. Prior to Noble he had been with Apache for 17 years. I was there 16 years, so we kind of grew up in the same place.

Investor You bring a similar culture or mindset to the new company.

Crum Yes, and we also have several people here from the old Burlington Resources and other well-known, successful large E&P companies. Steve Pugh joined us as chief operating officer from SM Energy where he was senior vice president and general manager of their Shreveport operation after a long career at Burlington. Curtis Newstrom came over from Linn Energy as head of business development.

When we first announced the Eagle acquisition, some investors may have thought it was a little soon to be doing such a big acquisition. But it really shouldn’t have surprised anyone, considering who works here.

Investor You did make a splash when the Eagle deal was announced.

Crum A lot of people were after it because of its great Mississippi Lime position, but River-stone and Eagle were looking for someone who could raise their baby. That was why we were attractive to them. Everyone in their organization, even Eagle founder Steve Antry, has agreed to stay with us for the first year. It’s important to get this thing off on the fast track.

Investor And yet the Wilcox will still get half the budget?

Crum Yes; we see significant untested upside in the play. We are working the basic Wilcox structures people have drilled extensively in the past and that were abandoned or passed on to others. The Wilcox is made up of a lot of stacked sand sequences, just like other plays everyone is going after in the U.S., but the trend had been left untouched for many years for a variety of technical and commercial reasons.

We did studies of depletion-drive reservoirs and our drilling has proven we can successfully stimulate the Wilcox, and now we’re moving to horizontal drilling there. Thanks to fracing and horizontal drilling, the industry is moving from shales with nanodarcies to other formations with millidarcies. And in the Wilcox, we can commingle four, five, six intervals to make a good well.

Last fall we announced our first fit-for-purpose horizontal Wilcox well, at North Cowards Gully Field in Beauregard Parish. It was a great success and a perfect example of what we think we can do in the play. It tested over 1,600 barrels of oil equivalent per day, a solid well.

We are doing more horizontal drilling in the field, and depending on results, we could have more than 25 horizontal locations in the field. Keep in mind that this is still pretty new. El Paso E&P is working alongside us, and Halcon Resources shot a 3-D survey with the intent of going after the Wilcox and they’ve announced a well. Swift Energy has been in there for a while and plans a well nearby in 2013. We like it, but there still aren’t enough players trying things in this play, so we’d welcome more. This is really tight rock.

Investor What are Midstates’ most challenging issues?

Crum The same as for everybody. You’ve got to successfully execute your strategy and deliver results. We do feel like we have the right funding, the right assets and the right team in place—and the right backing.

Investor It appears the Wilcox is a challenge for now. You are pushing the envelope in Louisiana while seeing reliable results in the Mississippi Lime.

Crum We have drilled quite a few wells in Louisiana but haven’t yet got the consistent results we wanted, but we are analyzing it and will continue to drill horizontally. We saw some very high pressures in the Lower Wilcox, so you need 16-pound-per-gallon mud. It’s a negative on drilling, but a positive on what is waiting for us down there.

On the other hand, there are 15,000 vertical Mississippi Lime wells in Oklahoma, and the play has been drilled extensively for decades, so that makes it easier for investors to understand. This Louisiana play is a bit under wraps. Clearly we’re leading the R&D effort there—in addition to drilling we have a sizeable 3-D shoot being interpreted right now.

Investor What about the Tuscaloosa Marine shale?

Crum We are watching it closely, quite frankly. Much of our acreage in Louisiana is prospective for the play. The industry is drilling pretty deep so we’d like to see more success by others before we drill on our acreage. I think the Tuscaloosa Marine has a lot to prove yet before people write home about it and say they’re going to develop it.

“We need to take good care of what we’ve taken on and deliver on the assets we have in Oklahoma and Louisiana.” John Crum