DrillAdvance is the name IOG Capital LP has bestowed on the type of structured finance it’s been putting to work for E&Ps since this summer. The structure has become known more commonly in the industry as DrillCo.

Charlie Shufeldt and partners co-founded IOG in 2013, closing an approximately $330 million oil and gas investment partnership with Metalmark Capital in September 2014 and a similar amount with Fortress Investment Group this past May. They fund acquisitions and development drilling through JVs and non-operated asset-level investment.

Shufeldt grew up in Atlanta and majored in economics at Stanford University. He spent four years in investment banking with Bank of America in San Francisco and New York before moving to Dallas to join hedge fund HBK Capital Management. He managed a portfolio of private and public oil and gas investments, eventually restructuring many of them in the wake of the Great Recession.

Shufeldt left HBK in 2013 to launch his own platform, Mineral Development Partners, managing upstream investments for family offices. Before long he was introduced to Marc Rowland, the former executive vice president and CFO of Chesapeake Energy, who was pursuing a similar concept. They teamed up to form IOG and today have some $800 million to invest.

Shufeldt serves on the board of Friends of the Katy Trail, the nonprofit supporting the old railroad right-of-way that has been converted into a magnet for walking, running and cycling in Dallas. He’s lived near and used the trail since moving to the city and believes it is a unique asset in the city’s growth. In a recent interview, he discussed IOG’s strategy and the financing needs of independents.

Charlie Shufeldt

Investor Commodity prices turned down just as you were starting up IOG. How did it affect your plans?

Shufeldt We got a lesson in humility and weren’t able to get going as fast as we had anticipated. We had closed the partnership with Metalmark and then prices marched down. We sat on the sidelines, knowing the opportunity set was only going to get better as other forms of financing became more difficult to access and companies looked to bring in partners to get projects drilled.

Today we’ve got a full pipeline of opportunities with strong operators who all face the same issue—they have great projects, but liquidity has gotten squeezed. They are looking for a financial partner to help move projects along. These projects can generate a 25% to 40% rate of return, even at the current strip.

Investor What’s attractive about your structure vis a vis the alternatives?

Shufeldt It’s a flexible and lower-impact form of financing. Operators tell us what they want to accomplish, and we tailor a joint development agreement. It’s nonrecourse and off the balance sheet, which is particularly important as the industry has become more levered in the downturn.

Additionally, if we want to sell our interest at some point, it doesn’t impact the E&P’s ability to hold onto the project. We can sell our minority interest and the E&P can continue to operate with its interest. We’re an investor at the property level, not an investor in the company, so we don’t tell them how to run their business.

Investor What investments have you made to date?

Shufeldt We’ve closed three. The first, with Lonestar Resources in Fort Worth, involved $100 million to fund drilling in the Eagle Ford. Lonestar has been able to be scrappy and find acreage blocks overlooked by larger companies and has put together really attractive drilling projects. It’s a perfect marriage. We bring the capital, and it has the technical abilities and the assets.

The second deal is an interesting application of our model for a family-run, third-generation E&P in Oklahoma City. Its old model was to keep a quarter interest in projects and sell down the rest to friends and family.

But, serendipitously, it was right on top of the Stack play. Wells costing half a million turned into wells costing $5 million to $6 million and it needed a new source of capital. We’ll be a majority financial participant and it will operate.

The third investment is somewhat unique, and involves a nonoperated working interest owner looking for a partner to help finance AFEs in the Bakken Shale. We’ve drilled six or seven wells with the company, and will probably participate in several more.

Investor What price decks do you use?

Shufeldt Our philosophy is we’re not smarter than what the strip’s telling us. Additionally, we see a lot of information on drilling programs that indicates what price it will take to generate more activity, and that price is toward $60. We don’t speculate on a recovery. We will hedge to help us know when we will hit our target return and our interest will revert back to the operator.

What we’re most proud of is that we’ve established a unique form of financing, have gotten several deals closed with different operators, and are proving up our strategy. What we’re doing is in high demand by almost every operator out there.