Against the bias of his grandfather and father, founder and owners of 60-year-plus drillbit manufacturer Varel International, sold in 1998, Nick Varel went into the oil and gas business.

He joined Gulf States Energy in his native Dallas as a natural gas analyst after graduating from Lynn University with a degree in international business in 2002. In 2004, he and his business partner, Bradley Williams, headed for the Fayetteville Shale action. Joining Arkansas Energy Group, they assembled some 100,000 acres as the land grab exploded. But while the money was good, their goal was to operate.

In 2006, they started up Elephant Oil & Gas, focused on nonoperated interests in the Barnett Shale Combo area. With the financial downturn came an exodus from the Permian Basin, and seeing an opening, they planted their flag in Glasscock and Reeves counties. They began drilling Wolfberry and parlayed that position into a 30,000-acre holding in the Delaware Basin they sold to Petrohawk Energy, Energen and others in 2011.

As the shale plays consolidated, they saw the buy-and-flip model was unsustainable. They obtained backing from EnCap Investments, which merged Elephant into Talon Oil & Gas in 2012. Talon was an acquire and exploit team, while Elephant had a fully staffed lease and drill team with offices in Dallas and Midland, Texas.

Employing an opportunistic strategy, they maintained their presence in the Permian Basin while seeking to enter the Eagle Ford. They invested in the 130,000-contiguous-acre Horseshoe Project owned by Venado Oil & Gas, in Lee County, in the Eagle Ford expansion area. At present the project has two rigs running with more than 20 wells producing a total of some 3,000 barrels a day.

In a recent interview, Varel discussed how the unconventional business model is changing.

Nick Varel

Investor: You and your partner are part of a generation that’s never worked anything but unconventionals.

Varel: We went through the crucible on unconventionals starting at 25 years old, when they were brand new. So we’ve seen the breadth of what unconventionals represent and the business structures and money behind them.

Investor: Why go the private-equity route?

Varel: We’ve operated privately, raising friends and family money, and now with private equity. For certain, private equity is superior. If you want to make a real impact in this business, you want to be in unconventionals. And today, you can’t do that seriously unless you’ve raised $100 million or more—and that might be an underestimation. It’s an unsustainable model if you are private.

Investor: What’s the current phase in unconventionals?

Varel: We’ve seen the basin expansion phase in the Permian—in Borden, Dawson, Scurry counties, for example—and in the Bakken on the Montana side. A lot of it hasn’t worked out. Now we’re seeing basin contraction. We’ve figured out the outline, that the best stuff is in the middle, and the big players are going back in to buy it up. That’s why you are seeing higher bonus and deal prices. It makes it harder for private-equity value creators—we are wholesale buyers and retail sellers.

You need to hug the robust A&D markets. That’s a conundrum, because the robust markets are in the Permian, Bakken and Eagle Ford, and they’ve gone through the maturity phase, and buying in the core is expensive. It’s a gut check for private-equity models that played the unconventional side.

Investor: How do you position yourself?

Varel: You have to be bigger in order to play. There is a lot of money being deployed in the private-equity side and the publics are still out there.

Investor: Thoughts on the price downturn?

Varel: If you subtract $10 from the price of a barrel of oil, it definitely affects the net present value of a well. For people to say it doesn’t hurt—I think to some extent that is chest-pounding. But can we survive a correction? Yes. There are a lot of efficiencies to be gained, and if activity slows, service costs go down. The market corrects not just in one part, but all the way down. There’s enough capital … patient capital … to keep things going. For the past two years, we’ve been doing the same thing to oil that we did to gas.

Investor: How will business structures change in this next phase?

Varel: The new oil and gas company in unconventionals isn’t going to be your grandparents’ oil and gas company. It’s going to be younger and more software savvy—and that will lend itself to aggressiveness.

From my computer, I can figure out who’s drilling what, where, when, as well as how much they’re producing, who owns the leases next to them, and we can run cursory title without leaving the office. These programs are nothing new, but look for them to become more robust and prevalent.

Investor: Outside interests?

Varel: I follow E&Ps like others do sports teams.

Investor: Favorite players?

Varel: For a public company, EOG. For an individual I’ve gotten to know over the past few years, Ted Collins. Both EOG and Ted are the 1993 Dallas Cowboys equivalent.