Traditionally, start-up E&Ps seeking low-risk, long-life oil and gas properties have heated up data rooms and wooed private sellers of conventional assets. Yet, as unconventional plays mature—especially the earliest, the Barnett—these will increasingly be targets.

And, Bob Reeves and his team at Athlon Energy LP are among prospective buyers. “That’s absolutely right. As those properties move off the hyperbolic portion of the production curve and establish more production history, they become targets for a team like us,” Reeves says.

“There is a point in a property’s life where enough risk has been removed, but enough reward remains to make excellent returns. That niche is where we will execute our strategy.”

?Athlon Energy LP president and chief executive officer Bob Reeves formed the start-up this past August with at least a $200-million initial commitment from Apollo Global Management LLC.

At press time, Range Resources Corp. signed a deal to sell all of its Barnett producing properties, making more than 100 million cubic feet equivalent per day, to privately held Legend Natural Gas IV LP for $900 million. “You’ll see even more of these deals in the second half of this year and the first part of 2012,” Reeves predicts.

Reeves, Athlon’s president and chief executive officer, and the team—all former Encore Acquisition Co. managers—formed Fort Worth-based Athlon in August with at least a $200-million initial commitment from Apollo Global Management LLC—the investment giant’s first foray in a build-up E&P story.

The team was fresh from the sale last spring of conventional-production-focused Encore to Denbury Resources Inc. As chief financial officer of publicly held Encore, Reeves developed many capital contacts over the years. He took the group’s business plan on a road show through Texas and New York.

“We didn’t use a broker to facilitate these meetings. We just called my contacts and said we’d like to introduce the team and visit with them about the strategy.” There were several offers and proposals were diverse.

“Then, it was just a matter of trying to figure out the best fit for both parties. When you plan to partner with someone over the next five years or so, it’s important to pick the right partner with the same type of business philosophy.”

The team made initial presentations to Apollo managing director Greg Beard and managing partner Sam Oh in New York, and the conversations culminated with a visit in London with the $53.6-billion firm’s co-founder, Joshua Harris. By August, it became clear to Reeves that Apollo’s strategy of investing in oil and gas is identical to Athlon’s.

Team leaders include Athlon co-founder Kevin Treadway, formerly senior vice president, land, at Encore; Bud Holmes and Melvyn Foster, who were in charge of operations and engineering of Encore’s Northern assets; David McClelland and Rusty Plemons, who were responsible for geosciences and land, respectively, for Encore’s Southern assets; and Jennifer Palko, who managed Encore’s reserves analysis and reporting.

Each of the seven officers has a meaningful investment in the company, alongside Apollo. “It’s a fantastic team that has a long track record of working together in several basins. The disciplines are all well represented.”

The funding process wasn’t easy, relative to Reeves’ experience with public markets where capital raises were often completed in overnight offerings. “This process is a lot more in-depth from a due-diligence perspective. In the public markets, the data is readily available because of reporting requirements. In private equity, there are background checks, references, model calculations.” But the efforts by both parties are worth it, “to completely understand each other before entering a long-term commitment of time and resources.”

Athlon’s first acquisition was closed in January, picking up some 200 operated wells over approximately 20,000 net acres in the Permian Basin, making some 2,000 barrels of oil equivalent a day and carrying many low-risk drilling opportunities.

“For now, we’ll be focused on the Permian, but we have a lot of experience in the Rockies, ArkLaTex and Midcontinent. We’re not limited geographically. We look for value where we can apply our operational expertise to enhance the returns beyond the initial acquisition metrics, whether it’s in West Texas or the Rockies.

“It’s a very competitive environment right now, and it’s difficult to find value. We could end up anywhere.” But not outside the U.S. and not offshore. “We’ll stick to onshore the Lower 48 in the proven and more predictable basins.”

Athlon seeks operated properties with shallow production declines—below 12%—with a strong component of proved, developed, producing (PDP) reserves. It is weighted to oil right now; however, a natural gas portfolio may come about as the cost of entry improves.

Athlon’s bank facility is led by Bank of America Merrill Lynch, and Reeves thinks the E&P could eventually go public. The team’s track record should be an advantage in deal-making, he says. “We’ve always closed our deals over the years, and we don’t mind paying a premium to move into new areas to establish a meaningful footprint.”

And the firm is flexible—and fast. “We’ve completed all types of deals over the years—cash, stock, leasing, joint ventures, farm-outs. Because our team has worked together in the past, we can move fast on any type of deal.”

?Mike Wichterich, chief executive of Three Rivers Operating LLC, aims to keep its portfolio within the $500-million to $1-billion asset-value range, selling off noncore properties as new, higher-margin properties are brought in.

Three Rivers

Mike Wichterich understands that tapping public capital is essential to some E&P business models. “When you cross over the $1-billion mark, you feel like you have to go public because you’re running out of private-equity and bank financing.” Three Rivers Operating Co. LLC has exceeded $500 million in assets already in its 15 months, and in the face of competing with aggressive, public-capital-rich MLPs in data rooms.

Instead of going public, though, CEO Wichterich aims to keep the company’s portfolio within the $500-million to $1-billion asset-value range, selling off noncore properties as new, higher-margin properties are brought in.

The Austin, Texas-based start-up made its first purchase in April 2010 from Chesapeake Energy Corp. In January, it completed its second acquisition—a package from Samson Resources Co.—resulting in a combined portfolio of some 700 operated and 800 nonoperated wells in the Permian, making approximately 7,400 barrels of oil equivalent (BOE) per day.

The company’s proved reserves are 68 million BOE; probable reserves, 86 million. Wichterich expects 2011 revenue of some $150 million. Staff totals more than 50 people, with about 20 of these in Midland.

Wichterich entered the E&P industry via Coopers Lybrand, which became PricewaterhouseCoopers, where he was an SEC specialist advising public and private producers, and then joined Mariner Energy Inc. as controller and then CFO. He departed in 2004, prior to its IPO, for the CFO role at David Honeycutt’s privately held Texas American Resources Co.

In forming Three Rivers at the end of 2008, he joined Gabe Ellisor, formerly with Rivington Capital Advisors LLC and BNP Paribas; Jim Keisling, a reservoir engineer with reserve-analysis firm W.D. Von Gonten & Co.; and Barry Smith, who was previously with Texas American and Weinman GeoScience Inc.

Wichterich is CEO; Ellisor, CFO; Keisling, vice president, engineering; and Smith, vice president, geoscience. In July, Russell Macaw, formerly a Permian manager for Whiting Petroleum Corp., joined the group as vice president, operations.

“My partners and I felt that, with the dip (in late 2008) in commodity prices, combined with a feeling that conventional-gas assets would be divested by larger producers, the timing might be perfect to enter the market with a proven business plan of becoming a serial acquirer of long-lived conventional assets.”

In hindsight, Wichterich says, the team was “generally right, but precisely wrong.” Assets weren’t coming onto the market; M&A activity in 2009 was one of the slowest transaction periods in recent deal-making history. “For transactions to pick up, we needed commodity-price stability, which came in early 2010. For Three Rivers, it was 14 months from the time of our inception to our first acquisition.”

When forming Three Rivers, he knew which private-equity firm he wanted as a partner. He had worked with Riverstone when it purchased Mariner from Enron Corp. in 2002. “I saw first-hand how Riverstone is sophisticated and dynamic. We went to them first and they supported us right away.”

Also key is that the firm reinvests in management teams in subsequent start-ups, such as backing Legend Natural Gas founders, who are on their fourth iteration. “We wanted a firm we would have a series of investments with.”

Three Rivers’ bankers are BNP Paribas and JPMorgan, with whom Wichterich worked while at Mariner. Among its acquisitions, it picked up approximately 10,000 net acres over the Bone Spring oil-shale play in New Mexico and hopes to begin drilling the formation later this year. In its conventional work, it plans to drill more than 40 wells this year into the Wolfcamp/Canyon sands at Sugg Ranch on the eastern shelf of the Permian; in Andrews County, Texas, its “Sword area,” its operator partner has four rigs working on Wolfberry. Its projected 2011 capex is $50 million.

“Our portfolio is about 50% gas right now; however, gas doesn’t meet the return objectives for new capital. So, we’re spending the majority of our dollars on oil.”

While seeking high-PDP properties, the company runs into MLPs in data rooms a lot. Before coming upon its second deal, it reviewed about 24 transactions.

“Now, when I see a package that is 80% PDP, there has to be something really unique about it for us to spend time with it. Or, we will be priced out. When (the MLPs) want to win, they win. But, it makes us all try harder.”

Three Rivers is targeting packages with PDP reserves of between 40% and 60% of the total, and with proved undeveloped (PUD) exploitation opportunities. Wichterich finds this niche positions Three Rivers between E&Ps competing for lease/drill organic plays and MLPs seeking distribution-producing, high-PDP plays.

And, the Three Rivers team plans to mostly stick to the Permian, as the basin isn’t too small for it yet. “We will become a serial acquirer in the Permian and, at times, we will find ourselves with non-core assets as well. Therefore, we will also be a serial seller.”

Eclipse Resources

Also capturing deep-pocket private equity is State College, Pennsylvania-based Eclipse Resources I LP. Founders Ben Hulburt and Chris Hulburt grew Rex Energy Corp. from a $7.8-million initial capitalization in 2001 to an enterprise value of some $600 million upon departing in October to form Eclipse.

The new firm has a $150-million equity commitment from 23-year E&P private-equity investor EnCap Investments LP and management. What will the Hulburts do in fewer than 10 years, if starting with nearly 20 times the start-up funding?

?Eclipse Resources I LP founder Rex Hulburt says the company has an advantage in that he and co-founder Chris Hulburt are native Pennsylvanians and know how to navigate the region’s regulatory regimes.

“I couldn’t take credit for all of it,” Ben Hulbert says. “There were other important team members involved, some of them still at Rex and others that have moved on. We were fortunate to be able to put together a fantastic team and it was a lot of fun to build that.”

Hulburt co-founded Pennsylvania-based Rex with chairman Lance Shaner with a first limited partnership in 2001, funded by private individuals. The business plan was acquisition/ex­ploitation in the Appalachian Basin, with a dividend-paying structure like that of an MLP. By 2007, the company consisted of 13 oil and gas LPs and LLCs, and had made more than 35 acquisitions.

Meanwhile, Hulburt and the team had begun looking at organic growth—leasing and drilling, particularly in the Marcellus play—and the higher-risk exposure didn’t suit the existing low-risk-seeking investors. The entities were rolled up into Rex Energy Corp. and it went public in 2007.

The foray into Marcellus exploration in late 2007 proved timely. “We were very early to the play, so our costs weren’t very high in the original acreage.” Further leasing pushed costs into the several-thousand-dollar-per-acre range, so to keep Rex’s balance sheet in shape, it brought in two joint-venture partners.

A 2009 deal with Williams Cos. was at 150% of Rex’s cost in two areas and Williams became operator, earning 50% interest as it drilled. “That deal returned the majority of our original capital in that acreage.”

Last year, a deal with Sumitomo Corp., predominantly for Rex’s Butler County, Pennsylvania, leasehold, returned all of Rex’s investment in that acreage. “Rex is sitting at around 60,000 net acres in the Marcellus with very little capital invested in that position, so that set it up for a long period of success.”

In October, the company’s approximately $600-million enterprise value was weighted by only some $15 million in debt, while it had $25 million in cash on hand and $50 million in drilling carries.

With Eclipse, the Hulburts—with Ben as president and CEO, and Chris as executive vice president, focusing on land, legal and regulatory—aim to focus again on the Marcellus—but on the Utica shale too. In February, it added a director of land, David DiBernardo, who has managed leasing in the basin for EOG Resources Inc., Chesapeake and other E&Ps.

“The Marcellus is becoming more of a developmental play now; a lot of the risk has been taken away. The Utica is much more in the early stage and much higher risk, but there are areas where the acreage cost is not nearly as high as in the Marcellus. Our strategy is diversification among the two plays.”

The Utica generally sits about 3,000 feet beneath the Marcellus. In northwestern Pennsylvania, moving into Ohio, the Marcellus thins and the Utica increasingly shows potential for gas condensate and then, farther west, for oil.

Ideally, Eclipse will hold acreage that is productive from both formations where they overlap, and make higher-value liquids from Utica where the Marcellus is less commercial. “Obviously, with commodity prices being where they are today, this could be very attractive."

Eclipse is among investments in Appalachian shale E&P by EnCap, including Grenadier Energy Partners, Marquette Exploration, PetroEdge Resources II and Protégé Energy II; its other interest is via a holding in John Walker's EV Energy Partners LP and it also holds an interest, with Flatrock Energy Advisors LLC, in Jack Lafield's midstream Caiman Energy LLC. (Editor's note: The printed version of this article in the April issue of Oil and Gas Investor cited Eclipse as EnCap's first direct investment in Appalachian shale E&P.)

In forming Eclipse, the Hulburts met with a half-dozen private-equity providers. “I wouldn’t say getting funding was easy. It certainly was easier than when I started in 2001, though. I didn’t have much of a track record yet at the time.” In choosing EnCap, “we were looking for a private-equity partner that wasn’t just a checkbook, but understood the industry well.”

An advantage to Eclipse is that the native Pennsylvanian Hulburts know how to navigate the region’s regulatory regimes. “Every basin is different and Appalachia has its own quirks. Operating in the Marcellus, especially in Pennsylvania, is more administratively burdensome than in some areas of the country. Being local and having a strong understanding of the lay of the land here is a great advantage.”

Rex came to hold assets in the Rockies and Illinois Basin, but Eclipse will focus on Appalachia for now.

What might the Hulburts do with a starting till of $150 million this time around? “Chris and I have learned a lot in the past nine years and that experience, specifically in the Marcellus, should go a long way.

“But having the capital and putting it to work in an intelligent manner are different things. We don’t want to run out and invest, just to say we’re investing capital. We want the right projects that generate the right rate of return for both ourselves and our partners.”