Born out of the Gulf of Mexico moratorium, start-up Venari Resources is already a partner in what may become the basin's best prizes.

March was a very good month for private offshore exploration company Venari Resources LLC.

First, the Dallas-based company participated in Anadarko Petroleum Corp.’s Shenandoah-2 well in the Gulf of Mexico, which encountered more than 1,000 feet of net pay. Shenandoah, a prospect in Walker Ridge Block 51 in 5,800 feet of water, was drilled to a total depth of 31,400 feet into the subsalt Inboard Lower Tertiary formation. Venari holds a 10% interest.

“This well has the potential of becoming one of the largest oil discoveries made in the deepwater Gulf of Mexico,” Venari president and chief executive Brian Reinsborough said of the announcement.

That news was followed just six days later with Chevron Corp.’s Coronado discovery of 400 feet of net oil pay. The Coronado prospect in Walker Ridge Block 98 was drilled to a total depth of 31,800 feet in 6,100 feet of water. Venari again holds 10%.

In between those two giant announcements, Venari competed for 18 blocks in the Central Gulf of Mexico lease sale and won 15, including the most hotly contested block. The company beat out six heavy hitters with its bid of $45.5 million for Walker Ridge 187, next door to the Shenandoah and Coronado discoveries.

Consider then, that just over a year ago, Venari didn’t even exist.

Contrarian plan

“We’ve had a great start to the company,” says Reinsborough, who founded Venari. “Those three accomplishments are remarkable for any company just coming out of the gate. In the first year, we have de-risked the company and have essentially satisfied our five-year growth plan objectives.”

With more than $1 billion in private-equity backing, Venari ranks as one of the largest start-ups with no assets. “There’s nothing ordinary about the business plan, nothing ordinary about the capital we brought into the company, and there’s nothing ordinary about our performance in the first year,” he says.

Reinsborough, a geologist by trade, built his reputation as a deepwater explorationist during 15 years at Nexen Inc. As president of Nexen Petroleum U.S.A., he led the company’s entry into the deepwater Gulf of Mexico with a 50% success rate over 10 years, including nameplate discoveries Appomattox, Knotty Head and Vicksburg. He wanted to leverage that experience and go solo.

Reinsborough tapped TD Securities managing director Jim Rogers to explore his options. The two share a 30-year friendship dating back to when they were young geologists and roommates while working in Calgary.

“Brian built an attractive business in the deepwater for Nexen they didn’t have before he arrived,” Rogers says. “That track record, plus his ability to attract and retain top-tier technical talent, is exactly what the private-equity world is looking to back.”

Rogers introduced Reinsborough to Warburg Pincus in 2009. The mega-private-equity provider, with $45 billion invested, has been instrumental in funding offshore start-ups for 25 years. Reinsborough liked the offshore experience and philosophy that Warburg Pincus had.

Likewise, Warburg Pincus managing director In Seon Hwang built a working relationship and trust with Reinsborough over the next two years. Hwang is an energy deal veteran, with 10 years at Warburg Pincus, and GSC Partners and Goldman Sach’s M&A group before that.

“We were looking for best-in-class management teams, and our attraction to Brian was several fold,” Hwang says. “We got comfortable with Brian’s expertise and exploration capabilities, executive capabilities and decision-making.”

However, the 2010 Macondo blowout and oil spill in the Gulf of Mexico intervened, and Warburg put a hold on any new deepwater investments. That lasted a year, when Reinsborough left Nexen and Warburg brought him in-house with the title of executive-in-residence, effectively an incubator for a new company. Showing its confidence in him, Warburg gave Reinsborough a blank canvas. “Wherever in the world you want to build an oil company,” Hwang told him, “write a business plan and we’ll help support you.”

Although he had the entire globe to consider, the investment thesis for Venari was opportunistic: Reinsborough believed in the future of the Gulf of Mexico, and the time to enter had never been better. As others fled, Reinsborough wanted in.

“Coming out of the drilling moratorium, I felt there would be an oversupply of prospects coming out of the two-year hiatus, creating a unique opportunity to be very selective in the market to farm into those prospects,” he says.

With a fleet of companies exiting or selling down, Reinsborough also anticipated the industry would over-risk the Gulf because of the moratorium, and as a result, would want to shed capital and share risk.

Raising capital

The opportunity to take selective working interests would require a boatload of cash—at least $1 billion, by Reinsborough’s figuring. “This is the ultra-deepwater. To be a credible financial partner where you’re approaching large-scale operators like Anadarko, Chevron, ConocoPhillips and Shell, you need to be well-capitalized.”

Warburg Pincus recognized the unique timing and quickly backed his vision with about half of the total equity raise.

“We think the deepwater Gulf of Mexico is one of the most prolific and attractive hydrocarbon basins in the world,” says Hwang of the investment. “Because of advances in seismic and drilling technology, we are able to continue to discover massive, multihundred-billion-barrel discoveries. We wanted to capitalize on that, coupled with an exceptional management team that’s able to deliver a program.”

Once the Warburg commitment was secured, Reinsborough put together a core technical team that had worked together at Nexen and took his visionary plan to 22 additional deeppocketed financial players.

“Some thought it was too contrarian, some said it couldn’t be done, that no one would partner with a start-up in the deepwater. But we believed in the plan and that we could execute on it.” Alluding to recent discoveries, he adds, “We’ve demonstrated it is achievable.”

Several other investor groups recognized the potential, and the equity raise was oversubscribed.

“A billion dollars is a lot to raise on the back of a business plan,” TD’s Rogers adds, “but given the scale of the opportunity and Brian’s track record, we ultimately had investor interest beyond that.”

Rather than complicate the makeup of the board with too many voices, Reinsborough settled on three additional investors. Singaporebased investment company Temasek came on board, Kelso & Co. committed as the next largest investor and The Jordan Co. made up the remainder.

“We thought it was important to capitalize the company well up front,” says Hwang. “Not just to participate in exploration, but to demonstrate the ability to remain a partner throughout the development phase. Any one of these projects might take three to five years and billions of dollars of capital to appraise and develop.”

Venari Resources launched in May 2012 with a total raise of $1.125 billion.

Technical advantage

Venari, a name inspired by Reinsborough’s wife, means “to hunt” in Latin and captures the central theme of the company. “We hunt for large oil reserves,” says Reinsborough.

He points to the oversubscribed raise as a reflection of the quality of the team, the quality of the business plan, and private equity’s view of the deepwater Gulf of Mexico.

Venari’s senior management team includes Bruce Busmire, executive vice president of finance, most recently with Anadarko Petroleum Corp.; Richard Smith, executive vice president of exploration, most recently at Stone Energy Corp. and before at ExxonMobil Corp.; Scott Cornwell, senior vice president of commercial and business development, from BHP Billiton Petroleum; Rowland Burno, vice president of engineering, and Adam Rubin, vice president and general counsel, both formerly with Nexen; and William Swingle, vice president-controller, formerly with Dynamic Offshore Resources. The Venari chief technical team includes Dr. John Wagner, chief geologist; Michael Kelly, chief geophysicist; and David McNaughton, chief engineer, all from Nexen.

The company hunts for reserves with leading-edge technology, an advantage he says Venari wields as well as or better than any other operator, including majors. The technical foundation of the company involves a rich database of the most advanced seismic.

“We have proprietary reprocessing capabilities in house that help us look at these data sets quicker to de-risk the sub-salt reservoirs.”

Advances in seismic imaging have made sub-salt prospects visible that were hidden five to 10 years past. Venari has streamlined a process to screen, evaluate and high-grade the best ones. “We’re nimble and can move quickly,” he says. “We want to farm into the very best prospects.”

The company seeks a 10% to 25% nonoperated interest in selective prospects. A multitude of great prospects remain undrilled, backlogged during the two-year moratorium. “There has been a natural selection process during the moratorium, and the best ones will float to the top,” says Reinsborough.

Venari’s technical bench makes it a partner of choice when pursuing farm-ins, he believes. “We contribute disproportionately to our working interest. Whenever we invest in a prospect, we will always put technical people on those projects with solid ideas.” Such a relationship provides Venari with influence at the table, and it serves the operator similar to an external auditing process, he says.

Not to be ignored: Venari is well-capitalized. “You can’t get around that we do pay promotes to get into prospects. That’s exactly what we’ve done this first year, and it has worked.”

Geological targets

Shenandoah and Coronado are first fruits of these labors, following an initial well that came up dry. Having evaluated some 80 prospects in its first year, Venari identified these and joined both Anadarko and Chevron in September 2012, with stunning success. “We liked the look and feel of both of these prospects. They both had the right risk-reward profile that we were looking for.”

Anadarko says Shenandoah is its largest discovery yet in the deepwater Gulf of Mexico. “It looks huge,” proclaimed Bank of America Merrill Lynch analyst Doug Leggate in a research report. Analysts at Citi and Global Hunter Securities concurred, estimating the resource potential likely will hold some 500 million to 1 billion barrels equivalent.

Both Shenandoah and Coronado are significant discoveries, not only in size, but in importance of what they’ve found, says Reinsborough. “You don’t very often get to log 1,000 feet of pay—anywhere in the world. This has tremendous scale for our company.”

He anticipates the two discoveries, just six miles apart, will together become a major production hub in the future.

Reinsborough continues to see great opportunities. Venari is currently working partnerships to participate in two to six wells to be drilled in the next year and a half. “Most of the prospects are mature and getting ready to go on a drill schedule,” he says. And similar to Shenandoah and Coronado, “they’re going to provide a short-term catalyst for us to build the company around.”

In addition to farming into existing, mature prospects, Venari is building prospects organically via lease sales. It is focused on three main targets in the subsalt plays and the Jurassic Norphlet formation.

Shenandoah and Coronado further prove the viability of the Inboard Lower Tertiary trend, a relatively young target revealed only in the last few years by advanced seismic processing. The Miocene is a maturing deepwater play, acknowledges Reinsborough, but “we think there is romance left in that play.” The Norphlet, in the eastern Gulf, is a play in which the former Nexen team is well experienced, and “we’re looking at that quite hard.” Venari partnered with Noble Energy in the 2012 lease sale to establish a foothold in the Norphlet, and added more in 2013.

“We feel there is a lot of growth left in these three areas. We intend to build our exploration inventory organically as well as farming in.”

Venari outbid partners Chevron and Anadarko, as well as ConocoPhillips, Shell and Cobalt International Energy, to win Walker Ridge 187, the biggest prize in the most recent lease sale.

“It was strategic for us. We want to be positioned well in this prolific mini-basin. We think it will be valuable acreage going forward.”

Altogether, the company bid some $86.8 million for its 15 blocks, still pending approval by the Bureau of Ocean Energy Management. Reinsborough says he will sell down or trade working interests in these prospects.

While Reinsborough affirms that operating may ultimately be part of Venari’s long-term vision, being a non-operator propels the company up the growth cycle much quicker.

“Being a non-operator allows us to move quickly and be opportunistic. That’s why we’ve had our success in the first year. If we came out of the shoot as an operator, we would be nowhere near where we are right now.”

Forward plans

Reinsborough says he expects to spend some $600 million on Shenandoah and Coronado before first cash flow is expected around 2018, and a similar amount for further exploration. “We’ll be very aggressive in the commercial market” for farm-ins, he says.

Even though the plan was for a five-to-seven year investment, Reinsborough says Venari may seek to go public sooner rather than later. “With the success we’ve had, we’ve had a lot of interest from the investment community.”

The early success is a reflection of the contrarian vision. “When people were looking to put capital elsewhere, I saw a great opportunity,” he says.

“I believed the U.S. would need a secure supply of oil, and one of those platforms for future growth would come from the deepwater Gulf of Mexico. I think we got it right; the industry is unfolding as we envisioned.”