In hindsight, Mike Oestmann was downright prescient in August 2014 as he told a crowded banquet room in Houston that his company was shooting for a 2015 exit. With a month to go, Oestmann, CEO and co-founder of Tall City Exploration LLC, got his deal done. On Nov. 30, the company sold 71,000 net acres in Howard and Borden counties, Texas, to Moss Creek Resources LLC for $803 million.
Tall City has about 1,000 acres remaining, none of which is being drilled, Oestmann said. “We essentially sold all of our acreage. We have a little bitty piece here and there but nothing substantial,” he said.
Over-modest, Oestmann said of the deal: “Luck beats skill.”
But as with any successful management team, Tall City was analytical and tactical. The company relied on science to track down oil riches and make them into an overnight success, as the saying goes, after years of work.
From day one, the plan was to drill, prove and sell. “We started in this play when Howard was not well thought of,” Oestmann said. By the end of their run, the company had 34 horizontal and six vertical wells with production of about 3,750 barrels of oil equivalent per day.
Nevertheless, the sales process stretched on for more than a year amid the tumult of falling oil prices and rejected lowball offers.
“We knew it was worth a lot more money than people were waiting to step up and pay in the data room,” he said. “It was just kind of dead—it seemed to us—in the M&A market.”
Tall City entered Howard County in 2012. Howard had not been the host of a standout vertical play, but the rocks studied by Tall City’s geologists (Oestmann included) suggested horizontal zone candidates that looked even better than the active southern Midland Basin.
Tall City snapped up acreage for as little as $500 an acre to begin with and eventually averaged less than $3,000 per acre.
“We put our wells in spots where we thought would prove up the most reserves,” Oestmann said.
While the goal was to make money, on occasion the basin could still surprise and excite. One of the wells Tall City drilled was roughly a mile from the Santa Rita No. 1, one of the first producing wells in the Permian Basin. Tall City’s well produced 1,000 barrels per day of oil.
“Almost a century later we find a big well right next to the discovery well,” Oestmann said. “It’s incredible. It speaks to how prolific the basin is.”
In November 2014, Tall City sold its first block of acreage—15,000 net acres in Reagan County, Texas, to Aubrey McClendon’s American Energy-Permian Basin LLC for $440 million. Tall City made a concession because of the falling price of oil, Oestmann said. “With the Aubrey deal, we ended up taking $150 million in convertible notes in order to get the deal done,” he said.
As it marketed its remaining acreage, commodity prices continued to plummet.
“We got into a data room in the fall of 2014 with these assets and we did not get what we wanted” in terms of price, Oestmann said. “We got a number of bids, but there was just a gap.”
Tall City quit drilling, waiting for service costs to come down. Denham Capital, which backed Tall City with a $300 million equity commitment, never pressed for a sale.
“There was no panic or anything like that,” he said.
In May, the market finally loosened. A neighboring company was one of several to strike a deal with Diamondback Energy Inc. for acreage in a transaction valued at $437.8 million. “As soon as the transaction occurred, our phones started ringing again,” Oestmann said.
Tall City, still listed with RBC Richardson Barr, began fielding offers. Oestmann began conversations with Moss Creek around May, finally getting a purchase and sale agreement signed in the summer.
The deal hit snags before closing. Moss Creek was created by the U.S. subsidiary of Blue Whale Energy Ltd., based in Beijing. The Committee on Foreign Investment in the U.S. (CFIUS) instituted an investigation to ensure the deal posed no national security risks, such as proximity to military installations. It all worked out. “We closed for cash for the amount we negotiated back in the summer,” Oestmann said.
After a short break, Oestmann said he will begin again. His father, Art, 82, still comes to work every day, looks at logs and searches for the next deal.
“Midland is full of guys like that,” Oestmann said. “There’s no concept of retirement. You’re just enjoying what you’re doing.”