Triana Tried And True

?“The technology grew up here. We can drill certain wells faster, better and cheaper using air instead of drilling mud and fluids,” says Henry Harmon, president and chief executive for Triana Energy LLC.

Private-equity investment has returned to the energy markets. Specifically, big money is flowing to the Appalachian Basin and finding compelling returns on investments in gas producers with assets near energy-hungry markets. In June, a major private-equity fund found its way to the long-time management team of Appalachian-gas producer Triana Energy LLC.

New York-based Morgan Stanley Private Equity, an affiliate of Morgan Stanley, entered into a strategic partnership with and placed a significant investment in Triana. Based in Charleston, West Virginia, Triana focuses on the Appalachian Basin, including the Marcellus shale.

The E&P enterprise was founded by chairman and chief executive Henry Harmon in 2006, and this deal marks Morgan Stanley’s second investment with Harmon and his management team.

In a previous investment, Morgan Stanley and co-sponsors backed a company, also named Triana, with several hundred million dollars. The team operated that company from 2001 to 2005, and then sold its principal asset to Chesapeake Energy Corp. for $2.2 billion, which concluded the company. While Harmon had planned a public offering, the attractive offer by Chesapeake was too good to pass up.

John Moon, partner and managing director of Morgan Stanley Private Equity, says of the current deal, “Similar to the first go-around, this is the first step in a broader partnership. While the initial investment is relatively small, less than $100 million, the idea is to build the company up over time through organic growth on their existing properties and through acquisitions.” The deal gives Morgan Stanley a majority interest in Triana.

?Highlands Drilling Rig #7, a SpeedStar 185-K, is at work drilling the Marcellus shale in Wetzel County, West Virginia.

Harmon and his team “didn’t skip a beat,” says Moon. “They made out quite well from the original Triana investment, then came right back into the business in 2006.”

Harmon and company initially returned on a relatively small scale using their own capital, preferring to take a conservative approach while keeping in touch with Morgan Stanley. As the opportunity to do something more substantial presented itself, Triana reached out.

“The Triana team is very disciplined and conservative,” says Moon. “They saw what was going on in 2006 and 2007 and weren’t prepared to dive in head first because they saw the excesses that were taking place in the basin and in the energy industry in general. But by 2008, things got interesting for them again, and we consummated our deal with them in 2009.”

The Appalachian Basin historically has been dominated by local mom-and-pop operators and large, publicly traded utilities. More recently, however, numerous mid- and large-cap E&Ps have been pouring dollars into the emerging Marcellus play.

The Triana team, having operated in the area for many years, is “an integral part of the social fabric of the Appalachian business community and that is a tremendous advantage,” says Moon.

“We think there is a lot of opportunity here. It’s the right time to be thinking about oil and gas investment generally, and the Appalachian Basin specifically. This basin is a bright spot right now in the industry.”

The area’s attractive well economics are undisputed. Because the basin is close to energy-hungry markets in the Northeast, gas trades at a premium to Nymex. Technologies such as horizontal drilling and various fracturing methods are enabling operators to tap reserves that were previously uneconomic.

“Many of these techniques were pioneered in the Barnett shale but have been modified to work well in the Marcellus,” says Moon.

Triana holds tens of thousands of acres, and it’s looking to acquire more acreage and enter into more partnerships. The opportunities are substantial, so “Triana is very much in the growth mode,” says Moon.

To date, Triana actively manages about 45,000 acres, with access to much more acreage through its partnerships, although the privately held company prefers not to disclose its production and reserves.

Triana targets the Marcellus as well as other reservoirs found throughout the basin from New York to Kentucky, Virginia, West Virginia, Ohio and Pennsylvania, says CEO Harmon. The company plans to drill 26 wells during the remainder of 2009, including 18 in the Marcellus, six in the Huron shale and two in the Oriskany sandstone.

“The Marcellus’ challenges are also the opportunities,” says Harmon. As is the case throughout the U.S., Appalachian producers are facing more regulatory and environmental hurdles than ever before, coupled with stagnant financial markets, low natural gas prices and fierce competition.

Triana’s team finds that the best way to meet such challenges and turn them into opportunities is to closely control spending and become one of the most efficient drillers in the basin.

To that end, the producer has chosen to employ air-drilling rigs where it makes sense. “Triana is a compressed-air driller at heart,” says Harmon. “We believe there are good applications here for air drilling.”

Clearly, there are areas where wells can be drilled faster, better and cheaper using air instead of drilling mud and fluids. Air drilling works well in the basin’s hard-rock regions. “The technology grew up here. We can drill certain wells faster, better and cheaper using air instead of drilling mud and fluids.”

Rig investment

Highlands Drilling LLC, the rig company working for Triana, was formed as a separate company by Triana’s management team in 2006. “We started this company because we knew we wanted to have the next generation of drill rigs and services, but we didn’t see other unconventional operators making any kind of real investment in air drilling.”

“It’s the right time to be thinking about oil and gas investment generally, and the Appalachian Basin specifically,” says John Moon, partner and managing director of Morgan Stanley Private Equity.

The rigs are built by and purchased from George E. Failing Co. based in Enid, Oklahoma. Triana owns 10 of the so-called SpeedStar 185-K rigs, which are under contract and deployed. Two more rigs, called SpeedStar 1100 (which refers to 1,100 horsepower), are positioned on pads and ready to start. The 100%-utilization rate is a testament to the demand for the effective technology, and Highlands Drilling has more rigs ordered, says Harmon.

“Highlands has drilled more than 500 horizontal shale wells using air technology, far more than anyone else in this basin. We have had extraordinary success with that,” says Harmon. “Mike Poole, president of Highlands Drilling, is an innovator with that technology.”

Compressed-air drilling pushes drillbit cuttings to the surface without mud and eliminates the need to acquire and dispose of processing water, thereby saving costs. Triana’s time on site is reduced because the rate of penetration is increased to more than one hundred feet per hour, compared to an average of tens of feet per hour when drilling with mud.

SpeedStar rigs are carrier-mounted and specially designed for Appalachia. The equipment has more than enough lift capacity for the basin’s deep-gas and long-lateral plays, yet supports Triana’s cost-efficient strategy. Also, the rigs can be moved using existing roads and operate with existing infrastructure, which is very important in the area, says Harmon. Larger rigs, even when broken down, are difficult to move through the mountainous terrain.

Triana also drills for traditional gas targets in the basin because the team finds significant opportunity in those zones, even while other players are setting those aside to drill the unconventional Marcellus trend.

“We are running our operation and acquisition programs under the assumption that the forward gas-price curve, in contango, is optimistic,” says Harmon. “To be successful, we are developing resources in a cost-conscious manner. We think prices are going to be low for quite a while.”