In an era when 70% of the US rig count is tied to unconventional drilling, it may surprise some that the most unconventional endeavor in all of oil and gas at the moment is actually conventional drilling.

Conventional? There are those who argue conventional drilling is the oil and gas version of early 20th century buggy-whip manufacturers. At first glance, evidence supports the meme. The rig count for conventional drilling is falling faster than the decline curve on an unconventional shale well.

Vertical drilling, which is less than 30% of the rig count, is a useful proxy for conventional drilling. There are fewer than four dozen rigs employed in US gas-directed vertical drilling. But while the oil-directed vertical rig count is higher—more than 330 units in April 2013—much of that activity is tied to tight-formation Wolfberry and Wolfbone commingled production in the Permian Basin, which employs 150 rigs, or about half of the national vertical oil-directed rig count.

Of the remaining vertical rigs in the US, approximately 45 are drilling on the Central Basin Platform (CBP), the buried uplift that separates the Permian Basin into a butterfly-shaped feature with the Delaware and Midland sub-basins serving as wings.

And it is here, atop the CBP, that a renewed interest in legacy targets signals a revival under way in conventional development, the most neglected segment in oil and gas. The CBP is a natural for this theme. It features shallow, historically prolific fields. The Texas portion of the CBP has produced more than 12.4 billion barrels of oil in 90 years, mostly from shelf carbonates in upper Permian-age San Andres and Grayburg formations, or the underlying Glorieta. These highly porous formations are naturally suited to secondary and tertiary recovery efforts and are at depths shallower than 8,000 feet, featuring a low-cost, low-risk, high-rate-of-return opportunity.Couple that with attractive oil prices, and you have the context for renewed interest in conventionals.

Similarly, in an age when seemingly every oil and gas headline incorporates some variation on “unconventional,” a curious theme is unfolding on the deal-making front. Over the past 15 months, the industry has witnessed more than $3.5 billion in transactions involving conventional CBP properties. The most notable is SandRidge Energy Inc.'s CBP exit in December 2012 via a $2.6-billion transaction with Sheridan Production Co. LLC. Other recent CBP buyers include upstream master limited partnerships such as Midland-based Legacy Reserves LP, which lassoed $520 million in legacy assets from crosstown neighbor Concho Resources Inc. in November 2012.

That churn in CBP properties is partly the reason the Permian Basin has gone from comprising 10% to 15% of domestic transaction deal flow in 2010-2011 to between 30% and 40% of deal flow in second-half 2012.While it is no surprise to casual observers that domestic unconventional transactions, at $93.7 billion over the past five quarters, are almost double the $49.4 billion in conventional deals, it is a different story in the Permian Basin. There, conventional deals tallied $11.9 billion during the same time period, while unconventional deals lagged a distant second at $8.4 billion, according to the Hart Energy A&D Database.

So what explains the Permian anomaly?

“The public companies are so focused on unconventionals that you see a lot of companies exiting the Central Basin Platform, selling their good vertical conventional properties to focus on horizontals,” said Scott Richardson, cofounder and principal of RBC RichardsonBarr. He spoke on a panel at the DUG Permian conference in Fort Worth in April. The Houston-based broker was involved in both the Sheridan/SandRidge and Legacy/Concho transactions in 2012.

“On the Central Basin Platform, all of the sellers in the $100 million-plus market have been public companies,” Richardson said. “One hundred percent of the buyers have been financial buyers, either backed by private equity, or MLPs. The Permian is a very liquid market. MLPs right now, in this interest-rate environment, are extremely aggressive, and almost all of the MLPs are focused on the Permian.”

Similarly, there is an army of private-equity-sponsored firms ready to buy the right package. Richardson counts 250 energy management teams backed by private equity in the domestic market, with 30% of those in the Permian Basin. In all, private-equity-sponsored firms have more than $50 billion to deploy, and many are now seeking conventional assets.

Although all was quiet on the transaction front during first-quarter 2013, Richardson expects the pace to quicken this year, especially in the Permian, where he projects an increase in the number of transactions in the range of $100 million to $500 million. Drivers include private-equity capital looking for alternatives to unconventional drilling, where a single horizontal well cost can exceed $8 million. A more subtle driver in the new trend toward conventional is that the unconventional inventory at several public independents now extends out more than a decade.

“There is not any company that has enough capital to fully exploit that, so you're going to see a lot of the public guys sell conventional,” Richardson said.

Applying enhanced recovery

In the case of Sheridan Production Co., which invested $2.6 billion in the old Sand - Ridge/Arena properties, the CBP offered an opportunity to apply experience in enhanced recovery to one of the premier oil-producing regions in the US

“SandRidge was more involved with downspacing,” Lisa Stewart, chief executive of Houston-based Sheridan, told attendees at DUG Permian. “We will be focused more on where we can install waterfloods. That is where we see the greatest opportunity.”

The company employs an acquire-and-exploit strategy focused on well enhancement. Activity mostly involves day-to-day blocking and tackling, such as installing surface lift systems or, alternatively, electric submersible pumps (ESPs). Sheridan currently has 450 ESPs at work in the Permian Basin.

“It's a big part of our business, and being able to manage having the right pump in the right well at the right time, and then having the electricity that goes with that, is a big part of what we do, and we do it cost effectively,” Stewart said.

Three out of five of the company's previous Permian Basin transactions involve waterflood enhancement, though the firm also employs infill drilling and other standard methodologies in mature conventional plays.

Sheridan, which was formed in 2006, operates as an analog to a private-equity structure, raising money from institutional investors to acquire and manage mature conventional properties. The company raised $1.3 billion in equity in 2007 and established a second fund that generated another $1.8 billion in equity in 2010. It also relies on reserve-based debt financing. Sheridan has closed eight acquisitions for conventional properties, totaling $5.3 billion, mostly focusing on transactions larger than $100 million having a significant PDP component.

“We want to continue to be in the deal flow in the Permian Basin,” Stewart said. “Our pitch is: Go chase that unconventional stuff and sell us your conventional assets. We're happy to take them off your hands.”

The revival in conventional drilling on the CBP is not relegated solely to small or private independents. Larger players also are adapting the technological breakthroughs opening tight-formation plays to legacy conventional resources.

Apache Corp. is adding unconventional drilling techniques to its CBP toolkit not only for prospecting previously untapped, lower-lying Pennsylvanian-age formations, but also for exploiting the shallower conventional Permian-era San Andres and Grayburg fields that have figured prominently in secondary and tertiary recovery. Rather than extending water-floods or COefforts onto the flanks of existing reservoirs, as other operators are doing, Apache is capturing incremental barrels in legacy fields by using horizontal drilling and completion techniques.

“With new completion technology, we get such good performance on the wells on the infill that we're moving forward without a COsource,” said John Christmann, vice president for Apache Corp.'s Permian business unit, in a presentation at DUG Permian. The company will spend more than $2.3 billion in the Permian in 2013, mostly targeting frontier shale plays like the Wolfcamp and Cline, but also on horizontal efforts in conventional plays on the CBP.

“We've had great success moving off those flanks, drilling horizontally and using unconventional technology in a conventional reservoir,” Christmann noted in the break-out session. “There are applications for unconventional techniques in all of those fields. We're probably one of the most active horizontal drillers on the CBP, not just for unconventionals.”

And that leads back to the gradually rising star of conventional drilling. The trend signals a subtle, but important, reorientation in industry structure. Previously, private equity underwrote experienced management teams who were pursuing a geologic idea or concept. Those management teams acquired acreage, proved up the concept, then ultimately flipped the package to a larger public firm with deeper pockets and an insatiable need for a steady pipeline of new prospects to grow production and keep shareholders happy. This age-old cycle traditionally provided the creative ferment to industry evolution.

Now the opposite is happening. The big public companies are struggling to digest a banquet of future unconventional prospects. Consequently, they are flipping conventional properties back to smaller companies whose experienced management teams are often financed by private equity.

It is a theme that reflects the early 1990s, when the majors spun off domestic properties to chase the big elephants and potential growth overseas. That movement gave rise to the large-scale public independent and, later, the rapid development of shale resources.

For conventional drilling, what goes around comes around. That might be why the rapid expansion in unconventional drilling over the past half decade could very well be the best thing to hit conventional drilling since $90 oil.

For more coverage of DUG Permian, see OilandGasInvestor.com and UGcenter.com.