[Editor's note: A version of this story appears in the January 2019 edition of Oil and Gas Investor. Subscribe to the magazine here.]

The fracked, horizontal, unconventional-resource bonanza seems ubiquitous across the Lower 48. It is not.

Vertical development of conventional resources is not only alive and well on Louisiana’s Gulf Coast, proponents make a powerful case for its profitability over horizontal drilling and fracking—albeit while the sweet spots aren’t thousands of square miles in size.

Wells can cost 10% of those in shale. Leases can cost as little as 1%. And prices for crude are higher on the Gulf Coast. Louisiana Light Sweet (LLS) usually fetches a price near that of Brent and usually at a substantial premium over West Texas Intermediate (WTI).

It’s old school, but it makes money, according to niche conventional-trap operators like Metairie, La.-based Upstream Exploration LLC, which has almost doubled its production in a year. “We took our production from about 2,200 barrels of oil equivalent a day (boe/d) to about 5,300 in about a year’s time,” said Michael Willis, president.

“We drilled a good well, but we also had some improvements to our infrastructure that has enabled us to increase production overall.”

Of the four wells it’s drilled so far, three are in Louisiana waters up to 25 feet deep. It has 100% working interest in those, which produce from Middle Miocene. It also has a 50% interest in a well in East Texas.

“Overall our production is split about evenly between gas and oil,” Willis said. “Even the gas wells flow with high condensate—about 50 to 100 barrels per million cubic feet (MMcf). We are driven by seismic, some of which is proprietary. We are on our fifth iteration of reprocessing.”

The primary area of exploration is the toe of the Louisiana “boot” in Breton Sound and East Cox Bay where the Mississippi River meets the Gulf. Success has been about 70%.

Its most recent well—in East Cox Bay Field in Plaquemines Parish—encountered 59 feet of net condensate pay with no apparent water from a 75-foot-gross interval in a geopressured Middle Miocene sand at some 12,000 feet. It flowed some 675 bbl/d and 4.9 MMcf/d on choke.

The company has 100% working interest in some 4,100 acres in the field. Privately held, Upstream Exploration is owned by HighBridge Principal Strategies (HPS) and is working with assets acquired in the 2016 restructuring of RAAM Global Energy Co. of which HPS was a creditor.

Another well came online Aug. 15, flowing some 1,700 bbl/d and 13 MMcf/d. It was paid for from cash flow. From the start, gas was moved through existing pipe in the area, “but oil was something of a challenge,” Willis said.

“From our first discovery, we used barges to get the oil out. But, more recently, we have tied into a sales line. That has allowed us to increase our production rate and improve our economics.”

Upstream Exploration is getting Heavy Louisiana Sweet (HLS) pricing, which closely tracks LLS. Lifting costs are between $5 and $6 per boe and the operator’s G&A is some $4 to $5 per boe.

“We generate a lot of free cash that we are reinvesting in operations. We pay about $250 an acre for leases, so we are putting our money into drilling, not into leases.”

Upstream Exploration’s Palmetto production barge in the East Cox Bay Field in Plaquemines Parish, La. (Source: Upstream Exploration LLC)

Upstream Exploration’s Palmetto production barge—including storage tanks—in the East Cox Bay Field in Plaquemines Parish, La. Upstream almost doubled its production in just a year from about 2,200 boe/d to about 5,300 boe/d. (Source: Upstream Exploration LLC)

Willis isn’t seeing competition for leasehold. “There is a high barrier to entry, especially in the state waters. This is a different environment, and we have the technical expertise.”

There are other, mostly private, operators along the Louisiana coast—some small; some, not so small. “The majors have a large P&A (plug and abandonment) situation in this area,” Willis said, “and we are looking for some acquisitions. But we are not getting into the P&A game.”

‘The Hits Are Big’

For Houston-based Mertz Energy LLC, the main focus is a Miocene Lower Planulina gas-trend prospect it plans to drill in Iberia Parish, southeast of Lafayette, La. The company just sold the bulk of its existing production. Details were not disclosed, but it left Mertz this past fall with just five wells and production in the 100s of bbl/d.

“Our main focus is to re-drill our existing prospect with new partners and a new surface location, so we can use a turnkey contract and drill a vertical well,” said James Mertz, president. “The original effort was an extreme-angle well to try to reduce some surface costs, but ended up being more expensive.

“Resource potential in place is very large for a single-well prospect: 88 billion cubic feet (Bcf) of gas and 5- to 6 million barrels (MMbbl) of oil. We can’t give this up because we have the low-hanging fruit on a brand-new 3-D survey: AVO, very strong amplitude perfectly conforming to structure, and rolling over into a fault with pressured shales up-thrown.

“We hope to spud within nine months from finalizing our working-interest arrangements. We are doing that now, and it’s about two-thirds complete.”

The target depth is 16,500 feet. “Rig availability has been an issue,” Mertz added. “There are still some available, but fewer, and dayrates have increased.”

In addition to his oil and gas business, Mertz is active in real estate and venture capital. Informed by that perspective from outside the oil patch, he is clear about the outlook for vertical wells.

“The conventional markets are contracting,” he said. “There are some incredible opportunities, but the marginal developments are simply not viable.”

However, Mertz added, “I like conventional development. The outcomes are binary; there are hits and misses. But the hits are big, just like in my venture-capital business.

“In the resource plays, it’s easier to deploy large amounts of capital in a short time. That is why the big private-equity houses are attracted to the shale plays. Those have a risk profile more like bonds. The risk profile in conventional development is more like equity, and the bond market is many times larger than the equity market.”

Close To Shore

Prospects that Houston-based Blue Moon Exploration Co. LLC has generated currently produce some 10 MMcf/d and about 1,000 bbl/d from about a dozen wells in South Louisiana and Southeast Texas. Most are in South Louisiana, on- and offshore.

Offshore waters can be anywhere from two to 2,000 feet, but Michel Bechtel, president, said he stays close to shore. “I have worked in the federal Outer Continental Shelf, but we are not currently there. We now stay in state waters and inland. Our high ground is a few miles north or south of Interstate 10,” Bechtel said.

If conventional production with vertical wells harkens back to an earlier era in the oil patch, then Bechtel could be one of the color characters of those times as well. In addition to his post at Blue Moon, he is mayor of Morgan’s Point, Texas—population, 339—alongside the Houston Ship Channel.

“I’ve been in this business 48 years,” Bechtel said, “and had my own company since 1983. My business partner, Tom McWhorter, and I have been in the oil patch together forever.”

The headquarters for Blue Moon is in a 1920s-era building the company bought and restored in the historic Heights neighborhood of Houston.

“We are probably one of the more active and successful prospect-generators in the South Louisiana area,” Bechtel said. “We’re producing mostly from the Miocene and Frio sands and currently exploring Lower Tuscaloosa objectives.

“We are looking for working-interest partners to drill and evaluate major potential in East Baton Rouge Parish. That area was a giant trend in the 1970s and ’80s for the majors.”

When the arrangements are made, Blue Moon plans to drill four to five wells. “We generate the prospects, lease the acreage and put together the play,” he said. “Then we go to the industry for working-interest partners.”

There is a smile in his voice when he mentions acreage costs. “Leases are in the range of $250 to $300 an acre in South Louisiana. That is a mere 1% of rates in the Permian Basin.”

Stacked Pay

With multiple sands in a prospect, “we can book more reserves under an acreage block than for most unconventional plays,” Bechtel said. “So, for a few hundred acres, we can look at prospects with 40 Bcf of gas and 5 MMbbl of oil in place. We don’t have to maintain a huge lease block.”

Neither are lease terms onerous. “We actually make money producing hydrocarbons. In the horizontal plays, they seem to make most of their money flipping acres.

“We are privately owned and make money selling oil and gas over the long term. We take wells to depletion. Our economics are fantastic compared with the unconventional stuff.”

Bechtel is “amazed” that there isn’t more interest in conventional production. “If you want to make money, go to conventional. The economics are better.”

He has several theories on why the sector continues to be overlooked. “There are lots of young people in the industry and in finance who have never known anything but unconventional.

“They are just clueless about conventional. As a result, Wall Street only pays attention to shale. The players on the financial side are very young. They just don’t know.”

One other factor may be the legacy complications that beset some operators when they tried to recomplete fields that had been first developed by the majors. There were both legal and environmental issues. Those have mostly been sorted out, but it gave the area a bit of a reputation for a while.

Over at LLOX Onshore Exploration, Covington, La.-based Taylor Butterworth, chief geologist, said, “We have an active drilling program with two rigs—one land and one inland barge. We will operate three to four additional wells by the end of 2018. For 2019, we have about 15 wells that we expect to operate.”

LLOX’s prospects are “probably 80% step-out wildcats and 20% development. Also, to note, our working interest ranges from 50% to 100% with the average around 75%.”

Rig dayrates have increased “due to shale plays’ demand,” he added. “Also, we sometimes struggle to find services because people and equipment are shipped to unconventional basins.”

Meanwhile, though, ongoing demand for services in the Gulf of Mexico “keeps some services in the nearby area.”

A Career In Land, 3-D

Matt G. Chiasson, president and CEO of Lafayette-based Orbit Energy Inc., said oilfield-service costs in South Louisiana “are reasonable, and we’ve been lucky in our ability to find rigs.

“If I need a rig I can usually get one in 30 to 90 days because there is a suite of rigs available that work specifically in this region. We’ve seen activity levels rise in the area,” Chiasson said.

“We have also seen some increase in capital coming in—some from independent companies; some from high-net-worth individuals. Those are savvy investors who are eager to make money—not just book proven reserves.”

Chiasson believes that “the shale plays are really just about proving reserves. It’s a treadmill. You have to prove reserves to get capital, but you need to spend money to prove reserves. Some of the areas work well, but it’s very expensive.”

Orbit is mainly producing from Frio north of Interstate 10 in southwestern Louisiana. “We are using 3-D seismic we shot ourselves or have licensed,” he said.

“We are drilling on a large in-house-generated prospect portfolio, where we drilled 155 wells with a success ratio of approximately 75%—mostly in that non-pressured Frio regime.”

All of Orbit’s wells are on land. They cost $1.2 million to $1.6 million completed; dry holes, less than $1 million. “Our honey hole is that Frio objective. We are also drilling shallower, Miocene targets and some deeper objectives, such as the Cockfield, which is equivalent to the Yegua in Texas.”

The oil zones can be a little gassy, and gas zones typically have high condensate yields. From a prospect with 200,000 bbl of net reserves and low drilling costs, wells are paying out in six to nine months.

Production is less than 1,000 boe/d; the oil is transported by truck. “Gas is a little trickier,” Chiasson said, “but we are in and around known basins and areas of production, so there is usually a pipeline tap within a mile or so.”

The oil gets LLS pricing. “The beauty of the Gulf Coast—and especially South Louisiana—is that we are getting that Louisiana Light Sweet price. We are getting the premium, while many of the other active areas, like West Texas, are taking a hickey.”

Orbit has very little debt. “We raise capital in a couple of ways,” said Chiasson, who is the majority owner, and is also sole owner of Planet Operating LLC. “We just finished a small equity-capital-raise and also go to the industry for working-interest partners. We have a large portfolio of prospects and 1,500 square miles of 3-D seismic data.”

While Chiasson is not adverse to a big pile of capital from private-equity investors, he is circumspect. “To have $50- to $100 million at your disposal would be huge in this Gulf Coast region,” he said. “No doubt some good things can come of that kind of capital infusion, but you also lose some control.

“When they say it’s time to sell, it’s time to sell.”

Meanwhile, Chiasson recalled, “a boutique PE firm came to us several years ago and stayed with us for quite a while. It was a good experience. The key is to have a well-planned model and be upfront and deliver on the business plan.”

In the industry for 30 years, he’s run his own company for 25. “I’m a landman by schooling and trade,” Chiasson said. “I started college in 1984 when everyone in this business was heading for the hills. It was not the best of times.

“However, I became an independent landman in 1989 and started managing large onshore projects in 1994 at the beginning of the Gulf Coast 3-D-seismic phase. Orbit was founded in 1999 as a result of that 3-D-seismic experience.”

Tuscaloosa Trend

Lafayette-based Hise Exploration Partners LLC is the latest manifestation of the legacy Hise companies founded in 1968. The drilling program that’s just starting is the third for this set of Hise entities.

The first ran from 2000 to 2008 and drilled 13 Tuscaloosa Trend gas wells to 20,000 feet in Pointe Coupee, East Baton Rouge and West Baton Rouge parishes.

That achieved a 200% return on investment. Cumulative production has been 90 Bcf and 1.5 MMbbl of condensate. Several of the wells are still producing.

The second program ran from 2014 to 2015 in Pointe Coupee, East Baton Rouge, Allen and Vermillion parishes. Those wells targeted shallower formations. Cumulative production to date is some 2.5 Bcf and some 650,000 bbl of oil.

Forrest Hise, manager, business development, is raising capital for the third program, dubbed “Black Bear.”

“It is custom-packaged based on the private investor,” he said. “Each drilling program reflects the current and long-term trend of the commodity price. Program I was drilled, targeting the deep sourcerock of the Tuscaloosa because gas prices could support the capex budget.

“In the Black Bear program, Portfolio 1 targets shallower, oil-bearing formations using non-pipe-setting wells.”

HEP was planning at press time to spud the first well in the Black Bear program, said Richard Hise, CEO. “Target depth is near 13,800 feet. The wells in this program will be vertical and target oil-bearing reservoirs.

“These wells should flow naturally from partial water drive, which is consistent with other our operations in the area.”

The four prospects for Black Bear are 10,500 to 13,800 feet in depth. Rigs are available, said Richard Hise. “The barge market is typically more available, but they can be hard to move.”

Forest Hise said Black Bear has had “a whirlwind of activity. The major players in private equity have not seen the enormous potential in the Gulf Coast, which is a big advantage in terms of our lease efforts for each project.

“However, the risk profile seen in Gulf Coast prospects is different than for prospects in the resource plays. For example, the returns are greater and the land costs are not as enormous as those in West Texas.”

He added that “investors in the Gulf Coast have to have a contrarian mindset compared with investors who want to pay top dollar for leases and drill a few PUDs in the shale plays.

“Our investors see the opportunity in Louisiana and have felt first-hand the positive results when the log comes into the office, showing large payzones from water-drive reservoirs.”

Publicly held operators have very little presence in South Louisiana; their nearest activity mostly consists of horizontal Austin Chalk development. Transportation is by truck or barge for oil.

“There is a tremendous number of pipelines for gas,” said Richard Hise. “We start early in our planning to get the resource out, working through a marketer.”

It also helps that the Hise companies have been active in the area for decades. “We have a 30-year track record of success and an asset team with 244 years of combined experience.

“We are based in Lafayette and are dealing with local landowners, vendors and operators. We are even on good terms with regulators, having had them out to our operations to see that we do a good job.”