Blue Whale Energy North America seemed to pop onto the scene with a $1.1 billion Permian acquisition in late November, but the company had quietly closed another $315 million deal earlier in the year, bringing its total to an eye-opening $1.4 billion in a year almost devoid of dealmaking.

What’s more, the capital to close those deals was sourced by Chinese investors—an interesting twist after foreign capital had mostly dried up following a string of multibillion-dollar shale play joint ventures in previous years. Specifically, direct investments by the Chinese into U.S. oil and gas assets had been thwarted by U.S. regulators in prior deals going back to the landmark failed CNOOC bid for Unocal in 2005 and the more recent attempt on ERG Resources by a Chinese company in 2013. Both of the Blue Whale deals, though, passed muster with the Committee on Foreign Investment in the U.S. (CFIUS), the body that had shut down the aforementioned mergers.

A peek behind the Blue Whale nameplate reveals Curtis Newstrom as leader of this effort, a six-person shop situated near the Energy Corridor in Houston. Most recently, Newstrom played the role of senior vice president of business development for Midstates Petroleum before it consolidated its management to Tulsa, and before that, of vice president of business development for the upstream MLP Linn Energy, an acquisition juggernaut during his tenure. His lineage traces back to Burlington Resources, and to the many CEOs spawned by that company in years hence.

Newstrom formed Blue Whale in early 2014; yet, while Blue Whale is built on his concept, the company itself is foreign-owned.

While with Midstates, Newstrom was approached to be the boots-on-the-ground A&D representative for Blue Whale Energy Ltd., the energy investment arm of Beijing-based private-equity firm Phoenix Tree Capital. He had seen the logistical difficulty Chinese companies faced in making U.S. acquisitions through offers on Midstates’ Louisiana assets, and Meidu Energy Co. Ltd.’s successful purchase of Woodbine Acquisition LLC in 2013.

“The way Asian companiess do business is typically a much longer time horizon than U.S. mandates will allow,” he said. “So the deal was to come up with a way to be competitive in the U.S. marketplace.”

Newstrom proposed setting up a fully staffed A&D shop that would source deals, and Blue Whale North America became the A&D arm for Blue Whale Energy Ltd. in China.

In April, Blue Whale closed its first deal with Juno Energy II, acquiring a 7,100-net-acre waterflood in Crosby County on the northern edge of the Permian Basin producing 2,000 boe/d. In November, it finalized another Permian deal with Tall City Exploration and Plymouth Petroleum for more than $1 billion, this time 78,000 net acres in Borden and Howard counties producing about 6,000 boe/d with significant drilling upside.

Blue Whale, however, does not take ownership of the assets, at least not for long. Instead, they are operated by Surge Energy America, a subsidiary of Yantai Xinchao Industry Co. Ltd., a Shanghai-traded public conglomerate with a $2 billion market cap. Yantai Xinchao became the ultimate parent of the assets in the first two deals. More are likely.

“Yantai Xinchao had a desire to transform into an energy company, specifically to invest in U.S. and Canada upstream oil and gas,” said Newstrom. “The platform is for us to be out front identifying acquisition opportunities for companies like Xinchao and others.”

Oil and Gas Investor caught up with Newstrom at Blue Whale’s headquarters in Houston.

Curtis Newstrom, CEO, Blue Whale Energy

Investor How is the Blue Whale investment model structured?

Newstrom Think of us as a service company sourcing the deals, and we get paid a percentage of each deal. That’s our incentive and our upside.

Phoenix Tree Capital is a private equity fund that invests not only in energy through Blue Whale, but in other industries, both in China and abroad.

However, there’s a significant difference in private equity between the U.S. and China, in that U.S. private equity doesn’t logically own public equity—at least not for the long term. In China, they do. So you have a group of investors within Phoenix Tree Capital that are typical LP/GP investors, and they are making significant investments in companies like Yantai Xinchao. They are doing that because Yantai Xinchao is ultimately going to buy assets in the U.S. that will hopefully expand their trading multiples. They’ll get their return from the equity appreciation of the public company.

Investor What piqued your interest about this work, which is a little different than what you’ve done before?

Newstrom Talk to my wife about this leap of faith. I can tell you, it wasn’t easy, but it was time to pursue another opportunity.

My background in and enjoyment of the oil and gas industry come from acquisitions. I love doing transactions, I love being involved with the technical evaluations of acquisitions—how you get there, how you bid it, how you compete—all that. I’ve done operations, reservoir engineering and managed asset teams, but I really like A&D.

The thing that got me over the hump was that I felt like it was a well-thought-out business model. They were giving themselves a good chance to be successful, whereas a lot of Asian companies have not done that. This concept of being on the front end, potentially representing multiple public companies in China, is what’s attractive. If each one of those companies has a desire to build a fairly substantial position, now we’re talking substantial capital to deploy and a significant number of transactions, which is what I like to do. That was the biggest driver for me.

And to be able to do $1.4 billion in transactions in our first year is pretty phenomenal. I give my team a lot of credit. So whether lucky or good, we are very proud of our strong start. We want to be considered a legitimate buyer in the industry.

Investor What’s your strategic plan?

Newstrom Our strategy is to grow through fairly significant acquisitions in the U.S. and Canada. Our target is between $500 million and $1 billion [US$]. We’re looking for assets that have a fair amount of existing cash flow to help fund all or part of the drilling.

The Chinese investors realize that the real upside comes in the form of drilling, not just in buying and producing properties. I get the question a lot: Are you just looking to buy PDP, an MLP-type deal? That’s not us at all. We want to find properties that have existing cash flow, because we’re not going to get into rank wildcat projects. We want to have a certain amount of proven reserves, but also a large amount of inventory to put drillbit dollars to work once we own the asset.

Investor Do you have a focus on oil vs. gas, conventional vs. unconventional?

Newstrom All oil right now. With gas prices where they are, that’s off our radar for now. Our team has worked both conventional and unconventional. It’s a returns-model, so it’s really where the returns make the most sense.

Investor Do you have concerns about CFIUS approving Chinese-backed acquisitions?

Newstrom Sure. There’s a focus on national security, the proximity to strategic assets in the U.S. We are cognizant that the federal government has to approve every transaction, and there is obviously heavy scrutiny on Chinese investments, so we try to make sure that we target areas that we think have high likelihood of being approved.

I’m sure you’re familiar with the Goldleaf/ ERG deal that did not get approved in California a couple of years ago. The federal government said due to the assets’ proximity to the coast and their proximity to a couple of strategic military bases, they weren’t going to allow a Chinese company to own majority interest in those assets. So, unfortunately, the deal fell apart.

But then, also, CFIUS must have an understanding of who specifically is involved in the deal. So when we do a CFIUS filing, we supply information on all companies involved and the people behind them. They want to make sure the investment group is a benign group and doesn’t represent a threat to the U.S.

I don’t want to waste time pursuing assets that have a low likelihood of being approved. That’s why we enlist the support of legal and consulting groups, like DLA Piper and the Cohen Group. Many members of the Cohen Group were formerly with CFIUS, and we’ve tapped them to get their opinions on certain areas of interest. DLA Piper has represented us as outside counsel since our inception and has tremendous experience in foreign investments in the U.S. So it definitely has to factor into our strategy.

Investor Will CFIUS approval be a part of the process of every deal?

Newstrom It’s a voluntary filing. If you decide not to file with CFIUS, and then CFIUS comes back later and unwinds your deal, that’s catastrophic. For that reason, we try to be as transparent as possible.

We want to develop a strong relationship with CFIUS to let them know we’re not a risk. We’ve made sure they know we want to continue doing this as a business.

Chinese public conglomerate Yantai Xinchao wanted to invest in U.S. and Canadian upstream oil and gas.Newstrom’s Blue Whale Energy is identifying acquisition opportunities for Yantai Xinchao and others.

Investor How much capital does Blue Whale have available to do deals?

Newstrom It’s not a fixed number. I wouldn’t say it’s unlimited, but it’s somewhat open season if we start working for multiple companies. There’s a multiplying effect. Let’s say Yantai Xinchao decided to put $3 billion to $4 billion to work over the next five to 10 years. If another company next door does the same, you’ve doubled that.

When we started, multiple companies were interested in putting significant capital to work. The market dynamics both here and in China have had a negative impact on that interest level, but over the next 10 years you could see $5- to $10 billion of capital deployment here. That’s significant. So it depends on how much appetite there is from various Chinese companies to pursue these kinds of opportunities.

Investor Could current oil prices dampen their interests?

Newstrom I would tell you that Yantai Xinchao is bullish in this low-price environment. They see a good opportunity to invest and get things at discounted prices. Other companies that we’ve talked with are not as bullish, so there’s been a pretty significant reduction in the number of companies that are stepping up and saying they want to make the investment. That’s what we’re working through.

My hope, like everyone else’s, is that prices rebound in the near future. There’s a marked difference between $90 oil when we started and $36 oil today. If prices get back into the $50 to $60 range, we will have more companies, like Yantai Xinchao, interested in stepping up investment activities.

Investor During the shale boom, billions of dollars of foreign capital—particularly Asian funding—came into the U.S. via joint ventures. Presumably, many of those companies are dissatisfied with their returns. In what ways does this differ?

Newstrom The biggest difference is operated control. I think a lot of Asian companies were disappointed with their JV investments because they were investing in nonoperated, noncontrolled positions where they were at the mercy of the operator. The investors that are behind us are big on making sure there is control, that we control the pace of activity and the things we do strategically in different economic environments. They don’t want to spend capital on wells with marginal economics. We want to control our destiny.

Investor Does Blue Whale stay in the deal after ownership of the assets passes to the Chinese public company?

Newstrom No, Blue Whale just has the role of finding deals, but I personally have two roles. My role is to not only manage the team that finds and closes deals, but to sit on the boards of the operating companies we set up. By being a board member, I’m staying in touch with what each company is doing to prosecute its plan. Part of my responsibility is to keep an eye on the management team to make sure their investments are properly stewarded.

When we bought the Juno assets, I convinced some former colleagues at Midstates who didn’t make the corporate move to Tulsa from Houston to come over and build an operating team called Surge Energy America to operate those assets. Yantai Xinchao owns Surge Energy, which will operate the Tall City acquisition. I’m on the board, and another representative from Blue Whale Ltd. in Beijing is chairman.

Investor Where else might Blue Whale buy?

Newstrom We’ve looked at assets from the Rocky Mountains, to the Williston Basin and into Canada; we’ve looked at nearly all of the prolific basins. We’d be willing to go just about anywhere that makes sense, but as you can imagine, in this price environment, when you get much beyond the northern Midland Basin, the Eagle Ford and possibly the Delaware Basin, the economics get pretty challenging.

We’re not speculators on price. We have to start at the current strip and honor that. It’s difficult for us to make sizeable acquisitions where we have to sit on the assets and wait on price to rebound, so our playing field is reduced in today’s environment.

But we’re trying to stay aggressive. We understand that the only way to get in the game with the spread that takes place in a lower-price environment is to make some assumptions on price sensitivities for when prices rebound.

We have a fair number of deals that we’re evaluating right now. The goal is to continue on this course. Do we spend another $1.4 billion this year? Potentially. It just depends on what’s out there.

Investor With tens of billions of private equity dollars looking for assets as well, how do you compete without paying too much?

Newstrom The definition of paying too much is different for different companies. We’re more of a long-term, ongoing concern model. And with our financing structure with Chinese equity, our cost of capital is going to be significantly less than the return profiles that these private equity companies demand. That’s our biggest competitive advantage: We can afford to pay a little more. That doesn’t mean we can overpay; we’re always going to have a returns-based model. But the fact that our capital isn’t quite as costly as your typical private equity portfolio company is going to help us.

Investor So what is your next move?

Newstrom Keep looking. We’re digesting a big deal that we just closed, so it’s not the right time to bid right now, but we’re not going to be out of the market for long. As it stands now, we’re in an aggressive asset-capturing exercise. We’re going to start looking hard to put some deals in the mix during 2016.