A version of this story appears in the September 2017, edition of Oil and Gas Investor. Subscribe to the magazine here.

At 2:45 a.m. on the May morning that WildHorse Resource Development Corp. was scheduled to give its first-quarter conference call after having gone public in December, CEO Jay Graham and his executive team were inking the final signatures on a $625-million deal with Anadarko Petroleum Corp. and KKR for a swath of acreage in the East Texas Eagle Ford play.

“A lot of people didn’t get any sleep that night,” Graham said, “but it was important because, with the results we announced in the first quarter, it was a game changer for our company.”

Jay Graham, WildHorse CEO.

Just five and a half hours later, the WildHorse executives announced the deal and results. Reflecting completions honed during the downturn, 30-day IPs on some of the recent wells were around 1,000 barrels of oil equivalent per day or higher, and EURs were three and four times higher than offset older completion designs.

While WildHorse had been making solid returns with its previous wells, these numbers were quite attractive for the East Texas Eagle Ford.

“When they saw those results, our competing bidders said, ‘We could’ve evaluated that deal differently had we have known of the well results that you guys just put out.’ If we hadn’t executed the deal before releasing the results on the earnings call, I think we still could have reached an agreement, but it would have cost us much more money.”

Additionally, mindful of balance sheet metrics, WildHorse constructed a unique financing mechanism to pay for the deal. While a portion of the cash price was pulled from its revolver, WildHorse raised $435 million from The Carlyle Group in return for preferred stock, considered a mezzanine equity instrument, which pays a 6% annual dividend either in cash or additional shares of preferred stock at WildHorse’s option. KKR elected to take its $69-million consideration in the form of WildHorse common stock.

Graham and WildHorse co-founder Anthony Bahr met while attending Texas A&M University and worked together as young engineers with Ocean Energy, led by CEO Jim Hackett, in the late 1990s. When Devon Energy Corp. bought Ocean, Graham followed Hackett to Anadarko, and Bahr went to Hilcorp. But the two always knew they would start something together and, in 2007, they reached out to their former Texas A&M engineering professor B.P. Huddleston for advice on doing so. “It’s about time,” Huddleston responded, as he always figured the two would start their own energy firm. He provided them their initial seed money.

He also sent them to Natural Gas Partners (NGP) for capital 10 years ago, and the duo has partnered with NGP ever since.

Graham and Bahr built a position in Terryville Field in North Louisiana, a zig as other companies zagged into the burgeoning Haynesville Shale nearby, and ultimately went public as Memorial Resource Development (MRD) Corp. In 2016, Range Resources Corp. scooped up MRD, in which Graham was CEO, in a $4.4-billion deal.

As Graham and Bahr took MRD public in 2014, the partners had secured financing from NGP for WildHorse Resources II, which owned an undeveloped piece of acreage on the edge of the Terryville play. Soon after the Range merger closed, Graham rejoined WildHorse II. Reprising their previous strategy, NGP rolled up four East Texas Eagle Ford portfolio companies into one entity called Esquisto, then combined it with WildHorse II to IPO as WildHorse Resource Development Corp. Just the third E&P to IPO coming out of the commodity downturn, WildHorse raised $412 million in December 2016 at its launch.

Simultaneous with the IPO closing, WildHorse acquired approximately 158,000 net acres from Clayton Williams Energy Inc. Together with the Anadarko purchase, the company planted more than $1 billion in the East Texas Eagle Ford in just under six months. Pro forma for the deals, WildHorse holds approximately 385,000 net acres in the play, making it the second-largest acreage holder across the Eagle Ford trend, and another 100,000 acres in North Louisiana.

WildHorse takes its name from Graham’s family ranch near Bray, Okla., itself named after the creek that runs through it. “To see the name traded on the New York Stock Exchange is pretty awesome,” Graham said. He chatted with Investor recently at its offices in Houston.

Investor Why did you IPO WildHorse Resource Development Corp. when you did?

Graham We’ve learned through the years that if there’s a market window open, and you’re trying to execute a capital markets transaction, you need to do it. You can’t time the market thinking in a few months maybe it will be better, because the equity window can close in a heartbeat.

At MRD, our first secondary offering post the IPO happened in October of 2014, a very short time before OPEC announced they weren’t cutting back production in ’14, which crashed the market. We got the secondary done, and then the markets were closed for almost two years.

When we saw them open in December of 2016 with the next OPEC announcement, it was like, it’s time to go, since our offering materials were ready. When it’s open, you had better capitalize on your market opportunities. We had essentially the last IPO of 2014, and one of the first IPOs coming back.

Investor Why IPO at all? Typically, private equity-backed companies would prefer to sell straight out rather than go public.

Graham Public currency is an advantage as an acreage consolidator. And we’re still growing and still trying to accumulate a larger position. Natural Gas Partners (NGP) will own pro forma for the acquisition close to 55% of the outstanding equity, which is a very concentrated investment for a private equity firm, so we needed to go to the public markets to access more equity to help us get the deals done that we want to do.

Investor So why didn’t you IPO the whole company rather than just 20%?

Graham We IPO’d in that same neighborhood at MRD. There are SEC and market conventions that generally dictate offering parameters, and we have the ability to access the public markets for additional add-on equity if needed. We’re not ready to sell the whole company, because we see the growth potential in our existing assets. The Clayton Williams acquisition in conjunction with our IPO was an opportune time to access the public markets to facilitate our growth profile. Plus, it’s a great opportunity for the public to get into an area that’s not called the Permian that has excellent returns.

Two rigs drill for the Eagle Ford formation for WildHorse Resource Development Corp. on the Victorick four-well pad in Burleson County, Texas.
(Source: Wildhorse Resource Development Corp.)

Investor Was the ability to fund the Clayton Williams acquisition contingent on raising enough funds through the IPO?

Graham Yes and no. We could’ve raised the funds inside the NGP family if it were necessary. The hope was to close the acquisition along with the IPO. At the IPO, we had the Esquisto properties and the WildHorse properties, which made up WildHorse II. Concurrent with the IPO, we were going to close the Clayton Williams acquisition, which was an additional 158,000-plus acres.

That caused some stress with the IPO, a combination of the market conditions at the time and then some market players knowing you’re trying to close a large acquisition with an IPO. That gave certain investors a little extra leverage over us, I think. Part of the reason probably that we priced below our range was trying to close that acquisition along with the IPO, but fortunately we were able to complete the acquisition.

Still, we were pleased to IPO when we did because, essentially, the markets have been closed for an IPO process since then. If we hadn’t been able to get out then, I’m not sure we could’ve done the Anadarko acquisition.

Investor Can you explain how you financed the Anadarko deal and why you did it that way?

Graham We financed the deal appropriately with the right amount of debt that maintains our 2x leverage (net debt/EBITDAX) goal. Then we asked, do we want to issue more common equity? Well, we’re 20% below our IPO price with a stock price that I don’t want to stress even harder, so you look at other options, [and we came up with] a preferred equity instrument.

We were able to get one of the top partners in the industry in The Carlyle Group to buy the entire preferred piece. Really, you’re selling your equity at a premium to where it’s currently trading and picking up an extremely high-quality partner and, along the way, picking up a second, very high-quality partner in KKR, which had been a joint-venture partner with Anadarko. KKR elected to take their share of the deal in WildHorse common stock and further participate in the development of the East Texas Eagle Ford as a common equity holder of WRD.

With one deal, we picked up a great asset in East Texas, which is germane to our development story, and then two partners in KKR and Carlyle that I think anybody would be proud to be associated with. It continues to broaden our equity ownership, and we felt that was the best way to finance the deal with the way the market was at the time.

Investor Why are you targeting the East Texas side of the Eagle Ford over other desired plays?

Graham We were looking to increase share value in an overlooked area. Similar to WildHorse I, which later became MRD, we returned over 10 times to our initial investors with that initial equity commitment by finding value in an overlooked area.

Today, in 2017, where do you do that? You do it in places where people don’t look, or people aren’t excited. It could be a new area. It could be an old, tired area that people have given up on or are not interested in, that maybe isn’t the flavor of the day. We bring in the latest drilling and completion technology and efficiently operate and, hopefully, turn it into the flavor of the day.

That’s what we did with Terryville. We took a play that Petrohawk (Energy Corp.) was leaving to go chase the Haynesville and the Eagle Ford in 2010. We took a noncore area for another operator that looked to be an old, legacy Cotton Valley play and turned it into a great IPO story.

The East Texas Eagle Ford is not an unknown play. A few years ago, Anadarko was very active, Apache was very active, but they’ve all left. (Note: Apache still owns acreage in the area, but is not currently drilling). It’s an opportunity to acquire and consolidate a large position from quality companies and be the only guy in town. We’ve done this before.

Investor How do you achieve those returns?

Graham If something doesn’t have 50% or more development potential, we’re probably going to shy away from it. Again, we’re looking for significant returns and an inventory with development potential. For example, we’re looking at areas where we can build an extensive scale with outsized returns. That’s where we focus.

That’s hard to do in the Permian because everybody’s competing there, so we go to places where we have reduced competition. Now, we have competition here. Private equity is pretty active in this area, but when you build the scale we have and the focus we have, it creates advantages and operational flexibility.

In the Permian, some companies are paying $40,000 an acre. We’re acquiring our acreage for $1,000 to $3,000 an acre and still getting leases for less than $1,000 an acre. So you’re getting in for 20 to 40 times less than some Permian entry costs. When you look at it on a per-location basis, we’re picking up drillable locations for as low as a quarter of the cost of the Permian with very similar returns. The difference is we have up to two or three benches; they may have five or six.

Investor How do you compare the Eagle Ford Shale on the east side of the San Marcos Arch to the popular South Texas Eagle Ford Shale?

Graham To me, there’s not a whole lot of difference. The misconception, I think, is this area is not as thick or that it is thinner. When you come across the arch, the Eagle Ford bends, but when you get into Burleson and western Brazos counties where we are, we’re focused on geologic properties that set it apart and allowed us to generate our results to date.

We just happened to run into a very carbonate-rich area, an area where the oil gravities and GOR (gas-oil ratio) are optimal for flow, where the structure is just right, the permeability, porosity and all of the rock properties come together. It all comes together just right in Burleson County.

Investor You dropped more than $1 billion between your two most recent acquisitions in a short time frame. What gave you the conviction to do that?

Graham The wells we were drilling. We’ve had a rig going essentially the whole time while everybody else has left. We’re continuing to advance our frack design. We’re seeing great well results. We were drilling these wells at generally 100% interest. Nobody else had the data from our recent activity. We’ve placed them in areas that we felt like gave us a competitive advantage to evaluate surrounding offset operator acreage.

We wanted to get the Anadarko asset early in the life of the public company because our results are reported every three months and our outperformance wasn’t going to be propriety for long. If we don’t go out and get the Anadarko asset early, with the results that we’ve released in the fourth quarter and in the first quarter, it starts moving the needle on the price of those acquisitions by creating upward price pressure.

Side-by-side fracks take place on Wildhorse Resource’s Victorick four-well pad in Burleson County, Texas.
(Source: Wildhorse Resource Development Corp.)

Investor How have you improved well productivity?

Graham I started out with Halliburton as a frack engineer in Hobbs, N.M. When we fracked wells back in the day, it was how far out from the wellbore could we frack? It was all about the wing length of the frack. Today, in these tight shale plays, the focus is on how effectively can we connect to all of the rock? We’ve got a lot of rock in that horizontal that we’re having to connect to and create the most efficient frack job.

The differences from Generation 1 completions to Generation 3, where we are today, is different fluids, stage and cluster spacing and, most importantly, sand loadings. We’ve gone from gels to slick water. We’ve gone from 1,500 pounds per foot of sand to more than 3,700 pounds per foot, and we’re testing upward of 5,000 pounds per foot. With cluster spacing, we were at 200 feet; now we’re at 150 feet and we’re continuing to change that as we go. A lot of little tweaks.

Anadarko, Apache and Clayton Williams curtailed well activity in general in 2014 when we were all in a Gen 1 stage. We progressed into Gen 2 and Gen 3. We’ve seen an increase in EUR on average of over 34% on a per foot of lateral basis since the Gen 1 design, so it’s definitely increased the recovery per foot.

In some areas we’ve seen as much as a three to four times increase. Legacy offset wells that were in the 30 to 40 barrels per foot range on a Gen 1 compared to 125 to 130 and over on some recent offset Gen 3 wells, just by increased sand loadings.

Investor Why is 90% of your capex going to the Eagle Ford at the exclusion of your North Louisiana assets?

Graham As a newly public company we need to quickly show results to the market. Cycle times in the Eagle Ford are approximately 14 days spud to rig release. Spud to rig release in North Louisiana is up to 50 days. We can get a two-well pad from spud to first production in about two months in the Eagle Ford, where first production in North Louisiana on a two-well pad is four to five months. That’s really what drove the increased focus on our East Texas assets. In addition, the Clayton Williams acquisition and Anadarko acquisition announcement led to an increased focus on the Eagle Ford.

Investor Can your North Louisiana assets compete for capital with Eagle Ford?

Graham Absolutely. It competes on a return basis to our Eagle Ford properties very well. But with approximately 385,000 acres in East Texas vs. approximately 100,000 in North Louisiana, just from a scale perspective, naturally you’re going to have more activity in East Texas. But it most definitely competes on a single-well returns basis.

Investor Despite the wells being deeper and more costly?

Graham But they’re extremely prolific. In Terryville Field, we have seen IPs well over 20 to almost 30 million cubic feet per day in production. We have great returns there. I think we’re allocating the right amount of capital on a cash-flow burn basis to that asset to develop it appropriately. We’re starting slow because we came into it with no rigs and are adding as we go. We are currently at two rigs in North Louisiana and are comfortable at that activity level in balancing the capex spend and resulting cash flow.

After WildHorse I went public as Memorial Resource Development Corp. and ultimately sold for more than $4 billion, WildHorse Resource Development Corp. CEO Jay Graham took the second iteration public with a similarly formidable footprint in the Eagle Ford and Cotton Valley plays.
(Source: Steve Toon)

Investor Do you aim for a particular oil and gas mix in your portfolio?

Graham No. We’re essentially a pure oil play and a pure gas play. We see having the gas asset as a natural hedge to commodity price swings. We’re fairly agnostic to what that product is. It’s all about returns for us.

Investor What’s your plan going forward?

Graham We’re going to be two rigs flat (in North Louisiana) in 2017, which will bring on nine wells this year with seven of those wells coming online near the end of the year because we picked up the second rig in Q2. Our current plan is to stick with a two-rig there. In the Eagle Ford, we are exploring optionality around adding a sixth rig late in the year to further delineate our acreage position.

Investor Do you want to expand beyond these particular plays?

Graham We’re still looking to add to our position, both in Burleson County and up and down the Eagle Ford trend. We’ll be opportunistic. We’ll do it the right way, and we’ll pay what we think is the right amount for us to get the returns that we desire. We’re focused in the Eagle Ford essentially from the Rio Grande to the Brazos River, along with our North Louisiana asset. Will we never go to the Permian? I won’t say that, but we’re not looking to. Will we never go to Scoop/Stack? Probably not but, you know, I’ll never say never.