Scale Does Matter: Earthstone's Robert Anderson on Shale M&A Growth

The OGInterview: Earthstone Energy CEO Robert Anderson spoke to Hart Energy on scaling up when others hunker down.

(Source: Arnaldo Larios / Hart Energy)

By
Deon
Daugherty
Hart Energy

Earthstone Energy鈥檚 production in the Permian Basin closed out 2022 topping its pre-COVID volume by more than 600% from a footprint some 250% larger than its 2019 holdings.

The growth stands out against a backdrop of lackluster upstream M&A dictated largely by COVID鈥檚 downward yank on most business metrics. But all told, the pandemic鈥檚 impact on M&A offers just one snapshot of trouble within an ecosystem of headwinds: the new norm of shareholder angst in the public markets, a general growth slowdown, Russian aggression and wildly vacillating commodity prices each contributed to a skittishness in dealmaking.

Most North American E&Ps looked over the landscape, saw the shadows and opted to keep their powder dry.

CEO Robert Anderson and his team of industry veterans鈥攁 well-oiled machine after working deals together for decades鈥攁lso observed the coming storm. But they saw opportunity within their sites鈥攕everal rounds鈥� worth of opportunity鈥攁nd they pulled the trigger.

鈥淥ur MO is to go out and acquire assets and continue to exploit them better than maybe the last guy or just improve the operations and then continue to buy assets,鈥� Anderson told editor-in-chief Deon Daugherty for The OGInterview.

鈥淲e are not that kind of company that goes to put together a 20,000 acre land position and then drill two wells to flip it. That鈥檚 not our DNA,鈥� he said. 鈥淥ur expertise is to see that somebody put the land position together and now we can go exploit it better than the rest of them.鈥�

That comes down to technical excellence, driving down costs and putting in a top-notch performance quarter-after-quarter.

鈥淵ou don鈥檛 have to be the biggest guy in a basin to operate efficiently. Part of what makes that so interesting is everybody was saying, 鈥極h, you need scale, you got to get to manufacturing mode before you can start driving down your cost.鈥� Little Earthstone was already doing that,鈥� he said. 鈥淲e鈥檙e nipping on the heels of the two big large independents in the Permian Basin in terms of operating cash, costs and margins.鈥�

Handshake dealmaking

Earthstone management hasn鈥檛 forgotten the lessons they鈥檝e each learned in the field, and they recognize that in many cases, the folks working in the field know it the best.

鈥淲e鈥檙e giving people in the field the ability to make decisions without a bureaucracy. We know the pumper in the field is the expert who knows what makes it tick every single day,鈥� he said. 鈥淪o let鈥檚 make it maximize production and minimize downtime. And if it breaks, we鈥檙e going to fix it right the first time. We鈥檙e not going to use a Band-Aid on it so that when we fix it, it will last a long time.鈥�

It works in part because many employees have a long history and built trust throughout the company鈥檚 growth.

鈥淚t does come from our operating teams and their history of being able to make decisions between an engineer and a field guy without having to go to the boss,鈥� he said. 鈥淎nd then they can go out and do things pretty quickly.鈥�

Like attracts like, and many of the vendors that Earthstone works with are smaller service providers who can make decisions standing at the job site instead of in a Houston boardroom.

鈥淲e like to have companies who will grow with us just the same way we鈥檙e growing,鈥� he said. 鈥淲e鈥檝e worked with one frac company in the Midland Basin since 2017. We don鈥檛 have a contract; it鈥檚 a handshake deal. They haven鈥檛 gotten any bigger, but they鈥檝e provided a great service for us over the last five years now, and it鈥檚 worked out well for both of us.鈥�

Permian consolidation

A typical oilfield dynamic during the Permian Basin鈥檚 shale gale has been the build-and-sell model by which consolidation has taken place for the sake of scale and manufacturing mode.

Once the notion that there were 鈥渢oo many鈥� E&Ps in the Permian took hold鈥攁round the same time that shareholders woke up to the 鈥渃apital destruction鈥� they still hold against the industry鈥攁 wave of consolidation took out dozens of small- to mid-cap firms.

When the winds pick up again, Anderson plans to be there to make some deals.

鈥淲e want to continue consolidation,鈥� he said. 鈥淲e have built a track record of being able to integrate assets quickly, efficiently and grow our business. So we鈥檝e more than tripled our production and we'll use that as a kind of a guidepost. Do we want to triple again? I don鈥檛 know that there鈥檚 a number in there.鈥�

To be clear, Earthstone plans to be on the buying end of the deals.

鈥淓verybody says they鈥檙e for sale all the time. We're not ready to sell. I think there鈥檚 some things we can do to still create value. Every public company hates where they鈥檙e trading right now, but I can鈥檛 control that,鈥� he said. 鈥淚 can educate investors of our business and our strategy and our successes and our inventory and all those things, but it really takes them to drive that. And it's an undervalued industry at the moment.鈥�

It鈥檚 true that almost any CEO in the space will lament dismal share prices, despite the spanking that E&P stocks are issuing to the broader market. And still, the generalist investors are reluctant to engage in upstream.

Why?

鈥淲e destroyed a lot of capital, as an industry, and investors are still mad about that. I think there are some who will never come back,鈥� he said. 鈥淯ntil the generalists see that the returns are real in this business and that the discipline is going to stay [the market will struggle]. Maybe it just takes time to heal.鈥�

The COVID effect

As the long-term pandemic鈥檚 long-term implications were coming into view, Earthstone leadership didn鈥檛 necessarily begin sharpening their pencils to redraw the Permian Basin. But the team had been around long enough to spot burgeoning opportunities.

鈥淲e sure didn鈥檛 think that we鈥檇 go from $0 to $2.5 billion with acquisitions over two years,鈥� he said. 鈥淒id we think that we had the bandwidth and the ability to go knock them down? And that after you get the first one, people take notice and it might open up doors for the next one? Yes. And yes.鈥�

And while cash did exchange hands, many of the deals included a stock component that made investment easier and selling perhaps more palatable.

鈥淲e鈥檝e had lots of sellers take Earthstone stock in almost all these deals,鈥� Anderson said. 鈥淲e鈥檝e used equity and the investors for the most part, have come out really well.鈥�

Is the approach something another company could replicate?

鈥淵es and no,鈥� Anderson said. 鈥淚t鈥檚 in our DNA to go out and do acquisitions and then develop the asset, like having organic growth alongside of M&A. We like to use our balance sheet or our conservative platform to be able to grow by producing assets that you can borrow against for [reserve-based lending].鈥�

Moreover, several E&Ps were still under the pressure of heavy debt as the weight of the pandemic bore down. Their credit facilities were limited. Private equity needed to put a win on the board. Companies that were effectively stuck needed an exit.

But perhaps the biggest differentiator between then-tiny Earthstone and its peers?

鈥淲e had the gumption and the track record to go do it,鈥� he said.

Tight club

Earthstone鈥檚 epic increase in scale can be measured by more than barrels and acres. The incumbent headcount addition that accompanies M&A has boosted the firm鈥檚 workforce more than 267%鈥攆rom 60 employees to more than 200.

鈥淲e have created a culture that people want to come to work here. And when you do that, you can get a lot out of people. We鈥檝e got a very talented employee base that has grown up over the last two years with the amount of activity we鈥檝e done in a number of acquisitions,鈥� Anderson said.

鈥淚f we had a different culture, we wouldn鈥檛 have been able to get people to drive as hard as they did because we asked a lot of our employees when we were much smaller.鈥�

Still, among those workers are employees who鈥檝e been with the firm since its private days before the reverse merger in 2014. One reservoir engineering tech drives from Katy, Texas, who has been with this team for over 20 years, to Earthstone鈥檚 headquarters in The Woodlands鈥攋ust shy of 100 miles roundtrip鈥攅very workday. The same longevity of employees exists in the field as well.

鈥淭hat鈥檚 a heck of a commute, but that goes back to the culture that we鈥檝e created.鈥�

Anderson鈥檚 tight team includes his longtime mentor, Frank Lodzinski, Earthstone鈥檚 executive chairman and a build-and-sell specialist since the Reagan years, and COO Steve Collins. The trio, along with others at the officers and staff level, has worked together through various endeavors dating back to the early 2000s.

鈥淚鈥檝e got a blue collar,鈥� said Anderson, whose first break into the oil business was working as a rig floor 鈥渨orm鈥� in North Dakota where wintertime conditions in the Bakken are often enough 30 degrees below freezing.

Anderson was hooked on the business鈥攏ot as much the work as a rig hand as the science of the work. He earned a degree in petroleum engineering from the University of Wyoming in 1986, which timed out to a 67% plunge in oil prices that made jobs scarce. He went on to obtain an MBA from the University of Denver, which put him on the path that he now walks in the C-suite.

鈥淲e鈥檝e been around here a long time. We just get up every day, work hard and do the right thing. Not that any of those other companies that I鈥檝e been with don鈥檛 do that. But the culture was not the same,鈥� he said. 鈥淎nd this culture is so much for me. I鈥檝e had the ability to influence what we were doing.鈥�

Longevity is a consistent theme during a conversation about Earthstone鈥檚 culture. The leadership team also has a long tenure with EnCap Investments LP, a relationship that began in 2013 with assets that are no longer in the firm鈥檚 portfolio. Earthstone is the third Lodzinski-Anderson entity in which EnCap has invested.

鈥淲e鈥檙e a very conservative, consistent company,鈥� he said. 鈥淥ne of our defining characteristics is longevity.鈥�

Indeed, cash from the jars of Vlasic pickles that have lined grocery store shelves since 1942 has been invested in the team鈥檚 oil businesses for more than 30 years across multiple companies, he said.

原文链接/hartenergy

Scale Does Matter: Earthstone's Robert Anderson on Shale M&A Growth

The OGInterview: Earthstone Energy CEO Robert Anderson spoke to Hart Energy on scaling up when others hunker down.

(Source: Arnaldo Larios / Hart Energy)

By
Deon
Daugherty
Hart Energy

Earthstone Energy’s production in the Permian Basin closed out 2022 topping its pre-COVID volume by more than 600% from a footprint some 250% larger than its 2019 holdings.

The growth stands out against a backdrop of lackluster upstream M&A dictated largely by COVID’s downward yank on most business metrics. But all told, the pandemic’s impact on M&A offers just one snapshot of trouble within an ecosystem of headwinds: the new norm of shareholder angst in the public markets, a general growth slowdown, Russian aggression and wildly vacillating commodity prices each contributed to a skittishness in dealmaking.

Most North American E&Ps looked over the landscape, saw the shadows and opted to keep their powder dry.

CEO Robert Anderson and his team of industry veterans—a well-oiled machine after working deals together for decades—also observed the coming storm. But they saw opportunity within their sites—several rounds’ worth of opportunity—and they pulled the trigger.

“Our MO is to go out and acquire assets and continue to exploit them better than maybe the last guy or just improve the operations and then continue to buy assets,” Anderson told editor-in-chief Deon Daugherty for The OGInterview.

“We are not that kind of company that goes to put together a 20,000 acre land position and then drill two wells to flip it. That’s not our DNA,” he said. “Our expertise is to see that somebody put the land position together and now we can go exploit it better than the rest of them.”

That comes down to technical excellence, driving down costs and putting in a top-notch performance quarter-after-quarter.

“You don’t have to be the biggest guy in a basin to operate efficiently. Part of what makes that so interesting is everybody was saying, ‘Oh, you need scale, you got to get to manufacturing mode before you can start driving down your cost.’ Little Earthstone was already doing that,” he said. “We’re nipping on the heels of the two big large independents in the Permian Basin in terms of operating cash, costs and margins.”

Handshake dealmaking

Earthstone management hasn’t forgotten the lessons they’ve each learned in the field, and they recognize that in many cases, the folks working in the field know it the best.

“We’re giving people in the field the ability to make decisions without a bureaucracy. We know the pumper in the field is the expert who knows what makes it tick every single day,” he said. “So let’s make it maximize production and minimize downtime. And if it breaks, we’re going to fix it right the first time. We’re not going to use a Band-Aid on it so that when we fix it, it will last a long time.”

It works in part because many employees have a long history and built trust throughout the company’s growth.

“It does come from our operating teams and their history of being able to make decisions between an engineer and a field guy without having to go to the boss,” he said. “And then they can go out and do things pretty quickly.”

Like attracts like, and many of the vendors that Earthstone works with are smaller service providers who can make decisions standing at the job site instead of in a Houston boardroom.

“We like to have companies who will grow with us just the same way we’re growing,” he said. “We’ve worked with one frac company in the Midland Basin since 2017. We don’t have a contract; it’s a handshake deal. They haven’t gotten any bigger, but they’ve provided a great service for us over the last five years now, and it’s worked out well for both of us.”

Permian consolidation

A typical oilfield dynamic during the Permian Basin’s shale gale has been the build-and-sell model by which consolidation has taken place for the sake of scale and manufacturing mode.

Once the notion that there were “too many” E&Ps in the Permian took hold—around the same time that shareholders woke up to the “capital destruction” they still hold against the industry—a wave of consolidation took out dozens of small- to mid-cap firms.

When the winds pick up again, Anderson plans to be there to make some deals.

“We want to continue consolidation,” he said. “We have built a track record of being able to integrate assets quickly, efficiently and grow our business. So we’ve more than tripled our production and we'll use that as a kind of a guidepost. Do we want to triple again? I don’t know that there’s a number in there.”

To be clear, Earthstone plans to be on the buying end of the deals.

“Everybody says they’re for sale all the time. We're not ready to sell. I think there’s some things we can do to still create value. Every public company hates where they’re trading right now, but I can’t control that,” he said. “I can educate investors of our business and our strategy and our successes and our inventory and all those things, but it really takes them to drive that. And it's an undervalued industry at the moment.”

It’s true that almost any CEO in the space will lament dismal share prices, despite the spanking that E&P stocks are issuing to the broader market. And still, the generalist investors are reluctant to engage in upstream.

Why?

“We destroyed a lot of capital, as an industry, and investors are still mad about that. I think there are some who will never come back,” he said. “Until the generalists see that the returns are real in this business and that the discipline is going to stay [the market will struggle]. Maybe it just takes time to heal.”

The COVID effect

As the long-term pandemic’s long-term implications were coming into view, Earthstone leadership didn’t necessarily begin sharpening their pencils to redraw the Permian Basin. But the team had been around long enough to spot burgeoning opportunities.

“We sure didn’t think that we’d go from $0 to $2.5 billion with acquisitions over two years,” he said. “Did we think that we had the bandwidth and the ability to go knock them down? And that after you get the first one, people take notice and it might open up doors for the next one? Yes. And yes.”

And while cash did exchange hands, many of the deals included a stock component that made investment easier and selling perhaps more palatable.

“We’ve had lots of sellers take Earthstone stock in almost all these deals,” Anderson said. “We’ve used equity and the investors for the most part, have come out really well.”

Is the approach something another company could replicate?

“Yes and no,” Anderson said. “It’s in our DNA to go out and do acquisitions and then develop the asset, like having organic growth alongside of M&A. We like to use our balance sheet or our conservative platform to be able to grow by producing assets that you can borrow against for [reserve-based lending].”

Moreover, several E&Ps were still under the pressure of heavy debt as the weight of the pandemic bore down. Their credit facilities were limited. Private equity needed to put a win on the board. Companies that were effectively stuck needed an exit.

But perhaps the biggest differentiator between then-tiny Earthstone and its peers?

“We had the gumption and the track record to go do it,” he said.

Tight club

Earthstone’s epic increase in scale can be measured by more than barrels and acres. The incumbent headcount addition that accompanies M&A has boosted the firm’s workforce more than 267%—from 60 employees to more than 200.

“We have created a culture that people want to come to work here. And when you do that, you can get a lot out of people. We’ve got a very talented employee base that has grown up over the last two years with the amount of activity we’ve done in a number of acquisitions,” Anderson said.

“If we had a different culture, we wouldn’t have been able to get people to drive as hard as they did because we asked a lot of our employees when we were much smaller.”

Still, among those workers are employees who’ve been with the firm since its private days before the reverse merger in 2014. One reservoir engineering tech drives from Katy, Texas, who has been with this team for over 20 years, to Earthstone’s headquarters in The Woodlands—just shy of 100 miles roundtrip—every workday. The same longevity of employees exists in the field as well.

“That’s a heck of a commute, but that goes back to the culture that we’ve created.”

Anderson’s tight team includes his longtime mentor, Frank Lodzinski, Earthstone’s executive chairman and a build-and-sell specialist since the Reagan years, and COO Steve Collins. The trio, along with others at the officers and staff level, has worked together through various endeavors dating back to the early 2000s.

“I’ve got a blue collar,” said Anderson, whose first break into the oil business was working as a rig floor “worm” in North Dakota where wintertime conditions in the Bakken are often enough 30 degrees below freezing.

Anderson was hooked on the business—not as much the work as a rig hand as the science of the work. He earned a degree in petroleum engineering from the University of Wyoming in 1986, which timed out to a 67% plunge in oil prices that made jobs scarce. He went on to obtain an MBA from the University of Denver, which put him on the path that he now walks in the C-suite.

“We’ve been around here a long time. We just get up every day, work hard and do the right thing. Not that any of those other companies that I’ve been with don’t do that. But the culture was not the same,” he said. “And this culture is so much for me. I’ve had the ability to influence what we were doing.”

Longevity is a consistent theme during a conversation about Earthstone’s culture. The leadership team also has a long tenure with EnCap Investments LP, a relationship that began in 2013 with assets that are no longer in the firm’s portfolio. Earthstone is the third Lodzinski-Anderson entity in which EnCap has invested.

“We’re a very conservative, consistent company,” he said. “One of our defining characteristics is longevity.”

Indeed, cash from the jars of Vlasic pickles that have lined grocery store shelves since 1942 has been invested in the team’s oil businesses for more than 30 years across multiple companies, he said.