The first baby born on New Year's Day always gets generous press coverage. With the calendar rolling over to 2000, and much of the nation obsessing over the impact of the new millennium, this year's premier newborn was even more celebrated than usual. What was little noticed and unremarked was the genesis of a new Denver independent at the same time. On December 30, 1999, Shenandoah Energy Inc. acquired both the upstream assets of Chevron's Utah business unit and the common stock of The Chandler Co.; the company's first day of business was January 3, 2000. Chevron's decision to transfer its Uinta Basin assets to fledgling Shenandoah was quite a departure from the major's past strategies. Chevron had never structured an upstream deal like this one-in exchange for its Utah assets, it took an equity ownership in Shenandoah and an undisclosed amount of cash, hoping to benefit from the new company's focus on increasing production and cash flow. Simultaneously, Shenandoah acquired Chandler, a long-time Denver independent. Mitchell Solich, president and chief executive officer of Shenandoah, was previously the president and CEO of Chandler. Solich, who joined Chandler in 1993, had been working on the deal for some time. "I initiated the transaction with Chevron in 1996, with the idea that Chandler and Chevron assets could be combined into a new entity," he says. Chandler had properties adjoining Chevron holdings in Utah. "There were many synergies that I could see, if the operations were combined." Indeed, the game plan looked promising: join the operating structure of an experienced, successful independent with assets that had been relegated to back-burner status by a major. Then, add sufficient capital and tender loving care to fully exploit those properties. The acquisitions were funded with a $20-million preferred stock offering, a $10-million initial draw on a $35-million credit facility, and issuance of a $30-million subordinated note. Chevron owns 40% of Shenandoah; Shell Capital and Prudential Capital each own 12.5%; and individuals (the former Chandler shareholders) own 35%. Shenandoah had to mature quickly. "When we came to work on January 3, we didn't have business cards, letterhead, an IT or a human resources department," says Christopher Wagner, executive vice president and chief financial officer. "We spent our first month integrating the Chevron and Chandler assets and operations." The new firm immediately focused on three core areas: Utah's Uinta Basin and Colorado's Raton and Piceance basins. The Chevron assets were mainly in Utah's Uintah County and included several vintage Green River oil properties and a dozen or so recently drilled Wasatch gas wells. At the time of the purchase, the Chevron holdings were making about 2,200 barrels of oil and 5 million cubic feet of natural gas per day. Chandler's properties were much more widespread. "Historically, Chandler had a whole array of properties throughout the Rocky Mountain region," notes Solich. "It owned assets in each of our core areas." Shenandoah quickly began divesting the noncore portion of the old Chandler properties. "The assets we sold included 425 interests scattered throughout six states and 16 counties," says Eric McGlone, vice president of land. "We sold seven packages of properties and received a nice price for the total proved reserves. The sale greatly reduced our day-to-day administrative burden, and allows us to focus on our core areas." Today, Shenandoah's operations are concentrated in four counties in two states. For its first year, the new company has a $66-million capital budget, of which $42 million is devoted to drilling. Wasatch drilling will consume $24.5 million of that total-the firm plans to complete 40 operated wells and participate in 13 outside-operated wells. "For many years, the Uinta Basin's Wasatch play was held back because of high well costs, and a lack of pipeline capacity and available markets," notes Solich. "Today, drilling and completion technology has improved, and pipeline capacity and markets have developed. Drilling activity is now exploding in the Wasatch." Shenandoah's acreage is well positioned in the play. Prospective Wasatch locations underlie large portions of its developed leasehold-held by the Green River waterfloods-as well as its undeveloped acreage in the same vicinity. As of July 2000, the firm boasted a tremendous inventory of 869 Wasatch locations. "The Wasatch interval is about 2,500 feet thick, and we normally encounter between three and six productive sands with total net pay of 50 feet in each wellbore," says Roger Flahive, executive vice president of business development and planning. "The wells make anywhere between 500 million and 2 billion cubic feet of gas, with an average recovery of 1.25 Bcf per well." The Wasatch wells are drilled on 40-acre spacing, and will produce for 40 years; initial production rates average 950,000 cubic feet per day. "It's a highly economic venture," Flahive says. "The Wasatch gas play is very significant," says Solich. "It's very predictable in its results, and the dry-hole risk is only between 2% and 3%. This is a classic manufacturing operation-we drive costs down, we stay ahead of the curve on pipeline capacity, gathering and processing, and we stay on top of the markets at all times." Indeed, in its short history, Shenandoah has already enjoyed great success in lowering well costs. A 7,200-foot Wasatch well had been costing previous operators around $850,000 apiece to drill and complete, says Terry J. Cox, senior vice president of production and operations. "Today, we've reduced that to $520,000 for an 8,200-foot well. Drilling time has also dropped-we've gone from 27 days to 12 days, for a well that's 1,000 feet deeper." The efficiencies have come from several new approaches. Underbalanced drilling has cut costs significantly, and the company has developed a rigless completion procedure. It moves on to the well with a stimulation crew only. "We do five to six frac jobs in one day, separated by composite frac plugs. Then, we drill out the plugs with a completion rig the next day, land the tubing, and swab the well in," Cox says. "We can have a well on production within 12 hours after that." Another bonus: for much of this and next year's programs, Shenandoah's Wasatch wells can be drilled on preexisting Green River well pads. Gathering, processing and marketing efficiencies are other keys to Wasatch success. "We've also developed a significant midstream operation," says Kerry S. Ramsey, vice president of product marketing and president of SEI Gathering & Processing Co. Shenandoah acquired a processing plant as part of the Chevron deal; at the beginning of the year about 4 million cubic feet of gas per day was running through the facility. "We've considerably revamped the plant, and completed additional work on the gathering system," says Ramsey. "We're now at 30 million per day, and by March 1, 2001, we'll be up to 100 million per day." The company is devoting $14 million to gathering and processing work this year, including the addition of a 50-million-per-day train at the plant. Despite its maturity, the Green River oil play still has potential left as well. Shenandoah's major properties are the Red Wash, Wonsits Valley, Gypsum Hills, Brennan Bottom and Glenn Bench units. All but Glenn Bench were Chevron assets. The Green River oil fields were discovered as far back as the 1950s; the waterfloods were put in place anywhere from 10 to 35 years ago. On primary recovery, each new well is projected to make an average of 175,000 barrels of oil, with an initial production rate of around 100 barrels per day. A well costs about $400,000 to drill and complete. Generally, a multitude of sands are simultaneously injected into and produced in the older Green River floods. Says Flahive, "The recovery factor in the more mature properties is quite low-in some cases as low as 4% of the original oil-in-place. On a modern flood such as Glenn Bench, recoveries are around 35%." In the outmoded floods, Shenandoah sees the opportunity to drill between existing wells and find completely unswept reservoirs. "We think that larger portions of these producing complexes can be redeveloped," he says. Presently, the company is targeting part of Red Wash Unit with a $15-million infill program. The budget calls for 35 new Green River wells this year; at press time, 22 of those tests were already down. Solich adds, "As we gain a better understanding of the oil projects, we are identifying more and more opportunities." One unexpected dividend came when Shenandoah determined that some of its Green River wells drilled on federal acreage qualified for royalty relief. "We found that we could take advantage of a federal program that allows us to reduce royalties on certain wells that are near their economic limit," says McGlone. "We expect to save $7 million during a five-year period due to these royalty reductions." The other area where the company has significant drilling activity is the Colorado portion of the Raton Basin. So far, Shenandoah has drilled 28 wells on its Las Animas County properties; it will finish 30 by year-end. These wells cost $285,000 to drill and complete and they produce about 2 billion cubic feet of gas. Production plateaus at 400,000 cubic feet per day after about 24 months of dewatering. "By the end of the year, we'll have 68 wells producing in the Raton Basin, and 47 additional locations to drill," says Solich. Shenandoah's third core area is a proposed natural gas storage property in the Piceance Basin. The Douglas Creek gas storage project lies on the Douglas Creek Arch in Rio Blanco County, Colorado. Shenandoah has completed an engineering study on the depleted gas field, and is in preliminary discussions with potential partners. Although it hasn't yet celebrated its first birthday, Shenandoah has already posted some impressive results. The firm is producing 45 million cubic feet equivalent per day, of which 60% is natural gas. "We're projecting EBITDA of $30 million for 2000," says Wagner. "As of July 1, our total proved reserves are 504 billion cubic feet equivalent, and we have another half a trillion cubic feet equivalent of probable and possible reserves on top of that." Michael McMurray, Houston-based vice president of Shell Capital Inc., says that Shenandoah is one of his firm's star transactions. "Mitch Solich and the rest of the management team are delivering on the development schedule that they had laid out. Since we closed the transaction, Shenandoah has doubled production, and we expect the 2000 drilling program to be completed ahead of schedule." The transaction also contemplated significant cost reductions from the prior operator's levels, and Shenandoah is right in line with those reductions, he adds. "The results are outstanding." Further, the company has done an excellent job of integrating the existing Chevron employees into its organization, he says. Shenandoah's technical, engineering and operation teams are all strong. "From a lender's perspective, I can't emphasize enough how important the people are. From the top to the bottom, everyone we deal with is first-class," McMurray says. If Shenandoah's first year is any indication, it's going to enjoy a long and prosperous life. Says Solich, "One of the strong characteristics underlying the whole transaction was that we really wanted it to be win-win, and to create value for all of the shareholders." So far, so good. A NEW TWIST The Shenandoah deal was unusual for Chevron-the major had never before taken an equity ownership position in an upstream company in exchange for assets. The equity position allowed Chevron to both maintain its upside potential and to monetize its cash flow from properties slated for divestment. "We are very happy with the results of Shenandoah's drilling program to date," says George Kirkland, president of Chevron North America Exploration & Production. "Shenandoah has invested more capital in these properties than Chevron would have, and Chevron has realized more value than if it had sold the properties outright. The keen focus of Shenandoah's management team has optimized the value of these assets."