Consider the Permian Basin, a noteworthy petroleum province for several reasons. First, more than 100,000 wells here produce in aggregate 12% of the oil and 4% of the natural gas output of the daily U.S. total. The basin holds 21% of total U.S. oil reserves and on an equivalent basis, 15%. Yet only a small percentage of the 8.6 billion barrels of oil equivalent in place have been recovered. Second, it is an easy place for an independent to gain a toehold and grow bigger. Third, while still a major-dominated basin, the Permian is changing, and fast, with a healthy acquisition and divestiture market opening up. At any given time, nearly 1,700 geologists are working on matters relating to the 59-county Permian Basin, according to a presentation made by Oxy Permian at the Executive Oil Conference in Midland in April. This mature basin is characterized by hundreds of operators and thousands of interest-owners that fragment the area, so assembling the right land position to kick off a big play is a tall hurdle-perhaps one to be overcome by new alliances. If a new set of eyes overlooks these mature assets, all sorts of new ideas will pop up, especially if existing lease lines can be "erased" through creative deal-making and joint ventures between new partners. If about $9 billion of property transactions in the basin occur annually, and a start-up can get access to just one-half of 1% of that, it could build a $100-million company in two years. It all spells big opportunity. Three Midland acquire-and-exploit companies born in 2000 plan to take advantage of the situation. Westwin Energy was formed by five top executives of Arco Permian after they decided not to join Arco's new owner, BP . It is led by Keith Weiser, former head of Arco Permian. In June, Ares Energy Ltd. was founded by a member of the business development team for Arco Permian, Bob Dimit, and two partners. Finally, last February after Vista Resources was merged into Prize Energy , Vista president Steve Gray chose to remain in Midland and create Pecos Production Co. Each start-up is staffed by people who are starting over, but they are not neophytes, as most have 15, 20 or more years of experience in this basin. These professionals will leverage their wide contact base and operational experience here into new business. As one of the executives says, "This is not our first rodeo." Each new company is capitalized such that it can begin buying and exploiting reserves immediately. By most accounts, some portion of at least 1 billion BOE of reserves could be divested in the next two years. Midland insiders claim that Arco Permian is not part of BP's long-term plan. Pure Resources and Oxy Permian need to prune their portfolios after recently closing large acquisitions. The fate of Marathon Oil's Permian properties is unclear. The top 10 producers in the basin control half the remaining reserves-and new companies stand ready to "relieve" them of a few good barrels. Executives at all three companies say they were strongly motivated by their desire to remain in family-friendly, small-town Midland rather than move to Houston or any other big city. But even more, they foresee a big change in control of reserves in the basin, which incorporates the southeastern corner of New Mexico and all of West Texas. Westwin Energy "Talk about the way things change-what an adjustment," says Westwin president and chief executive Weiser. About two years ago, as president of Arco Permian, he was in final discussions to combine that company's assets with those of Chevron to form a major new Permian Basin player. The current Westwin management team was supposed to head up the new entity. The group was literally two weeks away from signing the closing paperwork when, one Sunday evening, Weiser got The Call from Los Angeles. Arco had agreed to be acquired by BP, lock, stock and barrel. "It was such a shock at the time, but it has turned into a blessing," says Weiser of that fateful night. Today, BP manages its Permian assets from Houston. Weiser and team chose to remain in Midland. And, the howling coyote symbol of efficiency and drive, of which Arco Permian had been so proud (see "West Texas," Oil and Gas Investor, January 1998), has resurfaced as the logo for Westwin. Weiser and four partners from Arco formed Westwin in fourth-quarter 2000 after they spent that fall scouting for the appropriate funding. After all, they were emerging from the comfort of Arco's significant balance sheet, although Weiser had done project finance in Latin America for Arco. Enron Energy Capital Resources of Houston is backing the new company. Neither Weiser nor Enron ECR will reveal how much capital has been committed, but both say it is substantial enough for Westwin to make a sizable deal when the right opportunity presents itself. "Enron and Westwin see the world alike and we've developed a two-pronged strategy of drilling or acquisitions that will work in a high- or low-price environment," Weiser says. "Besides their financial muscle, we chose Enron for another reason. Since we are a start-up, we wanted to align with a financial provider that was not backing multiple companies in our backyard. Enron wants to fund just a single team in a select geographic area so that fits with our desire." Too, Weiser and Enron ECR's Steve Pruett had worked together in the 1980s in several Arco locations. At press time, Weiser was negotiating two additional acquisitions. Meanwhile, Westwin had two rigs running on a 100-well Spraberry oil package it acquired from Texaco and others, mostly in Midland County. The company purchased a gas field in Pecos County that it plans to bring online this summer. It holds additional drilling opportunities. This year's plan also includes drilling for oil and gas on acquired acreage in Ector, Hockley and Nolan counties. Weiser calls these "develocats" or extensions to plays already identified. Each of these acquisitions came from relationships and knowledge the five Westwin partners gained during their former life at Arco-and they are looking for more. The company is starting to generate some prospects and will buy into other firms' projects. Only about 26 of the 150 people in Arco Permian chose to move to Houston, so Weiser has many talented former colleagues to draw from on a consulting basis. "To find talent and build a team isn't an issue the way it might be for other start-ups. We believe in God, family and work priorities, in that order, and we think it's easier to do that in Midland. We asked ourselves, how can we leverage this great franchise over a larger set of assets? That was what we were aiming for with the Chevron deal, and what we'll try to do now at Westwin. "It was easy to get this new company up and running-we have all the top management team that was at Arco Permian, so we've worked well together before. We have more than 100 years of Permian Basin experience and lots of contacts. We know the assets, the fields that are here, and the owners." While commodity prices are high, Westwin intends to grow primarily through land acquisition and drilling, using the old coyote model of efficiency Weiser and others developed that turned Arco Permian around from flat to growing production. At the moment, he thinks proved developed reserves (PDPs) are overpriced for the most part. "But, we are aligned with a strong financial partner for the time when, if these prices don't last, we'll look at acquisitions. In the short term we are doing singles and doubles, and if commodity prices go down we'll try to do some homeruns with acquisitions." The expected drilling budget is about $25- to $50 million this year. "On acquisitions, a $10-million deal may be right for us, or a $100-million deal may feel good. It's very open-ended, but we have a backer that can do this with us," Weiser says. "There is so much to learn, being an independent without a huge organization sitting behind you. But we have a great team and a strong financial backer. Fortunately, we are in the right place at the right time." Ares Energy Ltd. Just a few blocks away in downtown Midland, Ares president Dimit would agree. Also an Arco alumnus, he started Ares in June 2000 after exploring the concept for about a year. "We looked at all the major basins in this country-where did we want to start a company? The Rockies, the Midcontinent, the Permian? Our team has experience in virtually all the onshore U.S. basins and we were involved in economic planning and analysis at Arco Permian, so we had a lot of data available. "We chose the Permian because it has the greatest amount of oil reserves still to be developed and the Gulf Coast region is still mostly a big boy's game where wells cost a lot more. And, we like the level of transaction activity going on here. It is very robust and we know all the key players." He and his two partners are engineers; two of the three have MBAs as well. All have experience with majors and independents; between the three they have been involved in prospect generation, operations, planning and acquisition evaluations, and investor relations. In taking the plunge to go independent, they say their biggest challenge was to realistically look at the business environment, and to look deep within. Were they and their families ready to take on the kind of commitment required to start a company? "We were already involved in the Midland A&D community, so we knew the players and we knew the money was there," Dimit says. "We believe the Permian Basin is seeing a tremendous transition-from the majors and large independents-to small independents, as has already happened in places like Tulsa and East Texas. Obviously, Pure Resources and Oxy Permian will do some portfolio management during the next few years, so we want to be on the forefront of that cycle." Ares' strategy is to buy and further develop large-company reserves where the assets hadn't been large enough for the prior owner to devote much attention or capital. The company will bridge the buyer-seller price gap through hedging or by making some kind of contingency payment based on the performance of the assets that it buys. "We are striving to be a $100- or $200-million company in five years," Dimit says. "We will do that by looking for first- or second-generation properties that may have trickled down to a large independent like a Burlington Resources." The new company is focused on neither oil nor gas exclusively, but rather, on the expected rate of return, with an engineering bent. Geological work will be outsourced to the many consultants living in Midland. "We are pretty sensitive to rate of return. We're willing to take some risks in the fluctuation of ROR we get, but we are not willing to drill a well that's all sunk-costs only. We need a return. Even if it's only 6%, at least it won't be zero." Ares' first transaction closed late last year. It is a $10-million property acquisition from Marathon Oil Co. with a partner, Belco Oil & Gas. Belco operates and holds 85% while Ares, which negotiated the deal and later brought in Belco, retains 15%. The acquired property is the Howard-Glasscock East Unit in Howard County, which includes 118 wells. It produces 550 barrels of oil per day. "We began negotiating on December 6 and closed on the 29th-it was extremely fast for a deal of this size, and very exciting and satisfying," says Dimit. "But we were new and didn't have our computer systems up yet for lease administration, joint-interest billing and so on, so we brought Belco in. I've known those guys a long time and knew they would have a low-cost focus. If we would have had more time, say 45 days, and fewer wells, we probably could have operated it ourselves." So far, Ares and Belco have redirected the existing waterflood out of the carbonate Glorieta and into the shallower Seven Rivers and Queen Sand zones at around 1,500 feet. The Glorieta is highly fractured and had become a "water-recycling" project, jokes Dimit. "Our pressure analysis indicates we are now getting close to fill-up, so production should bump up in maybe six months. We cut out about 25% of the cost of the field, primarily through personnel and overhead." The partners also modified the chemical program and tried to improve pumping-unit efficiency to reduce electricity demand per well. Meanwhile, Ares is scouting for its next, bigger, target, although this is easier said than done. Dimit says reluctant sellers are driven by three factors: they don't want to relinquish the kind of cash flow they have gotten lately, they demand too much money, and they need to hold on to their properties until year-end because they find it difficult to replace production if they sell. "I think it will be quiet out there until the fourth quarter, because everybody is enjoying that cash flow so much." While the start-up is 100% funded by its three founders, at press time talks were under way to secure additional private equity from undisclosed sources. Pecos Production Co. This Midland start-up will have more of an exploration bent than Westwin or Ares, and more so than did its predecessor, Vista Resources, which was acquired by Prize Energy. However, the acquire-and-exploit theme will be fully exploited, so to speak. Pecos was funded last fall with a war chest of $16 million in equity, one-eighth coming from its owners and the rest from Natural Gas Partners . Only about 20% has been invested so far. The fledgling company, which has five full-time employees, has acquired a few shallow-gas properties for development drilling in Lea and Chaves counties, New Mexico, and a gas-gathering system in the Pecos Slope (Abo) Field in Chaves County. At present Pecos operates about 40 small wells with net production of about 350 BOE per day, mostly natural gas. Targeting mainly long-life, shallow reserves, the company will pursue acquisitions in the $5- to $30-million range, says president Steve Gray. He admits the current high-price environment makes deals a challenge. "It was tough in January when gas was about $9-sellers looked at their run checks and had stars in their eyes. It's such a seller's market right now that we've spent most of our time putting together drilling deals," he says. "The hardest part is being patient, because when you have the capital, you want to spend it. High commodity prices and high cash flow are a double-edged sword, as it makes it harder to buy. "It used to be that you could buy something based on three to five times cash flow, but with this spike in prices, that is out the window. People are running price decks at $3.50 gas forever-that is still very healthy, isn't it?" Gray thinks some drilling should be included in the strategy as well. That's why the company is working up a few exploratory prospects in its backyard, led by Mark Hawkins, who was formerly a geologist for private Midland independent Collins & Ware , which was acquired by Apache last year. Pecos is always looking for farm-out opportunities as well. It typically keeps a quarter-interest and sells the rest to industry partners. Longer term, Gray intends to build Pecos into a suitable size through acquisitions and then merge or sell it in five or six years-a strategy that has worked well for many of Natural Gas Partners' portfolio companies in the past. The company had one rig drilling at press time-a rig that it waited three months to get, laments Gray. Contract rates have nearly doubled in the past year to about $10,000 per day, he adds, and contractors are more apt to put scarce equipment to work for their largest customers, rather than on small projects with only one or two wells. It's all part of the growing pains that optimistic oil-patch entrepreneurs face whenever they get started. But from small acorns, mighty oaks do grow.