Earl Reynolds spoke to Hart Energy at the recent DUG Midcontinent conference and exhibition. The Chaparral Energy CEO discussed what allowed recent success in their Garfield and Canadian county positions plus an interesting employee compensation plan tied to productivity.

Hart Energy: Chaparral Energy was listed on the New York Stock Exchange (NYSE) in July and production has grown since then. Describe the past several months.

Reynolds: Execution in 2018 has been excellent. Coming into 2018, our focus was about really trying to understand our resource in a very significant way. So we were doing delineation work across a couple of different areas—our Garfield position to the north and our Canadian county to the south. Those wells have performed very well and so because of the performance of those wells and the execution we’ve had on our production base and our PDP, we’ve been able to increase our guidance in Q2 for our Stack production and also in Q3 for our Stack and our total company production. We are really pleased with that. We are excited about going into 2019 because really it’s the next growth story for Chaparral.

Hart Energy: What is your acreage total in the Stack, Merge?

Reynolds: We have about 127,000 net acres in the Stack-Merge combined as of Q3. The Merge is about 20,000 of that, so a large chunk of it is the Stack. We have been focusing a lot of our capital in 2018 in the Merge with our Drillco joint venture that we executed at the end of last year. We are able to drill 17 wells in the Merge and those well results have been outstanding [and also] in the Stack.

One of the pieces at the other end of it is our activity in Garfield and Kingfisher counties. While it is a large part of our acreage, we have had some great results there in both of those areas. Results in Garfield have exceeded expectations. We are very happy with that as well.

Hart Energy: Which joint-venture partner was used and how did it allow Chaparral’s rig count to expand?

Reynolds: Our Drillco was really focused [and] Bayou City Energy was the counter party. They had been drilling in the Stack with other companies for several years. We went out into the investment community looking for partners for a Drillco and we found them to be one of the most qualified and excited about it. We actually designed the Drillco for one specific reason and that was to put capital and activity of work in our Garfield position in the northern part of our acreage and then in our Canadian county Merge position.

It’s a 30 well program, 17 of those wells were designed in our Canadian county Merge and 13 in our Garfield position. It’s worked very well. The concept here was to de-risk and delineate our position. They paid 100% of the well cost until they got a certain return, then it flipped to a certain working interest for them and a higher working interest for Chaparral. It’s done exactly what we wanted it to do. We will be finished with that Drillco early 2019. Then, we will be drilling our four rigs and they will be running all for Chaparral. The Drillco basically consumed a little over one rig in 2018.

Hart Energy: Is Chaparral currently planning any buyback of stock that is undervalued? Are there any dividend thoughts you can share?

Reynolds: The dividend, share buyback are always options for our company. But, our size is a piece of it. Where we are in our life cycle for our company is really starting to define our resource and start to pull a lot of very deep inventory of high-return drilling opportunities and bring it forward such that we can say here is the real value today. We are getting great returns on our capital so that reinvesting that back into the business, to us, makes more sense. I always say never say never.

We are always looking at ways to insure we meet our shareholders’ needs and at some point our scale is enough that we can do that. In fact, our focus and vision is to be cash flow neutral and we think we can do that in a relatively short period of time so we can get our cash flow and our production up high enough that we can actually start, if it makes sense at the time, return capital to our shareholders. That is really the goal for this company.

Hart Energy: Tell us about your policy where employees have some sort of compensation tied to productivity.

Reynolds: We are very proud to say, that one of the things we recognized early on when we think about running our business is that the way you create value in an E&P business is you have to insure you get a return. Effectively, you have to reinvest your cash flow and get a return on that to insure you grow equity value or value for a company.

We want all of our employees to be focused on that piece. We measure capital efficiency effectively, the reinvested capital and our drilling and completion capital [because] we want to insure we get a return. We set a threshold of what our expectations are every year; 25% of our at-risk compensation for all employees—all the way from the field to the office personnel to our support staff in the office, to the executives—is tied to how well we do versus that expectation. Our board sets it every year and we measure that every single month and we say, how are we doing and what can we do to aim to get better.

That facilitates a continuous learning organization to get better and better and better. That is exactly how you can become premiere and that is really what we are trying to accomplish as a company—25% of our at-risk compensation is tied to how well we do with capital efficiency and I am very proud of that point.