[Editor's note: A version of this story appears in the July 2019 edition of Oil and Gas Investor. Subscribe to the magazine here.]

Every pundit worth a podium presentation insists consolidation is essential to reduce redundant cost and increase capital efficiency in oil and gas. But few acknowledge the persistent resilience of smaller operators who compete effectively against deeper-pocketed, publicly held peers.

In fact, innovation is a common characteristic for nimble smaller firms, who create value in overlooked areas by extending existing plays into new areas. Scala Energy LLC and Admiral Permian Resources LLC have done this in the western Delaware Basin, as has Discovery Natural Resources LLC in the southern Midland Basin. Or, they can expand a play’s Tier I economic core through superior execution, as has Caza Petroleum Inc. in New Mexico’s northern Delaware Basin.

“The Top 100 Private E&Ps” featured in the July 2019 issue of Oil and Gas Investor

Privately held operators are simultaneously risk-averse and open to new technologies that add incremental value at multiple steps, from drilling to full-field development.

Furthermore, most leverage win-win collaborations with oil service firms who developed specific technologies during the downturn that serve as inexpensive insurance policies, enabling smaller companies such as Whitehorse Energy LLC or Lario Oil and Gas Co. to execute at highly proficient levels.

Privately held independents are not dealing with tens of thousands of future locations or near-term developmental budgets involving double-digit rig counts. Rather, these firms pursue a stage-by-stage, well-by-well and holistic field-wide approach to economically sustainable oil and gas development. Finally, smaller firms such as Henry Petroleum LLC and Caza Petroleum drill out of cash flow and use creative hedging to protect themselves in a downturn.

Or, as Ryan Keys, Triple Crown Resources LLC co-founder, said, “Ingenuity and a lot of hard work—and not rock quality—makes the difference.”

Now, that may sound counterintuitive to long-held industry maxims that rock quality, zip code and scale-based leverage are the major determinants in oil and gas success. However, the best financial returns industrywide in oil and gas are found in the most mature tight formation plays like the Eagle Ford and the Bakken. Yes, rock quality is exceptional.

However, E&Ps responded to the commodity price downturn by incrementally fine-tuning the ability to lower cost and increase recovery in mature shale plays through operational expertise and single-minded focus on the task at hand. According to Keys, both the Eagle Ford and the Bakken are free-cash-flow positive in aggregate. Not so the Permian Basin, which was late to the tight formation play era. However, the Eagle Ford and Bakken models demonstrate there is significant economic upside as E&Ps get better at what they do.

That is why the path forward in the Permian may be found in the operational expertise of privately held independents. The decline in merger and acquisition activity prompted private-equity-backed Permian management teams to turn away from a quick acreage flip as an exit strategy toward a focus on optimal capital harvest from recently acquired assets.

“We are not in the oil and gas business, we are in the money business,” said Denzil West, Admiral Permian Resources CEO.

Indeed, privately held independents such as Henry Petroleum and Admiral Permian consistently rank among the top financial performers in both the Midland and Delaware basins on a barrel of oil equivalent (boe) basis. In other words, size does not matter when it comes to capital-efficient execution.

Experience makes a difference. Although many Permian, privately held management teams created new firms in the last half-decade, these entities are not traditional start-ups. Rather, all have senior management teams with expertise measured in terms of decades. These teams assemble field-tested operations personnel and emphasize execution, which extends from fast follower adoption of drilling and completion innovations to full-field operations. For example, Discovery Natural Resources creates capital efficiency through its own acreage-wide water infrastructure, which helped lower per-barrel operating cost from $18 in 2014 to $9 in 2019. Discovery eliminates parent-child well interference issues through a simultaneous rolling pad approach to development.

Execution matters.

“Our guys have a long and deep history of executing in the Permian,” said Admiral Permian’s Denzil West.

“Adaptability is what makes us different,” said Christian Veillete, vice president for Denver-based Lario. “We can change on a whim if we want to. That’s been an advantage in managing our own situation.”

Richard Mason can be reached at rmason@hartenergy.com.