Gene Shepherd is a legendary wildcatter with roughly 40 years of experience in the oil and gas industry including at Brigham Resources

After teaming up with Vitol earlier this year, Shepherd is now back on the hunt for $1 billion deals in the U.S. Lower 48 as CEO of VTX Energy Partners, which is backed by the global commodities trading firm.

Shepherd spoke with Hart Energy following his presentation at the Executive Oil Conference in Midland, Texas, on Nov. 16 about the exploration environment and what opportunities he’s seeing—both oil and gas.

Nissa Darbonne: You’ve traditionally wildcatted for oil. You’ve traditionally invested in oil. You’re looking at rolling your backing by Vitol—would you consider gas?

Gene Shepherd (00:53): Absolutely. Yeah, there’s no question that we would. Vitol, despite trading a lot of barrels, they’re sort of commodity agnostic. They’re just really looking for inefficiencies in the marketplace. And so, interestingly enough, probably since the beginning of the year, about half of the opportunities we’ve been looking at have been on the gas side.

And some of that’s a function of the basins we’ve historically been focused on, both the Permian and the Williston. The Williston is more of a mature basin now, and the Permian is—it’s expensive. And so, there’s still opportunity in the Permian, it’s just there’s a lot of companies competing for those opportunities.

So, we’re maybe spending more time looking at maybe out-of-favor basins and are looking at gas in those out-of-favor basins. It’s at the top of the list, particularly given the outlook for the gas prices now.

ND: And in terms of where you’re looking, are you looking for prospect level exploration opportunities? Are you looking for properties? A property that’s fully delineated but has not yet been exploited? What stage of development or the cycle are you looking in?

GS (02:12): The environment is such that there's just not great capital formation, really, on the exploration side of the business today. I think that’s going to have to change because we’re running out of drilling locations.

So, where we are focused currently is—and some of it’s ... maybe last year there was just so much opportunity and so little capital that you didn’t have to take exploration risk. You could go buy something, buy PDP and an inventory of drilling locations, and generate an attractive rate of return. But, as I said, as the universe of drilling locations depletes over time, then we’ll run out of opportunity.

But at the present time, I think there is adequate opportunity. That’s primarily a function of ... it still feels very challenged in terms of capital formation. And so that’s really, there’s been so much capital flight out of our industry that that’s really opened the door for us.

And we’re looking at larger opportunities, north of a billion dollars, and there’s very limited capital formation at that size. And that’s a conscious strategy on Vitol’s part. ... That’s a more inefficient segment of the market today, doing a larger transaction. A lot more competition for a $100 million opportunities.

ND: It came up earlier today. There is this kind of gap in startups to acquire because private equity went from backing, let’s say, 10 new startups a month to fewer than 10 in a whole year. So, has this not generational gap but let’s say investment gap created sparse opportunities out there?

GS (04:11): Well, it’s really just there’s so little capital. And so, public investors aren’t hugely constructive to the industry. And you’ve had a lot of private equity, traditional, generalist, private equity firms, particularly the New York-based firms, that have gotten out of upstream. And so, the diminished pool of capital means that you’ve got a diminishing pool of opportunity until we start spending exploration capital today. But there’s so little capital that there’s ample opportunity for the capital that is available, if that makes sense. Does that make sense?

ND: It does. Yes. Thank you, Gene.

GS (04:46): Yeah, thank you.

ND: And thank you for joining us.