When newly public Whiting Petroleum Corp. spun off from parent Alliant Energy in the fall of 2003, it had 430 billion cubic feet of gas equivalent (Bcfe) in proved reserves in various regions onshore the U.S. A year later, the Denver-based company doubled its reserves to 867 Bcfe after four asset acquisitions and a corporate transaction, the purchase of Salt Lake City-based Equity Oil. The latter brought it 87 Bcfe of proved reserves for $72.6 million, or $0.84 per thousand cubic feet equivalent (Mcfe), making the deal Whiting's least expensive in 2004. Next, an asset transaction brought it 39.8 Bcfe of proved reserves in Colorado and Wyoming for $44.2 million. Another deal took in 12.0 Bcfe of proved in Louisiana and South Texas from Delta Petroleum Corp. for $19.3 million. Then, Whiting gained interests in Wyoming and Utah for $35 million totaling 30.8 Bcfe of proved. Finally, it did its biggest deal yet: 251 Bcfe of Permian Basin proved reserves for $345 million. The company's total $516.1 million in transaction spending added 421 Bcfe to its proved column (29% gas; 66% developed; 65% operated), and replaced more than 900% of estimated 2004 production. The acquisitions' average cost was $1.22 per Mcfe. Daily production gained from the purchases totaled 70.7 million cubic feet equivalent. Oil and Gas Investor recently visited with Whiting president and chief executive officer Jim Volker to talk about how the company was able to close so many deals, given today's tough A&D market. Investor How did you choose each acquisition? Volker Each acquisition comes with its own story. With all the transactions, we tried to ensure we were making a good internal rate of return (IRR). Our typical objective is to make between a 15% and 20% IRR on everything we do, using appropriately risked reserves and a hedged price deck. Investor Were you primarily looking for Permian and Rockies assets? Volker Yes we were, primarily. Since we're basically a rate-of-return buyer, and we're active in all these basins anyway, we try to see everything that's on the market in these basins. We have a full-time, four-man, reservoir-engineering team here. Three of the team members are full time on acquisitions, so we go to the batting cage every day and work on trying to hit the ball. We're reviewing everything that's in the market that we can learn about and opportunities our teams uncover in our core areas. We do not care if it is publicly offered or privately offered to us. We're active evaluating acquisitions every day. I think that's what it takes if you're going to be in this game. Investor Why the Permian? Volker We have been trying for 10 years to make a good acquisition in the Permian-properties that were not already fully developed and exploited. These properties came to us with only about 60% of their proved reserves already developed. Probable and possible reserves further enhanced the undeveloped opportunities, so they have upside. Investor Why were you a successful buyer in 2004 when so few companies have been able to close any deals? Volker First of all, it's not just this past year. Over the prior five years, Whiting made about $100 million per year in acquisitions while we were within our now-former parent company. We now have the ability to do larger acquisitions. Before, we were limited by the amount of money our parent company wanted to invest; we were not the primary or core business. However, we had both staffing as well as capital structure to do more acquisitions. We were poised to do it. Fortunately, there were good opportunities presented to us both publicly and privately in 2004 and we've taken advantage of that. Investor When making deals, do you make pre-emptive bids, or are you just out-bidding other buyers? Volker In order of preference, we prefer to do negotiated transactions, including pre-emptive offers, and then limited bids and competitive bids. We swarm an acquisition with experienced engineering, geologic, land and accounting personnel so that we can thoroughly but efficiently finish our due diligence and quickly get to closing. Investor How do you win your bids? Volker I think it's important to have solid, in-depth knowledge of the properties so your offer is based on good reservoir engineering and, if possible, something you may know about the properties that other bidders may not know. Investor How did you choose each type of acquisition financing? Volker We used stock and the assumption of bank debt in the Equity Oil merger. On the asset purchases, we used our available bank line. In September, we entered a new credit facility with a $480-million borrowing base. It had been $195 million. We reduced our total debt from $588 million to about $358 million in November with proceeds from a $240-million, secondary stock offering. Investor What is your cost of capital? Volker On our bank debt, we're paying 3%. We pay 7.25% on half of our $150 million of outstanding bonds. We did an interest-rate swap to floating on the other half, on which we are currently paying 4.5%. The weighted average across all our debt is approximately 4.2%. Investor What is your debt-to-capitalization target? Volker Here at Whiting, we want to keep our capital structure such that our total capitalization is in the range of 40% debt or less. Since the recent stock offering, our net debt-to-total-cap is right at 37%, down from 64% prior to the stock sale. We're not opposed to allowing our debt-to-total-capitalization to go above 40% for an acquisition but we will have a plan to bring it back down to the 35% to 40% range. Investor What role does hedging play in your acquisition decisions? Volker We're trying to grow reserves every year behind every share of stock on a basis that doesn't subject stockholders to too much risk, i.e. what might happen in the event of a decline in oil and gas prices, so we hedge. Our policy is to be approximately 60% hedged on both oil and gas out roughly a year in front of the current quarter. We have roughly that much hedged through year-end 2005 with floors and ceilings ranging from $4.50 to $12 on gas and $28 to $65 on oil. Investor At what point is production guaranteed to cover acquisition costs? Volker That varies from acquisition to acquisition. Properties along the Gulf Coast typically pay out a little faster than properties in the Rockies or West Texas, but on average, with respect to assets we acquired in 2004, we expect our pay-out periods would occur between 36 and 60 months, cash on cash. Investor Do you have an internal goal of asset growth by a particular date? Volker We hope to grow reserves to twice as large as we are now, but only if we can do it accretively, net of issuance of additional shares. At the beginning of 2004, we had proved reserves of 439 Bcfe and 18.75 million shares of stock outstanding, or 23.4 Mcfe per share. Today, with 29.725 million shares outstanding we have 29.2 Mcfe behind every share. We've achieved a 25% increase in the Mcfes behind every share of stock while maintaining our debt-to-total-capitalization ratio under 40%. Investor Are your core areas going to be the Permian and the Rockies? Volker Right, and the Gulf Coast. We continually evaluate our asset base and will make sales if and when appropriate. With respect to the Midcontinent and Michigan, those areas produce net cash flow to us well in excess of the current investments necessary to keep production and reserves flat or growing moderately. Therefore, although we get offers to sell those assets, our preference is to expand our holdings in the Midcontinent and Michigan, if possible. The average wellhead price for us in Michigan is about $0.05 above Nymex, because of its strong industrial base and the good gas market. It is a great cash cow for us right now. Investor What does 2005 look like? Do you see more purchases ahead? Volker There are a lot of assets on the market right now. During 2004, we reviewed or evaluated about $6 billion worth of deals to make the $516.1 million in acquisitions. That is only a single-digit success rate. For 2005, currently, there's about $2.5 billion in our inventory under evaluation. We'll do more acquisitions if we can do them accretively and keep our internal rates of return 15% to 20%, or better. Our capital structure as a result of this equity offering is back in shape, so we will again try to be an accretive buyer.