The view from the top—captured by a hovering drone’s camera—lays out Alta Mesa Resources Inc.’s (NASDAQ: AMR) intricate operations near the gentle bend of the Cimarron River in Kingfisher County, Okla.
Alta Mesa has brought clean lines of orderliness, flattened smooth with use, to a wooded stretch of Oklahoma’s Stack play.
To CEO Hal Chappelle the picture conjures Richard Scarry’s children’s books—a mix of color and dutiful busy rabbits and police bears navigating airports and bus stations, offering children “a thousand things for their little eyes to see,” he said.
It turns out there’s a “Busy, Busy World” in Oklahoma’s Stack too.
Chappelle points out Alta Mesa’s surface impoundments for frack water, oil storage tanks, a horizontal well being drilled, a tank battery, and vertical well. “They look great, right?
“We had four rigs running, drilling a multiwell pattern at the same time,” he said.
Chappelle’s playground—and business—is changing now. He’ll now share control with other legendary oil and gas executives, and the company has gotten far more complex since early February.
Chappelle’s Alta Mesa Holdings LP, Jim Hackett’s Silver Run Acquisition Corp. II and Kingfisher Midstream LLC combined into a company they say is worth $3.8 billion.
Chappelle seems disinterested, at best, with the prospect of being the first company to be a publicly traded Stack pure-play.
“We’re really focused on being our best,” he said. “We recognize we’re on a journey. We didn’t arrive anywhere.”
The deal instead centered on unifying upstream and midstream companies into an oil and gas manufacturer. Funding from Silver Run II and private-equity firm Riverstone Holdings LLC, which eclipsed $1.6 billion, will help its manufacturing machine hum.
With midstream and a stable of talent, Silver Run’s involvement isn’t just about the capital the blank-check company will contribute or an address on NASDAQ.
Silver Run II’s most compelling component was Hackett, Chappelle said.
Following Silver Run’s $1-billion blank-check IPO in March of 2017, Hackett could have chosen any number of basins to set up shop. But Alta Mesa board member William McMullen, founder and managing partner of Bayou City Energy LP, broached Alta Mesa with Hackett.
Hackett and Chappelle were acquaintances; they’d met. When they spoke in early 2017, the two men seemed to click.
“That’s the magic connection that was made, at that moment,” Chappelle said.
He immediately felt Hackett shared the same approach to business, particularly in how to treat people and how to measure success.
“Jim’s very, very important,” he said. “Then it really was a differentiated opportunity for us.”
Chappelle’s pride is clearly Alta Mesa’s people. When he talks about his employees, he puts them in this order: “scientists and engineers and businesspeople.”
Behind its posh reception area, the décor at Alta Mesa’s corporate offices in Katy, Texas, consists of logs, maps and geosteering results stuck to company walls. The printouts track the progress of wells, most named for thoroughbred racehorses or brands of scotch.
In one office, a geologist formerly with ExxonMobil Corp. (NYSE: XOM) watches six computer screens to monitor a well. In the same office, long imaging scrolls—a kind of underground MRI—are rolled out to study the natural fractures.
The company’s geophysics, completions and fracking operations are headed by former leaders from companies such as Schlumberger Ltd. (NYSE: SLB)—who in some cases have managed to bring their old teams over to Alta Mesa.
“Those are talents that are necessary to have a best-in-class operation,” Chappelle said.
The company’s leasehold spans Kingfisher, Garfield and Major counties, Okla., where it sees an inventory of 4,000 gross drilling locations.
As the merger was completed, Alta Mesa added another 10,000 net acres to its position and now holds more than 130,000 net. Kingfisher Midstream also significantly increased its infrastructure and gathering system.
Since August, the company’s production has jumped 20% to 24,000 barrels per day as of February. It also boasts single-well rates of return of 80%, according to a January presentation.
The new Alta Mesa reigns over delineated Meramec and Osage—commonly lumped together as simply Mississippian-age rock— and a 500-foot window of oil. Alta Mesa is developing naturally fractured formations to serve as one large reservoir by creating conductivity among them, he said.
Alta Mesa’s Stack acreage was once populated by hundreds of vertical wells. In its initial area of operation, the company identified 125 active operators in a single township alone.
Its territory began to overtake the area—and now covers about 300 square miles. The position straddles the border of Kingfisher and Garfield counties.
On paper and in the field, Alta Mesa appeared destined to be a Midcontinent force. In land area alone, its position is 20,000 acres shy of all the usable land in New York City and its boroughs. Alta Mesa assembled a solid block in the Stack oil window.
At first, though, Alta Mesa Holdings’ infrastructure was less inviting. It featured legacy systems that were built around vertical production and 70-year-old technology.
“It became abundantly clear to us that the basin was functionally constrained for processing capacity, and the existing legacy processing capacity for gas was inefficient,” Chappelle said. “And there are contract attributes that were favored [for an] old style—you know, 50 years ago—kind of gas market and not the current” market.
ARM Energy took the lead in building a midstream system, funded in part by one of Alta Mesa’s private-equity partners, Highbridge Principal Strategies LLC. Kingfisher Midstream developed in tandem with Alta Mesa. Lines increased to 6 inches from 2 inches and modern processing was added, including ethane rejection to produce propane.
Kingfisher Midstream is intertwined throughout its operations with a gathering system now zigzagging more than 410 miles across the leasehold. With the start-up of a 200-million-cubic-foot-per-day (MMcf/d) plant expansion in first-quarter 2018, takeaway capacity has more than tripled to 260 MMcf/d from 60 MMcf/d in 2017.
And the company is now looking to ramp up to full speed.
A couple of weeks after Alta Mesa’s stock debuted, Chappelle took the stage in Houston at Hart Energy’s inaugural DUG Executive conference.
Alta Mesa, Silver Run and Kingfisher are a triple-threat, bringing a balance sheet with heft, skill in the field and a midstream framework to carry product to market. The company will look to spin off Kingfisher, perhaps later this year.
“We’ve been able to move now into development mode,” Chappelle told conference attendees. He envisions shifting from four to six rigs to a “cadence of about eight to 12” eventually.
Over time, the company may push its boundaries outward or just take small tracts of leasehold, but it won’t chase anything outside of its comfort zone.
“There are material M&A opportunities that are going to present themselves in this general region,” he said. “And we believe we’re positioned to consider and compete to potentially be the best solution. We could do one or more, we could do none. We like building out from where we are because incrementally we have confidence in the next thing we’re doing.”
Acquisitions are likely to be bolt-ons, Chappelle said. “At some point, there’s a saturation point, right?”
For now, Alta Mesa will still be hunting for 50 acres here, 500 acres there, “all the time,” Chapelle said.
Alta Mesa’s healthy bank account and access to public markets now puts larger acquisitions within reach. But economics, not a sprawling position, govern what the company acquires.
That philosophy won’t change as the company adds new faces and partners or faces competitors.
Chappelle remains in favor of small deals, anyway. That’s how Alta Mesa was built.
“You’ve got to do a lot of blue-collar block-and-tackle stuff in the middle of that,” he said.
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