by Andrea Heisinger
July 20, 2016

One E&P Veteran Outlines Strategies for a Down Market

Tall City Exploration announced a $300M equity infusion from Denham Capital in May. But before that happened, it sold $1.2B of assets.

Tall City Exploration knows what it’s like to sell assets when the oil and gas market is booming—and after the bottom falls out.

Gary Womack Pic
Gary Womack, Tall City Exploration

The Midland, Texas-based oil and gas exploration and production company shed two assets in the Permian Basin between November 2014 and November 2015.  Demand was strong for the November 2014 sale of about 14,000 acres of leasehold in Reagan County, Texas, and 1,400 barrels of oil per day to an affiliate of American Energy Partners for $440M in cash and notes, says Gary Womack, Tall City’s vice president of operations.

Then came the downturn in oil and gas prices, and Tall City’s sale of acreage and interests in wells in the Midland Basin was a much different story.  “The Howard County [Texas] asset was a longer process; things semi-stabilized a year ago,” says Womack, referring to Tall City’s $803M sale to Moss Creek Resources. “We had a buyer approach us who made an acceptable offer. The volatility and pricing made sales more difficult in 2015. Now, one of the challenges is there’s a lot of discrepancy in buyers’ and sellers’ price expectations.”

Denham Capital, which first met with and invested in the Tall City team back in 2012, had lengthy discussions with the company prior to its divestment of the two assets.

Jordan Marye - Hi Res
Jordan Marye, Denham Capital

According to Denham partner Jordan Marye, those at the firm struck a “philosophical and strategic overlap” with the management team at Tall City, and an agreement emerged. “They were starting a company, and we wanted to be there as a sponsor.”

The firm committed $300M in equity to Tall City Exploration I, and in May announced a new $300M equity commitment to Tall City Exploration II. The new company will look for investments throughout the entire Permian Basin, located in a swath of Texas and New Mexico, rather than in specific parts like its previous iteration.

Womack says he’s been around the oil and gas business for about 25 years, and has seen a lot of ups and downs in the oil and gas market. There has been one difference in this down market, he continues: the magnitude. “The buildup as far as activity [in the Permian Basin] is several degrees of magnitude greater than what I’ve seen in the past.” He adds that the downturns he’s seen in his career are the same every time. “There’s a little bit of infrastructure devastated but then it’s built back up, [and the] service industry takes the hardest hit. We’re on the upside of that right now.”

One difference between investments made from this second equity commitment from Denham Capital in 2016, versus the first equity commitment in 2012, center on the exit strategy of assets. “The opportunities are more defined in the Permian because of the volume of drilling in the past five years,” says Womack. “The main task this time is to do extremely good due diligence in anything that we buy. We need to manage price volatility.

“We all think that [oil and gas pricing] will work itself out, but the timing is uncertain. Now we’re in a buying mode, buying acreage.”

A VP of operations at an E&P company that has twice gotten equity commitments from Denham Capital tells Privcap where he sees value in today’s market.

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