OLD OIL WAS RICH AND OSTENTATIONS. NEW OIL IS A COMPANY PRESIDENT standing in line at Southwest Airlines. New Oil doesn’t ask a secretary to get visitors a cup of coffee because, likely as not. there is no secretary. Although crude prices have shot from $10 per barrel to more than S35. New Oil is lean and wary. Given the high-profile Dallas exits of Arco and Fina. and the earlier departures of Tex as Oil and Gas, Oryx, and others, you might assume thai Exxon is the lone energy player left in town. For instance, among the 108 lists of Dallas businesses published by the Dallas Business Journal, you will not find a list of local oil companies. There are three separate lists lor telecommunications firms. There are four lists for wireless businesses. There’s a list for cosmetic surgeons. But there’s not one for oil. Think of that: In Dallas, Texas, there’s not a list for oil companies. Oil made Dallas, Texas, or at least the Neiman Marcus portion of Dallas, Texas. In the era of Palm Pilots and fiber optics, oil seems to have disappeared.
Make a few phone calls, however, and you begin to hear the pumpjacks. “Dallas has become more of an entrepreneurial, independent oil and gas town,” Ken Hersh tells me from a freshly carpeted office in Las Colinas. Hersh is a managing director of Natural Gas Partners, an energy venture fund managing more than $1 billion in oil and gas investments. The firm recently moved from Fort Worth after their offices were destroyed in the tornado. “Houston has the machinery of the oil business,” Hersh says. “They’ve got engineering and the service companies. But Dallas is centrally located between the oil fields of the Southwest. The independents can really flourish in this environment.”
David Hopson will tell you the same thing. Hopson manages land and acquisitions for Hyperion Resources. “Houston probably deserves the title as the energy capital of the world. We’ve all seen the moving trucks headed that way. Today, in Dallas, the business is back to the way it used to be, except that creativity is much more important than it was 20 years ago. Today you grow a company by drill bit and by acquisition. You also have to pay attention to Wall Street.”
Dallas-Fort Worth still has plenty of independents. Big ones, too: Triton. Hunt, Pioneer, and Cross Timbers. Danny Conklin, chairman of the U.S. Oil and Gas Association, calls it a fraternity. “We could have another boom right now, but we can’t man it. Service companies aren’t gearing up for the increased production like they have in the past. We’ve yo-yoed so many times before that roughnecks have said the hell with us. They all went and got jobs somewhere else. They said ’I’m not coming back.’”
One analogy that Hersh likes to draw requires a walk to his computer. “Look,” he says, pointing at the screen. “Dell Computer is trading at a total value of $89 billion.” It was down $9 billion for the day. “That’s about the same as the market value for all the publicly traded independent oil and gas companies.”
“In Texas?” I ask.
He turns. “No. The entire country. For our investors, energy constitutes an ’alternative investment. ’Which is perplexing to me since oil and gas companies own hard assets. A lot of these computer companies are essentially marketing companies and only own soft assets.
With oil prices back, we wanted to see how New Oil is doing. So we visited three companies that capture the spirit of oil in Dallas today: the conservative, methodical operator; the technology and outsourcing partner; and the guy who has simply bet it all.
Conservative
TWO YEARS AGO, PRIZE ENERGY DID NOT exist. What did exist was a relationship between Phil Smith and Natural Gas Partners’ Ken Hersh. The men knew each other from Smith’s previous company. Tide West Oil, which sold for $200 million in 1996, just before the bottom fell out of the energy market. Smith celebrated the sale by taking his family to Australia. The two decided to go into business together when they saw an opportunity too good to pass up.
In 1998. Pioneer Natural Resources, a billion-dollar. Dallas-based energy company, needed to sell some assets. It struck a deal to sell a package of oil and gas properties to Costilla Energy of Midland. Costilla was bet-ter positioned for window shopping than for actually buying. It went bankrupt before the transaction could be closed, a victim of the twin hammers of the oil business; falling energy prices and debt. As one veteran says of the industry, “It may be simple, but it ain’i easy.”
When the Costilla purchase collapsed, Smith and Hersh made their move. Together with Lon Kile, who at the time was an officer with Pioneer, the men put together a deal to buy the assets within weeks. They used conservative financial projections, modest debt, and a bunch of equity. Almost immediately, oil and gas prices started to rise. But the founders are sticking to their game plan.
“Basically, we buy existing things and fix < them up,” Kile explains from a conference I table. He is presently Prize’s president, “We’re employing a strategy used by other independents like Cross Timbers, Apache,and Devon Energy. We’re not wildcatters. We’re committed toexploiting existing properties, not exploring for new ones. We’ve learned that you’ve got to make it in very different economic environments.” Kile doesn’t have to think back very far to remember the bad times. “We don’t want elephant hunters around here. We want our people to look through our file room to get their ideas.”
That may take some time. After a subsequent acquisition, Prize now has significant interests in 2,500 wells scattered in a rough triangle from the Permian Basin to the Louisiana coast and back to western Oklahoma.
While Kile is concerned with limiting drilling to the file cabinets, CEO Phil Smith is thinking about the company’s stock price. He pushes back from the conference table and walks to a dry erase board covered with columns of numbers. He locates the column for energy prices extending out five years. “The market is neglecting hard assets,” he says. “We think it has lost track of the necessity of true earnings and free cash flow. Oil and gas equity values are undervalued by 30 to 40 percent.” Smith shakes his head. ’Investor expectations today are unrealistic.
Mo business can consistently produce 20 percent returns forever.”
They can, however, produce in the high teens. which is exactly what Prize intends to do by sticking to its formula: buying right and sprucing up. For now. Prize is sticking ;lose to home. Lon Kile sums up their boundaries with a laugh, “Right now, Lou-isiana is international enough tor us.”
If anyone wonders whether a conservative strategy can work in the wild-and-wooly oil business, take note: Today, 2-year-old Prize has more than $500 million of proved energy reserves-oil and gas in the ground-and a market value of $239 million. One wonders whether the Dairy Farmers of America. with whom Prize shares its new, one-story office building in Grapevine, have any idea of the success of their neighbor. To a passing motorist on State Highway 121, the offices look like a suburban dental practice. New Oil has gone underground.
Applying: Technology
WHEN I WALK INTO THE OOFFICES OF USA Compression, which overlook Central Expressway, Vern Sterba is studying a color chart. Sterba is the technology guy at USA. He spent 27 years at Enron and EDS developing sophisticated control centers for pipelines. The pie chart captures the performance of a natural gas compression engine the size of a school bus. USA leases compression engines to integrated energy giants and independents. “You see that?” Sterba asks me. pointing at what looked like a chunk bitten out of a cherry pie. “This is a temperature chart on an engine operating in McAllen, Texas. A cylinder is running cold. Probably has a misfiring spark plug.”
Via low-earth orbit satellites and the Internet, the company’s CompresSmart technology mounted on the compressor sends signals warning of the cool cylinder to headquarters and automatically notifies a field technician by cell phone or pager. “The technician already knows what the problem is before he ever gets to the compressor,” Sterba grins. Until recently, the only way to monitor most natural gas compressors was to send a guy in a truck, on daily rounds, to thump gauges and listen for banging. Technicians had no way of knowing what they were going to find when they pulled up to a lonely compression station. More often than not, they found they had wasted the drive. USA can monitor 90 different data points on a compressor. If they strapped CompresSmart to an Olympic marathoner, coaches and trainers could monitor a blister from the other side of the world.
If the compression side of the natural gas business is analogous to the human circulatory system, then compressors constitute the heart. At the wellhead, compressors get gas out of the ground. They then push that gas to processing facilities, through intrastate and interstate pipelines. Eventually, compressors deliver natural gas to cook tops and hot water heaters.
“It’s only recently that the pieces were in place so we could do remote monitoring of gas compression engines,” Eric Long tells me. Long is the company’s chief executive officer. He and chairman Bill Pollock have spent a lifetime in the natural gas industry and are quite comfortable around roaring $750.000 engines. USA has 150 scattered from Wyoming to Louisiana. “Of the thousands of compressors in the gas industry.” Long continues, “only 5 percent are remotely monitored and only 10 percent are outsourced.”
Pollock echoes Long’s assessment. “If you look at the oil and gas industry, you’ll see millions of dollars in stranded equity-underutilized equipment owned by producers.” he says. USA is changing all that. In 18 months, the company has grown from two employees and no assets to 80 employees and $100 million in assets, none of it from acquisition. Clients are able to focus on their core business-producing and selling energy products.
“It’s kind of funny,” Long says. “The industry uses very sophisticated technology on the exploration side, like 3-D seismic. But on the compressor side, the technology is very mature. We’re bringing new technology to the market.”
Various ligures gel batted around, but demand for natural gas in the United States is certainly growing. Some economists expect it to grow almost 40 percent over the next 10 years. “If that happens, the domestic gas busihess is going to need to spend $150 billion on infrastructure.” Long smiles. “That’s a lot of compressors.”
The Wildcat Pipeliner
carter montgomery’s brother oncecau-tioned a friend, “Whatever you do, don’t tell Carter no.”
Whether the admonition was over swapping GI Joes or partnering a lemonade stand, it’s easy to imagine the soundness of the advice. For five long years, Montgomery’s Longhorn Partners has been working to complete a 700-mile gasoline pipeline from Houston to El Paso. He has soothed skittish investors, weathered a volatile energy market, been subject to the skullduggery of competitors, and endured the wrath of Austin environmentalists. In the past five years, he has experienced it all: warts, boils, and grasshoppers-and he’s still fighting.
Talk to him for an hour and chances are you’ll hear him say, “I saw another guy doing it, and I figured I could, too.” That premise has led him from hunting with falcons al age 14 to putting together one of the most complicated pipeline transactions in Texas oil and gas history. When he was 24, Montgomery decided that he wanted to drill for oil in Alaska. Arco was doing it. He figured he could, loo. So he drove over to the Dallas Public Library and started flipping through the Anchorage phone book. “I was looking for oil and gas people to talk to-you know, geologists, landmen, I thought if I nosed around long enough I could stumble into something.” Montgomery eventually stumbled onto Alaska’s North Slope and drilled a well with friend Robby Vaughn. Unfortunately, Arco drills dry holes, too.
In 1994, Exxon decided that it wanted to sell a pipeline that shipped West Texas crude to Houston refineries. At the time, Montgomery was operating a gas-gathering plant in southeastern New Mexico. He was aware that El Paso motorists were paying eight to 20 cents more per gallon than consumers served by major market refiners on the Gulf Coast, El Paso’s gasoline comes mostly from small-capacity, higher-cost refineries in West Texas and New Mexico.
Montgomery figured that he could reverse the pipeline-send gasoline from Houston to El Paso. All it meant was refurbishing the existing 450 miles of pipe and laying an additional 250 miles, from Crane. Texas, over the Delaware Mountains at a total cost of $250 million. “The numbers said that this was a very viable project.” Montgomery says. “El Paso is the nation’s 19th largest city, and the Southwest is one of the fastest growing regions in the country.”
“I thought it would take about two years.” he tells me from his office at the Landmark Center in Dallas’ West End. “I thought we’d be up and running in 1996.” It appears thai Montgomery and teammates O.B. Harris. Pat Sullivan, and Horace Hobbs have almost made il. The 18-inch pipe is in place. Suppliers are ready to ship. Consumers are standing at the pumps, If the EPA and the Department of Transportation finalize their finding of no significant environmental impact. Montgomery will open the valves on his pipeline sometime next spring. He and his investors will operate a common carrier pipeline-the equivalent of a tollroad, “We can ship a gallon of gasoline from Houston to El Paso for 3 cents to a nickel,” he explains. “It will make the El Paso market more competitive.”
The pennies will add up. Longhorn’s pipeline ha,s a capacity of more than a million gallons of gas per day.
