Sometimes you write a story.  Sometimes a story writes itself.

In the next three sentences I’m going to give you everything you need to know.

One…

With more oil and gas producers in financial distress than aren’t, this has to be an historic opportunity to be buying oil and gas assets (especially shale).

Two…

Former EOG Resources (NYSE:EOG) Chairman and CEO Mark Papa is likely the most respected shale oil businessman in the industry.

Three…

Papa just brought public a blank check company called Silver Run Acquisition Corp (NASD:SRAQU) which has nothing to do but spend $450 million of cash on oil and gas assets.

What a position to be in.

Countless companies are desperate to get rid of assets to raise cash.  Lenders are taking over oil and gas assets that they don’t want and also badly want to sell. Assets are available at rock bottom prices and buyers with cash are few and far between.

And here is Papa, one of the most knowledgeable players in the game in the very enviable position of being one of the very few buyers in a panicked market.

If that isn’t a recipe for success I don’t know what is.

The “Godfather” Of Shale Oil

While a significant percentage of the U.S. shale industry teeters on the brink of financial ruin shale oil producer EOG Resources (NYSE: EOG) remains on sound financial footing with some of the very best shale assets in the industry.

Shareholders can largely thank Mark Papa for that.  He retired as CEO of EOG in 2013 and resigned from the Board of Directors at the end of 2014, but he left behind a company with great assets and in great financial shape.

EOG of course is lucky to exist at all. In 1999 EOG was spun out of Enron, the high flying trading company which wanted out of the boring E&P business.  Papa became CEO and Chairman of EOG (which is short for Enron Oil and Gas).

That was great news for Papa and EOG.  As you know, Enron went down in flames in 2001 in one of the most high profile fraud cases in the history of American business.

The unwanted spinoff EOG went on to become a significant oil and gas producer.

Papa transformed EOG into a company focused on innovation.  It quickly became an early adopter of horizontal drilling and multi-stage fracking and became a leader in producing natural gas from shale.

As a testament to its innovative culture EOG would be nicknamed by an analyst as “the Apple of oil”.

The shale gas focus worked well for EOG.  It also worked really well for quite a few of its competitors.  In 2007 Papa suddenly had a moment of extreme clarity.

He realized before almost everyone else that there was so much gas being found in shale that U.S. natural gas prices were going to be ruined for decades.

So Papa decided to do something.  He immediately had EOG do a complete 180 degree turn.  He told his geologists to stop looking for natural gas and to start looking for shale oil.

Papa put EOG ahead of the game.  Conventional thinking in 2007 was still that the tiny pores in shale rocks worked well with small natural gas molecules, but that bigger oil molecules wouldn’t be able to flow through.

Dutifully, the EOG geologists followed their boss’s orders and came back with a shale play in Texas called the Eagle Ford.  For an entire year EOG quietly signed leases with landowners in the Eagle Ford and paid very little to do it.

In 2009 EOG tested a horizontal well with fracks and knew it had a big win.

Fast forward to the spring of 2010 and Papa and EOG were ready to tell shareholders that they believed they had locked down nearly a billion barrels of oil reserves in the Eagle Ford.

The company was busy elsewhere looking for shale oil.While Papa and EOG were locking up a big land position in the Eagle Ford they were also busy in the Bakken.

EOG had drilled a well as far back as 2006 in the Bakken, but at the time believed that only a very small portion of the entire formation would work.

That turned out to be a mistake because the decision resulted in EOG leasing only 20% of the land in the Bakken when it could have had almost all of it.

Near the end of 2008 when oil prices were crashing in the midst of the financial crisis EOG drilled an experimental horizontal well using a new fracking technique.That well came on production at more than 1,400 barrels which was more than 4 times what nearby wells had been achieving.

That high production well with the new techniques greatly expanded the amount of acreage in the Bakken that could be developed economically.

It also meant that Papa and EOG had built two massive land positions in the core of two of the major shale oil plays.

A Return Focused Mindset

Perhaps even more important than the assets Papa left EOG with is the culture that he created. More than most of the other shale oil independents EOG has been more “return” focused than obsessed with growth.

That has left EOG with a balance sheet much better equipped to handle the downturn.

Papa brings Silver Run Acquisition Corp to the public market as a “blank check” company.  That means that Papa and his crew have raised cash from investors for the specific purpose of making acquisitions.

The shareholders are willing to front the cash despite having no idea which specific assets or companies might be acquired.

The fact that Papa was able to get this done in this market speaks volumes.  So far in 2016 there have been only five IPOs vs 27 at the same point last year.  The market appetite for IPOs has been minimal and the appetite for energy companies significantly less than that.

Also a sign of respect for Papa is that Silver Run was able to raise $450 million which is $50 million more than the company was targeting.

The way a blank check company works is that management has two years within which to invest the cash or it is returned to shareholders.

Given the current state of the oil and gas market, finding an attractive acquisition target should not be difficult.

Papa Believes Shale Is In For A Rebound

While speaking at the CERA conference last month Papa suggested that the shale industry is in for huge pain for the next 6 to 12 months.

But for the survivors he sees much better days ahead.Papa believes that oil prices will swing higher, perhaps substantially so.

He believes that the driver of this will be world demand growth of a million barrels per day for the next five years and the fact that capital spending on mega projects has screeched to a halt.

Papa believes that the world is going to need more oil in the coming years.  With big project spending halted across the industry the source of much of that oil is going to have to be shale.

Which is right where Silver Run and Papa are likely to be. The right man, in the right place at exactly the right time.

Keith Schaefer

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