Just Saying No to the Barnett Shale

By Jim Fuquay, Fort Worth Star-Telegram, Texas

Apr. 6–FORT WORTH — From Approach Resources’ modest offices atop a midrise on the west side of town, President Ross Craft can view a good chunk of the Barnett Shale natural gas field and wants no part of it, thank you.

“There’s life after the Barnett Shale,” joked Craft, a Texas A&M University petroleum engineering graduate whose professional ties to Fort Worth date to 1988, when he worked at American Cometra, an energy company that sold out in the mid-1990s. Approach, which was founded in 2002 with backing from a New York private-equity firm and quietly went public in November, instead has operations in West Texas, East Texas, New Mexico and Kentucky, and participates in a Canadian play.

It’s not that Craft has anything against the Barnett Shale. It’s just too darn expensive.

“We’ve looked at it several times,” he said. “The return just wasn’t enough to satisfy the rate of return that private-equity firms demand.”

Besides, Approach has a sister company in the Barnett: Crosstex Energy, a big pipeline operator based in Dallas. Both companies are backed by New York investor Bryan Lawrence, head of Yorktown Partners, an investment firm with a number of energy holdings. Yorktown also backed Antero Resources, a Barnett Shale producer that started in 2002 and was acquired by XTO Energy for $685 million less than three years later.

Yorktown still owns about 37 percent of Approach’s stock.

Approach’s various plays — mostly natural gas but some crude oil — present challenges similar to those posed by the Barnett Shale, where producers face what’s called a “tight” formation that doesn’t let go of its gas easi- ly. In Texas, the company’s properties are in tight sandstones. Kentucky and New Mexico are shales, while the Canadian venture, in British Columbia, is both tight sand and shale.

Those properties, called unconventional resources, match Approach’s technical expertise, Craft said. But there’s another reason the company is active there. With the depletion of more easily reached deposits in this country, they’re about the only game in town.

“Tight gas plays and unconventional plays are very expensive because of the massive fracturing and technology you have to apply,” Craft said.

“Concrete has better porosity,” he said. “But that’s what’s left.”

In West Texas, Approach has more than 60,000 acres in the Cinco Terry and Ozona Northeast fields in Crockett and Schleicher counties southeast of Midland. Since 2004, the company has drilled more than 300 wells in the Ozona, enough to make it the 10th-busiest in West Texas and No. 2 in the Canyon Sands formation that is the target of the company’s efforts, said Curtis Henderson, Approach’s executive vice president and general counsel.

Jeffrey Longbotham, president of Midland-based Riviera Energy, said activity in Crockett County is heating up as high prices and technology advances open up new opportunities.

“Crockett County is very prolific,” said Longbotham, who said he is aware of Approach’s activities in the area but wasn’t familiar enough to comment on the company specifically. Overall, Canyon Sands wells generally are smaller than Barnett Shale wells initially, but they also don’t decline as rapidly, he said.

Instead, “the Canyon Sands is very predictable” in the long term, and the wells require little additional spending on maintenance, he said.

In East Texas, Approach has a joint venture with EnCana Oil & Gas USA to drill on more than 13,000 acres in Limestone and Robertson counties. The company expects to spend about $14.4 million to drill about a dozen wells there this year.

Craft said he considers the East Texas properties the equivalent of “a farming operation, a gas-manufacturing facility. You drill gobs of wells with little chance of a dry hole, so you know what your return will be.”

In many unconventional plays, including the Barnett Shale, oil or gas is spread relatively evenly throughout the formation, rather than the stereotypical situation where explorers hope that they hit that hidden pocket of oil or gas that conveniently bubbles right up to the surface. With the usual provisions for the unknowns involved when drilling down a mile or more, unconventional fields offer relatively predictable results.

Not so in New Mexico’s Mancos Shale, an oil shale that Craft describes as “our wildcat play.” The company expects to drill its first well by June.

“We normally don’t do exploration plays, but it was cheap with 90,000 acres under one lease, which is unusual, and under $200,000 a well” for a dry hole, he said.

“If we drill eight wells and don’t do well, we still haven’t lost a lot of money,” he said.

Last year Approach drilled or participated in 71 wells, raising its proven reserves by 70 percent to 180 billion cubic feet of natural gas equivalents. It reported a scant $2.7 million in profit on $39.1 million in revenue, both down from 2006.

The company said the nearly $7 million in costs related to its initial public offering in November pushed up expenses, but with the $72 million raised in the IPO applied to pay down debt, the company finished 2007 with no long-term debt.

Wall Street seems happy with the company’s progress. The shares (ticker: AREX) are up 35 percent since their issue.

Armed with a $200 million line of credit reached with Frost Bank in January, Approach figures that it’s ready if the right opportunity arises.

“It saves your powder for when you can really add value” with a timely purchase or investment, Chief Financial Officer Steve Smart said of the company’s debt-free approach.

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