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Listed In London, Drilling In Denver: Meet The Oilman Who Covets Barrels As Much As Technology

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Few would disagree that the U.S. shale oil bonanza has been driven by independent upstarts. American wildcatters' ingenuity and perseverance in perfecting hydraulic fracturing or 'fracking' has brought in incremental barrels from the Permian to the Eagle Ford basin, and all else in between.

In that geographic, significant "all else in between" is the U.S. state of Colorado's booming Denver Julesburg Basin. Industry estimates suggest the basin could hold up to 4.5 to 5 billion barrels of oil equivalent for viable extraction – and rubbing shoulders with the great and good of the drilling industry seeking that prize is a very different kind of oilman.

Meet Robert Price, founder and Chief Executive Officer of Highlands Natural Resources (LON:HNR), a Denver headquartered exploration and production (E&P) firm, that's listed thousands of miles away on the London Stock Exchange of all places.

Eric Anderson

But why go for a London listing for a U.S.-focused business? "Why not? It's the world's premier capital market. London is where you go to when you are seeking a diverse global pool of investors to narrate a compelling Colorado story to. That's what I did in 2015 in heading to a market that I know from past experience gives a fair hearing to operationally prudent firms like ours – we are a low risk operation with good geology and solid backers," Price says, in an exclusive interview.

That Colorado story is indeed an interesting one. In order to fully grasp it, and what makes Price's company tick, your correspondent headed around 20 miles southeast of downtown Denver to the Lowry Bombing range, an area once known to have housed U.S. intercontinental ballistic missiles during the Cold War. In 2012, wildcatters struck oil on the patch located in the outer fringes of the DJ Basin.

A scramble followed with majors and independents alike wanting in on the rush, and subsequently ConocoPhillips (NYSE:COP) became the dominant regional force. The landscape these days is littered with sites having anywhere between 16 and 24 wells, and some are rumored to be contemplating 32 wells.

But there is one site where a mere eight wells may be seen operating at full tilt. "That’s us!," Price says. "Based on our internal data analysis, we think eight wells are optimal. We have designed our fracks to be larger than what has been done in the past. It is our belief that doing so would make these eight wells as economic as possible. With respect to others tapping the basin, that's our opinion and time will tell if we are right."

How the acreage came HNR's way is just as intriguing as its way of thinking. The Colorado oilman and his trusted friend and partner of three decades – Paul Mendell – farmed it out from ConocoPhillips when oil was rapidly sliding below $50 per barrel back in 2015, and the industry was awash with tales of about the profligacy of some shale players who had overpaid for acreage and underperformed.

"All the talk was of shale exploration being a passing phase. Well it isn't now, and it wasn't then for those like us with process efficiencies at the core of their planning and operations.

"You will find companies spending tens of thousands of dollars an acre. In the DJ basin its $5,000 to $10,000 dollars an acre. We are a small company, so when we farmed in the Lowry Bombing range acreage in trying times for the industry, we didn't pay a consideration.

"We gave an override and a backend, but we didn't pay a high upfront cost for the leases. Of the eight wells we planned at the acreage, we drilled the first two wells, and then transferred the next six over to True Oil, a larger partner and independent exploration and production firm."

Eric Anderson

HNR has now ventured beyond the East Denver patch to prospecting in West Denver, where the company currently has 3,617 acres. Price says it is too early to predict how things would shape out there.

"But it could be the exact same model as East Denver. It's much less strain on our resources when we get another company to operate it, and makes much more sense for us to have the margin on acreage and carried working interest. This philosophy helps us to grow the company without an explosion in working overhead cost."

Wider anecdotal evidence and data suggests drilling times have been halved stateside, and Price confirms it with beaming pride. "We drilled our last well [at the East Denver site] in less than two weeks and we're talking depths in the range of 17,000 to 19,000 feet. We use data analytics in partnership with Halliburton (NYSE:HAL) to reduce drilling times."

What's more, in a unique development, the global oilfield services firm, which is currently promoting its Integrated Asset Management (IAM) and optimization program, has also taken a stake in the venture.

"For us, that's the spirit of collaboration in a competitive landscape. Halliburton wants us to be a success. These partnerships don't happen overnight or that often. Paul [Mendell] and I have worked together for over 25 years, and Halliburton was one of our key partners in the Williston Basin. Best predictor of future behavior, is past behavior! Ourselves and Halliburton have been very good partners for decades."

Gaurav Sharma

And on current form – the East Denver site is producing and on its way to a 5,000 barrels per day (bpd) production level that would soon be brought to market via ConocoPhillips' pipeline network, instead of being loaded on to tanker trucks as is the case at present. HNR retains a 7.5% carried interest in the project with a well peaking forecast of around seven years, and up to 24 wells can be drilled in total at the site.

In order to give investors confidence in the venture, Price maintains a 10% stake in HNR, putting his money where his mouth is. "If we are successful, it won't be just about the barrels from our standpoint – we'll make a margin on the leases, on retaining overriding royalty interest, and on the carried interest, all at low upfront cost."

Given Colorado has some of the most stringent environment laws in U.S. compared to other oil and gas states, the company also chooses sites to drill very carefully.

"The basin was discovered decades ago before the population of the Denver metropolitan area was what it is today. There are companies that drill around houses, but we've chosen not to do so near residential areas in East and West Denver, and there is less push-back from residential communities."

However, quite unlike many U.S. independents, the Colorado oilman says his company is not just about black gold. It also looking to propagate its proprietary technology – DT Ultravert (DTU) – a re-fracking and parent well protection solution, for enhanced oil recovery (EOR), which the company claims will help the wider industry achieve at least "a 15% increase in production."

"Our own processes and internal solutions inspired the idea that we should be in the business of selling our methods and technology, and partake in the U.S. EOR drive. DTU was the end result."

The solution has been proven to prevent 'well bashing' in horizontal and vertical wells. HNR has allowed four patents and additional patents pending in the U.S. and internationally. The company is advancing commercial conversations with a "range of oil and gas operators and service providers to commercialize DTU technology."

Since the process involves nitrogen, HNR "could be" supporting the technology stateside with its "own 800-acre low-cost nitrogen discovery in Kansas."

"The single largest process cost of DTU is nitrogen. Commercial air separators [e.g. Air Liquide, Linde] charge as much as $10 per mcf and above for this. So we wanted to find our own nitrogen – and appear to have found it in Kansas. We are an oil and gas company but our nitrogen discovery could be very significant. If we can sell it for $5 to $10 an mcf, then we ask ourselves why drill for natural gas?

"Not that we don't! Methane is in our resource mix too along with helium at a 220,000-plus acre prospect in southeast Montana where drilling and assessment operations are ongoing. And there's a CO2 field in Arizona too we are looking to commercially tap."

Eric Anderson

At its last financials, HNR filed £2.9 million ($3.8 million) in income during four months up to 31 March 2018 from just two wells – Powell and Wildhorse – in East Denver. The company currently has a market valuation of in sterling terms of £22 million, and expects higher income.

Investors appear largely content with their low risk gateway to Colorado's oil, but aren't aspirations for so many revenue streams a bit too much to be taking on? The question brings a smile to the wildcatter's face.

"Well we are Highlands 'Natural' Resources afterall. But what I'd say is that our philosophy has always been to seek enhanced partnerships, spend prudently, and spend little on a very large upside project. You'll see that reflected across the board, not just for oil exploration."

Price, a banker turned driller with over 30 years experience, says having started out as wildcatter, risk appetite comes naturally. "Back in the day, we drilled wells with odds of striking one producing well after drilling 10 but that one successful drill provided great upside and paid for many more exploratory wells, and so rolled the dice."

Perhaps the old mavericks of the crude industry have been replaced by data scientists and number crunchers as the oil business advances in the digital age, Price opines, something his HNR colleagues exemplify in many ways. Technology helps lower the risk, but can never eliminate it.

"That's the nature of the game. It's truly in my blood to take a certain amount of risk that the resource business demands. Being able to provide shareholders with great upside potential creates immense excitement for me and its what gets me up in the morning. That would never change."

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