The Ledger
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Farber: CrownRock exit driven by completion tech reaching theoretical maximums
“There's only so much resource that you're ultimately going to recover, and we just felt like we were getting closer to the sort of maximum economic recovery point, and that, that changed the risk calculus. You had this big asset, you had market risk in retaini…”
McLean: Permian Shift to Horizontal Drilling Yielded 3x Capital Productivity Uplift
“And it also prompted an acceleration of a big industry shift in the Permian Basin from the vertical drilling, which we had been doing since our founding in 2007 to horizontal drilling, which proved to be effectively a three X uplift in the productivity of the …”
McLean: Direct raw acreage leasing yielded 100%+ returns vs 10-15% on producing assets
“If you were to go buy producing assets, you would effectively get a large base of producing properties that would be earning a 10%, call it 15%, rate of return on something. And as a sideline of investing the capital to get access there, you would get some und…”
Farber: Exxon's Pioneer deal removed two of CrownRock's best potential buyers
“The flip side of that was the business had been so successful that we got to a size that very few companies could afford to bid in that process. And the deal that John was talking about with Exxon taking out Pioneer, that took two of our best buyers off the ta…”
McLean: CrownRock's management had greater respect for capital than any team Lime Rock ever met
“I think their biggest differentiator relative to every other management team that we've ever dealt with is Tim Dunn and his lieutenants and partners had a greater respect for capital than any other management team I've ever met.”
Reynolds: CrownRock used mutual ownership rather than tiered PE waterfalls
“This was not a term sheet that said, hey, under certain circumstances, the management team take is X percent of the profits, and above that level, it's Y percent of the profits. It was a mutual ownership structure from day one, where the management team and th…”
McLean: CrownRock grew from under 40k to over 160k barrels per day
“And at that point in time, we were producing a little under 40,000 barrels a day, and we had projections to get well over 150,000 barrels a day if we held it for another five years. We briefly got over 160,000 barrels a day right before we sold the investment.”
Farber: Lime Rock funded CrownRock land buys by selling packages to MLPs
“We sold a number of packages early on in the investment to MLPs, to these production-based partnerships that were public trading at good values, and we were able to lock in a lot of capital to cycle into land over time, and that's how we kept the initial inves…”
Farber: Horizontal wells drove CrownRock's value, enabled by vertical drilling
“If you just look at the absolute breakdown of value creation in terms of vertical wells versus horizontal wells, Almost all the value creation ultimately resulted from the horizontal wells. We wouldn't have had the land to drill those wells on unless we held t…”
McLean: CrownRock investment created well over 200 millionaires
“Well, ultimately every employee of Crown Rock was an equity holder. I mean, that was a big part of the overall compensation scheme that we had there. Well over 200 millionaires were kind of birthed from the Crown Rock investment.”
McLean: CrownRock returned 79x while the public XOP index returned 0.9x
“If you looked at the E&P oil and gas index, the XOP of independent producers over the ownership period of Crown Rock, where we realized on that one specific investment, a 79 X ROI, The return on that index was .9 X. You lost 10% of your money.”
McLean: Offering liquidity makes employees value equity and hold it
“What you find when you do that is almost no one wants to sell. As soon as you offer the ability to sell it back, They can see that it has real tangible value. They could make the election to sell it and realize some cash, but it's very rarely that they would e…”
McLean: CrownRock lost half its Gothic Shale capital, carried by Wolfberry
“The gothic shale was a complete bust. We lost half of our capital. Then we invested in that part of the play, but the wolfberry was so profitable so early that it carried those other stumbles.”
Reynolds: CrownRock's success cannot be replicated across standard energy PE deals
“There are attributes of the people, the Midland Basin, that you just don't replicate.
It's a very special case, and there's probably some danger in thinking there's an application in a postmortem for everything we do going forward, because there's certainly no…”
McLean: CrownRock required only $100M of primary equity in total
“We committed seventy-five million dollars. The management team contributed twenty-five million dollars in properties, so the only primary equity that was ever invested in the business was a hundred million dollars.”
McLean: U.S. oil production share reached 70-year low in 2007 before rebounding
“2007 U.S. Oil production as a share of global production hit its absolute minimum that we've seen over a 70 year time span. And at the moment that we sold it hit a local maxima that spanned 30, 40 years.”
McLean: CrownRock sold forward 90% of crude production entering 2008 crisis
“We had already sold forward in the financial markets, 90% of our next year's crude oil production, so we had a lot of ballast and resiliency through that period.”
McLean: Early Midland wells recycled CrownRock's capital in 3 to 6 months
“The oil wells that we were drilling right around Midland, Texas were insanely profitable. I mean, we were essentially able to recycle capital With the use of leverage in a three to six month period of time, which really carried those early losses.”