American Oil and Gas Reporter - July 2017 - 45

SpecialReport: Industry In Motion
should respond," notes Lodzinski.
He indicates the majority of the Earthstone management
team has been together for more than a decade, and the
experience of the individual team members dates to the 1970s
and drilling deep, highly deviated Gulf Coast wells. They also
were early practitioners of horizontal drilling and multistage
hydraulic fracturing though their involvement in the Austin
Chalk, Vicksburg and other plays. "In the Austin Chalk, we
were lucky to go out a few thousand feet laterally. Now we are
routinely extending out several miles," reports Lodzinski. "Certainly all this experience has helped us develop our current horizontal drilling techniques."
In addition to the management team, Lodzinski estimates
that at least 35 percent of Earthstone's support staff has been on
the team before. "The accounting, land, regulatory and other
staff members are a highly important ingredient in our success,"
he says. "We have production superintendents who have been
with the management team for 15-20 years through multiple
entities, and many also are investors."
Exceeding Expectations

The majority of Earthstone's 21,000 operated acres in the
Permian basin has a net 85 percent working interest. "When we
were looking for opportunities, we focused not on where the
market was at the time, but where it was going," says Lodzinski.
When Earthstone initiated discussions with Bold Energy III, he
says, there were not a lot of horizontals producing in Reagan
County with new frac designs, but the early wells indicated the
presence of oil within the thicker Wolfcamp sections, namely
the B zone.
"We felt pretty good going in that direction, and have
identified 500-plus drilling locations in the Wolfcamp," he adds.
The type curves associated with the producing wells show
dramatic improvement moving from the first generation of
completion design to the current fourth generation, Lodzinski
says, and a Gen V design is in the works. The generation-togeneration enhancements generally include larger frac sand
volumes, increased pump rates and denser stage spacing
throughout longer lateral sections. "The last 14 wells placed on
production are exceeding our type curve expectations. All of
them have used the Gen IV completion design," he states.
Earthstone is running a one-rig program in the Midland
Basin this summer, but plans to deploy a second rig later in the
year, according to Lodzinski. "In general, our acreage is held
by production, so there are minimal outstanding drilling obligations," he details. "However, we intend to maintain an active
program to accelerate drilling and completion activities. We
expect to drill a minimum of three wells per pad whenever
possible to maximize the value of our assets."
Role Of Private Equity

Tailwater Capital actively manages four pools of private
equity capital, including two midstream funds that back gathering,
processing, treating and compression projects. "We also focus
on downstream bottlenecks and are in the business of trying to

help make the delivery of hydrocarbons and products to the
downstream sector more efficient as well," says Edward Herring,
Tailwater Capital's co-founder and managing partner. "We
really play across the full midstream spectrum."
Tailwater's two upstream funds are focused on nonoperated
working interests in upstream opportunities that can take many
forms. "We can be more creative with private capital than with
public currency," explains Herring. "We may lease smaller
chunks of acreage that have been delineated, or five to 150-acre
unleased positions where the operator in the area would be a
high-quality partner for our capital."
"Our investments can take the form of wellbore assignments,
where someone owns nonoperated interests but does not have
the capital or the ability to finance it," adds Herring. "It also can
take the form of drilling companies or joint ventures that are set
up to accelerate drilling in an area behind a single operator."
Looking back at the experience of the past two years, Herring
says, 2015 was a year of "dislocation" with a dramatic drop in
oil prices. "By our internal estimates, publicly traded U.S.
upstream companies overspent their free cash flows by 150
percent on average between 2010 and 2014," he says, adding
that much of that overspend was financed by cheap debt and
equity that was highly valued.
"Coming off of the volatility of 2015, there is a more capital-constrained upstream market in general today," Herring observes. At the end of 2016, he says, Tailwater assessed that
about half of all public exploration, drilling, completion and
production companies had debt in excess of three times their
cash flows, and 20 percent of those had debt in excess of six
times cash flow. "We are talking about balance sheets that may
not be terminal, but they require you to live within free cash
flow."
Herring says the upstream public company universe is viewed

Earthstone says its strategic combination with Bold Energy III
includes 500 (gross) operated proved and probable drilling locations, with that number expected to increase with further derisking of Spraberry and Wolfcamp intervals. Moreover, ongoing
completion optimizations are steadily improving horizontal well
performance. The last 14 wells placed on production, all of which
were completed with the 'Gen IV' design, are exceeding type
curve estimates, the company reports.

JULY 2017 45

American Oil and Gas Reporter - July 2017

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