U.S. WINNERS & LOSERS
A new breed of energy company is a hit with investors using a mantra long scorned in the oil-and-gas business: Small is beautiful.
When the U.S. energy boom began almost a decade ago, the companies leading the way believed bigger was better. They amassed huge land holdings so they could drill thousands of wells—and then struggled as the glut of natural-gas freed through hydraulic fracturing pushed down prices.
Like their bigger rivals, the upstarts frack to tap previously untouchable oil and gas deposits in dense shale formations. But these companies have focused on the right property instead of the most property—and raked in big stock paydays as a result.
For the most part, neither the less-is-more upstarts, nor the bigger-is-better graybeards are bringing in more than they spend to drill and frack. The difference is that Wall Street no longer is throwing cash at established shale players holding loads of acreage.
"It's quality over quantity. We don't have one million acres and we don't strive to have one million acres," says Daniel Rice IV, the 33-year-old chief executive of Rice Energy Inc., RICE +2.90% which drilled its first well in 2009.
The company, which went public in January, has a stock-market value of $3.9 billion, its stock up 44% since its initial public offering. The Rice family owns a third of the stock.
Rice holds the rights to lease about 90,000 acres in the Marcellus Shale, nearly all in two counties in Pennsylvania and one in Ohio.
Compare that with Chesapeake Energy Corp., which holds leases to drill on nearly 13 million acres in eight states, after vacuuming up as many leases as possible in the mid-2000s. Despite having the right to drill in an area 140 times that of Rice, Chesapeake's market value is $18.33 billion.
The land-grab approach, pioneered by Chesapeake and copied by its rivals, left companies spending more than wells generated in revenue. Some huge companies that bought into the energy boom, such as Royal Dutch Shell PLC, have written down their shale assets and said that drilling for natural gas was a losing proposition.
The Marcellus Shale spans 95,000 square miles across four states. But only a small part of that is considered economically feasible, and investors now will pay dearly for the companies that can drill in those sweet spots.
"The real appeal for investors is premium acreage," says Gordon Douthat, an analyst with Wells Fargo. Driving down costs is important, too, he says. "It's a pretty easy formula, but many people haven't been successful doing it." Rice, he says, has drilled some of the most productive wells in southwestern Pennsylvania.
Several companies with similarly small, focused footprints have had successful IPOs. Diamondback Energy Inc., which is focused entirely on the Permian Basin of West Texas and emphasizes its low drilling costs, went public in late 2012. Shares of the company, which is based in Midland, Texas, have quadrupled since then.
Another Midland company, RSP Permian Inc., went public in January and raised $390 million. Two founders of the company, which holds 33,900 acres in five counties in West Texas, held shares valued at nearly $200 million each, according to Securities and Exchange Commission filings.
While these newly public companies are spending more than they make, they say they offer investors fast growth and are spending necessary money to drill wells and lay pipes that will generate positive cash flow in the next few years.
Antero Resources Corp. holds 433,000 acres in the Marcellus Shale and Ohio's Utica Shale. The Denver-based company's $1.6 billion IPO in October was one of the year's largest and its shares have climbed 44% since then.
Rice—which is based in Canonsburg, Pa., about 20 miles southwest of Pittsburgh—has had the most eye-popping results, especially for its founding family: CEO Mr. Rice, two younger siblings and his father, company director Daniel Rice III, a former fund manager for BlackRock Inc.
"It looks to me like the Rice family rolled the dice and won," says Jay R. Ritter, a University of Florida professor who studies IPOs. It is relatively common for tech-company founders to accumulate impressive stock wealth from an IPO in relatively little time. But in most other industries, it is rare for someone to start a company and just a few years later, "be worth hundreds of millions of dollars on paper," Prof. Ritter says.
Mr. Rice IV says his father put up $50 million, which the CEO and his siblings used to acquire its leases. Private-equity firm Natural Gas Partners invested $300 million in 2012, and received shares valued then at around $900 million. The rest of the initial capital, Mr. Rice says, came from borrowing.
Rice Energy's rise has had its bumps. In 2010, the company entered into a joint venture with Alpha Natural Resources Inc., to drill on land held by the coal company. Before the deal, less than 2% of the assets of a BlackRock mutual fund run by Mr. Rice III were invested in Alpha. After the deal, Black Rock's investment rose to more than 9%, a relationship that wasn't reported publicly.
Shortly after it was disclosed by The Wall Street Journal, Mr. Rice said he would leave BlackRock. He couldn't be reached for comment for this article and previously declined to discuss the matter.
Mr. Rice IV and the rest of top management, who are in their late 20s and early 30s, "came in to this with no preconceived notions," says Cameron Horwitz, a managing director at U.S. Capital Advisors LLC in Houston, which provided investment-banking services to Rice in its IPO. "They let the data run the company."
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