Point of View - Davis Petroleum president touts employees' entrepreneurial spirit for private firm's success

Gregg Davis, president of privately held oil and natural gas independent Davis Petroleum Corp. (DPC), largely credits his company's success to the entrepreneurial spirit of its employees.

Davis, now the third-generation family member to take the helm of the Houston-based firm, told OGJ that DPC attracts the "best and brightest" geologists and geophysicists by offering a work environment that differs from what a public company can offer through simple stock options.

Years ago, Davis's father, Marvin, initiated a compensation system that gave overrides to key management employees. For example, the younger Davis said, "A geologist will receive essentially a costless interest in every well he gets drilled, which not a lot of companies offer today, or if they do, they place restrictions on it."

Over its 60+ year history, DPC has expanded from its early focus on the Eastern Interior and Illinois basins, Central platform of Oklahoma and Texas, and the Midland basin to include significant acreage in the deepwater Gulf of Mexico and along the Gulf Coast. The company also has taken a strong foothold in the Rocky Mountains, an area that it first entered in 1952. Years ago, Davis made a decision to expand the company's operations in the Rockies, a move that now is beginning to pay off big for the firm.

Perhaps most noteworthy among the company's operations is its generation and development of prospects in Eagle Bay field in Galveston Bay, one of the most sizeable Gulf Coast discoveries in recent years.

Ultimate reserves from Eagle Bay will be 300 bcf of gas and 20-25 million bbl of oil, Davis said. The initial discovery well came in at a flow rate of 76.4 MMcfd of gas and 11,002 b/d of crude and condensate, "which for this area of the world is world-class," he said (OGJ, Jan. 16, 1998, p. 60). "We've been able to since develop out that field and drill about nine wells there."

In addition, Davis spearheaded the creation of Davis Offshore LP, a unit of DPC comprised largely of the former Vastar Resources Inc.'s exploration team. Davis Offshore was created in 2000 because of the company's desire to move into the gulf's intermediate-deepwater exploration play in about 500-5,000 ft of water.

All in the family

Founded by Davis's grandfather Jack Davis in the 1940s as Davis Oil Co., the company now known as DPC still has a hallmark of essentially being an exploration company, "so we're not an acquisition company," Davis noted.

During 1953-85, Jack built up reserves, expanded the company, and developed a lot of significant fields, Davis recalled. At one point the company had over 500 employees and 10 regional offices, he explained.

Davis, at the age of 12, began working for his father's business during the summer months. "The deal was that I would work for half the summer, and then could have fun for the other half," he recollected. "My father's dream has always been to pass on the business to one of his two sons. Now, I realize that was my dream, too."

During 1980-85, the company divested itself of its developed reserves, "and very timely so," Davis noted, "for by 1985-86, when the downturn hit, we had sold off essentially all of our production save for a few small wells." In the company's history, total divestitures have reached close to $1 billion.

It was during this downturn that DPC scaled back operations, keeping only "skeleton crews" in Denver and New Orleans. DPC then waited for the time when a better macroeconomic picture would develop for the oil and gas industry, and in 1995 they decided the time was right to build up again. That year DPC started a resurgence in the business, relocating the New Orleans office to Houston.

DPC then started assembling an exploration team to focus on a few core areas in Texas and Louisiana, both onshore and nearshore, in a relatively underexplored area called the Transition Zone—a county-wide onshore area stretching from far South Texas to Port Arthur in Southeast Texas and then into southwestern Louisiana. DPC drilled deeper targets—"impact-type reserves"—and early on had some success, "which really was the springboard for where we are today and where we're going in the future," Davis said.

The company has been actively exploring ever since, steadily increasing to about 15 exploratory wells/year from 5 exploratory wells/year. "This year we should drill anywhere from 20 to 27 exploratory wells in the basins that we're in," Davis said.

Best and brightest

DPC's workforce is currently about 40 strong, Davis said. "We're always trying to find the next great geophysicist, geologist, or engineer." Through the compensation system launched by his father, employees can "immediately" see results based on their work.

Also, Davis explained, "The working environment is very simple. We just create a very fun, exciting, entrepreneurial environment to work in. We don't have dress codes or a clock that you punch in and punch out. It's an environment where you're allowed to be free-spirited, entrepreneurial, and there's no red tape."

Davis said he holds impromptu meetings with geologists at least 8-10 times a day where a geologist voices an idea or a landman sites the importance of obtaining a certain lease. "I think that we're somewhat unique in the environment we offer and the compensation system, and we're just known for getting a lot of difficult projects drilled."

More than half of DPC's staff is devoted purely to the exploration effort, Davis said, adding that many of the firm's petroleum scientists came from Amoco Corp. in the 1970s and 1980s. Today, Davis notes, the talent pool is shrinking. "A lot of the seasoned veterans are retiring. The training efforts of a lot of the major public companies have decreased. We're not necessarily seeing that same breeding ground for the talent. How we find our talent? A lot of times it's word-of-mouth."

Deepwater opportunities

Davis said that the majors' existence in the deepwater gulf has forever changed the scope of gulf operations. The majors essentially have created the opportunity for companies such as DPC to explore in the area, he said. As a result of their large deepwater discoveries, the majors had to build huge production facilities, which created markets, Davis explained. And due to their massive size, "they're not interested in finding 20 million bbl, 50 million bbl; they need 200 million bbl, 300 million bbl."

Around the infrastructure, however, exist a number of smaller opportunities for companies such as DPC to come in, Davis said: "The technology has been developed, and it's now 'off-the-shelf,' and we're drilling these fields near this infrastructure. We'll tie them back on the seafloor and back to these production facilities that have excess capacity. And they're more than willing to take the production."

To date, DPC has participated in three deepwater wells and made two deepwater discoveries, which will be on line in 18 months. A fourth well is under way in the Green Canyon area.

Rocky Mountain high?

With improvements in well completion techniques, DPC has forged ahead in the gas-rich, underexplored Rockies.

Davis shies away from the coalbed methane plays in the area, which in his mind are not really an exploration play but more of a mining play—and very sensitive to pricing because of the narrow economics.

"We went into the Rockies focusing purely on the deeper exploration potential, below 10,000 ft, focusing in the Green River and Powder River basins. We acquired a lot of acreage and now have drilled three discovery wells in three project areas within the Green River basin and are expanding off that," he said. DPC intends to drill several hundred wells over the next several years off of these discoveries.

When asked about the obstacles involved in drilling in the Rockies, Davis said, "We're going to have to figure out ways to efficiently drill [in the area] as a nation, if you will, and to do it without disturbing the environment and keeping all interests in mind."

Davis noted that the sometimes harsh winter weather makes operating in the area difficult, as does the area's remoteness.

Also, DPC has found that it's difficult to find available rigs. "The service companies seem to be spread thin," Davis observed. "Essentially every well that you drill in that area requires fracture stimulation and a long, drawn-out completion process, sometimes lasting several weeks. There's several fields being developed up there—Pinedale, Jonah, and others—that are very successful projects, but they tax the labor pool and the services available."

Davis said another challenge for DPC in the area—in spite of all the technological advancements that have been made in drilling and completion techniques—is that his company has encountered rocks with different characteristics and different pressure regimes and subtle formation sensitivities that can complicate completion procedures.

"For instance, in some zones you can't use any KCl [potassium chloride] water, because the clays will absorb the water and then clog up the pore spaces, and you can't make a completion. Despite all we know, in a lot of these areas, we're still feeling our way into how best to develop these fields," he said.

"The operators up there are all still trying to refine their techniques and trying to find the next-best way to get more production out of each completion, because the whole area is just tight rocks with lots of gas. If you can increase your rate by doing something different from what you did last time, that's a big difference.

"When we go into an area like that, we end up on a very steep learning curve. Often you'll have to make some mistakes before you can get a successful completion."

Existing pipeline infrastructure also remains a challenge, Davis said. "Up there, you have to pick your spots. If there's no pipeline within 20 miles, then suddenly your economics are driven by pipeline infrastructure."

Also, with the downfall of Enron Corp.—and companies like it that used to finance such pipeline projects—investors today are looking toward producers to finance such projects. "They want some guarantee—and I don't blame them—that we're going to drill up enough production in an area for them to bring in a multimillion-dollar investment. But companies like us aren't necessarily willing to make that guarantee."

On the regulatory front, Davis said that the federal government often is an easy target because of the level of bureaucracy involved in the permitting process. "I think the intentions are good. Nobody wants operators to go out there and run afoul and create oil spills or ruin the environment. But the process is still very cumbersome," he said.

"There are a lot of agencies to deal with when you want to drill a well up there. That is a challenge that the government is trying to address right now. It's not an easy task.

"Clearly, if they could streamline that process while still maintaining the integrity of the environment, the wildlife, and other interested parties, that would be good."

Business model

DPC's business model, Davis said, has been founded on the basic advice that his father received in the 1930s:

"My grandfather was friends with H.L. Hunt. My dad one night was out and asked H.L. what his philosophy was of how to do well in this business. H.L. said, 'Son, the man who drills the most has the best chance of coming up with the most.' That's been our basic operating philosophy to this day: that we focus on generating as many quality projects as we can and get as many of them drilled," Davis said.

The added twist, he noted, was that his father never felt that anybody was smarter than Mother Nature, meaning the best project on paper can end up being the biggest bust. "And then, sometimes the ones that are the 'sleeping dogs' end up becoming the winners," he said.

Davis said that DPC spreads its risk across a broad portfolio of prospects, from high-risk to low-risk, and then keeps only a certain portion of each one of those. "We like to drill a bigger portfolio of projects and keep a smaller interest."

Overall, Davis said, "I love the excitement of a well drilling in a new area that has a chance of finding something that no one else has found. The lure of finding the next big field is what it's all about. I got infected with it early on, growing up with my dad.

"There's more heartache and more excitement in this business that any other that I know of. I guess it's similar to the movie business in that a lot of movies are made, not many of them are very good, but then you get some that are really big, that keeps you coming back."