Premier Natural Resources and investment giant KKR in successful partnership

Chris Jacobsen, co-founder and CEO of Premier Natural Resources
Photo courtesy of Evan Taylor Photography

OIL & GAS FINANCIAL JOURNAL: We always enjoy the opportunity to speak with a private company – especially a company with a great story. Before we get into your partnership with Kohlberg Kravis Roberts (KKR), how was Premier Natural Resources started and what was your goal at the time?

CHRIS JACOBSEN: Premier began in 2006 based on a business plan similar to that used at Vintage Petroleum, the previous company formed by Charles C. Stephenson Jr., one of our five founding members, to acquire and exploit producing oil and gas reserves. All of us had worked at Vintage in different capacities so while we were all engineers, we each had expertise that was accretive to the value-added chain of tasks. Initial capital was designed to give us an operating presence in one or more of the producing basins in which we had operating expertise. We looked for acquisitions that had a combination of lower-risk workover projects and drilling opportunities.

Our initial long-term strategy was to build our production and associated cash flows generated from that production to support larger acquisitions. This strategy and our partnership with KKR have created a portfolio of properties that produces approximately 250 million cubic feet equivalent of gross natural gas production per day with continuing upside potential.

OGFJ: In March 2010, Premier and KKR established a partnership. How does a private company like Tulsa, Oklahoma-based Premier Natural Resources strike up a great working partnership with an investment firm like KKR? Tell us a little about how that relationship started.

JACOBSEN: In 2008, we began assessing larger packages of US-based oil and gas properties and were introduced to Kohlberg Kravis Roberts & Co. At that time, we partnered with KKR to evaluate the acquisition of a large, privately held company. While we did not ultimately acquire that company, the evaluation did solidify our ongoing partnership. Initially, during the volatile oil and gas price periods of 2008-2009, Premier conducted thorough technical, operational, and business diligence evaluations on behalf of KKR. One such assessment resulted in KKR's June 2009 investment in East Resources, which held more than 650,000 acres in the newly discovered Marcellus Shale.

Premier and KKR worked together for almost two years before formalizing our partnership. During that period, we became very familiar with each other's strengths and found our business principles to be aligned – many of which can be summarized by the phrase "attention to detail and taking a disciplined approach to bid evaluation." In March 2010, Premier and KKR formalized the partnership with the creation of KKR Natural Resources (KNR) through which Premier conducts the technical evaluations of assets, analyzes the potential of the financial investment, and ultimately, if purchased, operates the properties for increased performance.

KNR was formed with an initial capital commitment of $250 million, which grew to $425 million by the end of 2010, and has nearly quadrupled to $1.6 billion today.

OGFJ: Premier Natural Resources goes by the motto: "Acquire to exploit and exploit to acquire." I'm sure our readers have heard bits and pieces of this from other companies, but how has Premier shaped its strategy around this?

JACOBSEN: We use our 30-year operational knowledge to acquire properties located in our geographic areas of expertise and focus our operational activities to improve production and revenue while controlling costs. As we determine which exploitation projects are working, we use that expanded knowledge to acquire more properties with the same attributes. Typically this knowledge is associated with the application of sound engineering and geologic principles to inventory the original oil and gas in place while subsequently employing technology to improve the ultimate recovery of that reserve potential.

OGFJ: Your partnership with KKR has acquired more than $1 billion worth of assets since March 2010. Many of these assets are natural gas. May I ask your outlook on natural gas prices and how has your view on prices shaped your acquisition strategy?

JACOBSEN: We don't discuss specific price forecasts due to the competitive nature of our business, but we are very comfortable making acquisitions that factor in the current forward price curve for natural gas.

Fundamentally, we believe that natural gas is the fuel of choice to meet the growing demand for energy in the US required to support a growing economy. Natural gas has a lower environmental impact and is extremely competitively priced relative to other sources of energy. The current pricing of natural gas in North America is making our petrochemical and LNG industries competitive on a global basis, which should in turn result in increased demand for natural gas and support for constructive prices going forward. Therefore, we have positioned Premier to benefit from these attractive long-term industry dynamics.

Members of the Engineering, Geology and Operations teams discuss merits of a potential acquisition.
Photo courtesy of Evan Taylor Photography

OGFJ: How do you believe the remaining capital will be allocated?

JACOBSEN: While we currently have a significant aggregation of natural gas and NGL assets, we continue to focus on expanding our reserve base to areas where the best investment opportunities present themselves. Currently many of those opportunities continue to have a majority of the reserves and production comprised of natural gas.

The US oil and natural gas liquids shale programs are providing an opportunity for the industry to invest capital at attractive returns on capital on a predictable basis, which is very compelling for public companies. Those companies, however, need to source additional capital to fund the development of their shale programs. Premier plans to take advantage of that "recapitalization" by aggressively sourcing and evaluating producing properties that public companies deem "non-core" and are looking to sell to fund their capital programs.

Premier reworking a well in Mississippi. Photo courtesy of Premier Natural Resources.

OGFJ: When Premier is evaluating a potential acquire and exploit prospect, what are some of the key attributes that stand out as attractive to you and your team?

JACOBSEN: To start, production from known producing basins and formations is one of the best ways to identify and evaluate hydrocarbon reservoirs with significant upside potential. Producing regions in Arkansas, Louisiana, Mississippi, Oklahoma, and Texas are where we have specific operational expertise and experience, and typically, our greatest success.

After acquiring an asset with significant upside potential, we further leverage our operational expertise and experience to change the shape of the production curve. Effectively changing the shape of the production curve helps to ensure an increase in production, a lower overall decline curve, and a higher rate of return than our predecessor, thus providing adequate justification for the acquisition.

Throughout this entire process, we maintain a close working relationship with our field personnel, who have their eyes and ears on the ground. They are the individuals we communicate with on a continual basis to help us ensure that quarterly production goals are being met or exceeded, while controlling costs.

And last, but not least, is our ability to leverage and deploy technology to maximize hydrocarbon recovery. In today's oil and natural gas industry, technology cannot be underestimated, and at Premier Natural Resources, we are constantly seeking new ways to leverage technology and drive stronger returns.

OGFJ: This is not your first go-round in the oil and natural gas industry. Can you tell us a little about your prior experience at other companies before you co-founded Premier?

JACOBSEN: I started with Exxon Company USA where I worked for five years in five different reservoir engineering, project management, and supervisory assignments. I learned and applied the fundamentals of engineering, geology, and petrophysics in developing mature fields and then transitioned into new frontiers with more technically challenging opportunities. We were all so young, but were given considerable technical and financial responsibility which made us highly accountable for positive results.

After Exxon, I had the opportunity to work with Netherland, Sewell and Associates Inc., one of the leading petroleum consulting firms. During my 12 years with NSAI, I became senior vice president. Clarence Netherland and Fred Sewell instilled the value of integrity above all other matters and a relentless commitment to excellence and service to the client.

Later, I joined a small independent in Tulsa where the spirit of entrepreneurship was blended with detailed technical evaluations without the benefits of a larger balance sheet. This forced me to stay focused on our business plans knowing that we had limited resources that would not allow for technical or financial disruptions. Ultimately, I joined Vintage Petroleum as vice president of US Operations and Exploitation where I stayed until January 2006, when we merged with Occidental Petroleum.

OGFJ: What are some of the major challenges today associated with running a private company?

JACOBSEN: Our biggest challenge is financial volatility due to commodity prices. Secondly, we have to find sound projects where we have access to the key information that we need in order to find the potential value that others have missed while staying disciplined in our bidding for assets and in our execution of the exploitation, operations and financial plans. The key is to know which deals are going to be over-priced and which deals are worth stretching for because the remaining unevaluated potential will provide value growth that is accretive to the estimated returns.

Finally we have to attract, hire, and train good people with the technical, operational, and financial aptitudes to manage our business at the field and office levels. We put a lot of emphasis on character with a strong work ethic.

OGFJ: As you look toward 2013, how do you plan to allocate capital across your portfolio of properties?

JACOBSEN: We will commit our capital to the most attractive economic projects to increase cash flow and maximize the return on investment – both financially and in the context of our people's time, which is one of our scarce resources. We also expect to allocate our resources and capital to the continued aggregation of new acquisitions.

OGFJ: Thanks very much for taking the time to talk with us.