OGJ Top 10 Independents-No. 6: TEC maintains three-pronged growth strategy-in one basin

San Antonio-based The Exploration Co. has a three-pronged strategy for sustaining the company's production and earnings growth, according to James E. Sigmon, president and CEO-and all three parts involve the same Texas basin.

The first leg of this strategy involves its large acreage position in the underexplored Maverick basin in South Texas, where the company has used new technology-predominantly 3D seismic-to identify Glen Rose reefs in the basin. The ongoing exploration project is being used to build the company using the patch reefs, which are at a depth of 5,500-7,000 ft. TEC holds more than 245 sq miles of 3D seismic data gathered over 365,000 acres under lease. "New technology just completely opened up a new environment for us," Sigmon said.

The second leg involves a coalbed methane play in the same basin in Maverick County, Tex., which lies along the US border with Mexico. Here, TEC has drilled 15-20 CBM desorption wells in a partnership with the US Geological Survey. USGS has been doing desorbing analysis for the basin, and TEC has drilled two wells with them as 50-50 partners.

The third part of the company's strategy involves the deep Jurassic play in the Maverick basin. Prior drilling attempts in the 1950s by Shell Oil Co. and Exxon Corp. and in the 1970s by Conoco Inc. failed to successfully confirm the deep play. This was due to lack of the appropriate technology, Sigmon explained. TEC has since formed partnerships with other companies in the area to continue the exploration project.

Gas concentration

Sigmon noted that TEC's reserves are heavily weighted toward gas at 78%. "That's why we're profitable now," he said. "We were out chasing this stuff in the Maverick basin back when prices were low, and we would still be able to do it profitably even with low gas prices.

"I cannot control commodity prices. I've got to be able to control what [volatile prices] do to the company. The way we control what it does to the company is to keep a low debt profile," Sigmon noted.

In the meantime, Sigmon keeps his natural gas price projections in check: "We're optimistic, but we're not unreal."

Independents' challenges

Independents currently face two major challenges: high service costs and untrained field personnel.

"Service companies' prices have just increased dramatically," Sigmon explained. "They are becoming so big [through consolidations], and they need increasingly more money. That's fine, if oil prices and gas prices stay up, but when gas prices have this fluctuation that we've seenellipsewe're paying 50-70% more for services. Our margins have actually decreased, and unless prices come down or some more independents come into the business-some smaller companies that do the same services-we're going to see margins for E&P companies slow down."

Regarding trained field personnel, Sigmon said that as TEC has expanded its operations, it is finding fewer and fewer trained people. "It just takes time to get people trained," he said.