Built to withstand volatility

Petro is different, and less sensitive to oil price swings. We've built a company that can withstand the volatility in commodity prices and turn a profit, regardless of whether oil is selling at $26 or $100 per barrel. Petro's assets are different. We're targeting conventional resources with finding and development costs of $10 per barrel and under. To do that, we've assembled a domestic portfolio of low-risk conventional assets in proven, producing oil and gas basins such as California's San Joaquin Basin and Osage County in northern Oklahoma. In both of these regions, we're using advanced 3D seismic to better understand and interpret the subsurface.

As a complement to our low-risk domestic portfolio, Petro River owns small interests in various conventional international projects that provide investors exposure to greater upside from these exploration programs. Between our onshore project in Northern Ireland, on- and offshore assets in southern England, and our offshore project in Denmark, Petro River has exposure to more than 747,000 gross acres internationally. These projects all conform to our core strategy of low-cost, conventional production.

OGFJ: How has Petro River, a company with a market capitalization of approximately $50 million, been able to accumulate such a large inventory of projects domestically and internationally? Have you secured the required capital for your drill program?

COHEN: Through our relationship with Horizon Energy Partners LLC. Horizon is a private partnership comprised of veteran industry executives. Great minds must think alike because Horizon had quietly assembled a portfolio of conventional, low-cost projects that were right in line with our objectives. The match was made sweeter by the fact that Horizon was intimately familiar with our Osage acreage and saw its potential. So in May of this year, we made a mutually beneficial deal with Horizon. We completed the acquisition of Horizon I Investments LLC in an all-stock transaction. As a result, Petro River received $5.0 million in cash and receivables and an indirect 20% membership interest in Horizon Energy Partners LLC, a privately-held operator.

All of our projects, except Osage County in Oklahoma, are a direct result of our partnership and ownership interest in Horizon. We believe our portfolio is one of the best based on potential high value/risked adjusted returns to our shareholders. Further, the acquisitions were made when oil was near its 10-year lows, essentially at distressed prices. The portfolio consists of only conventional opportunities and projects that target finding and development costs of less than $10 per barrel.

And in November, 2015, we recapitalized the company, which-along with the Horizon transaction, enabled us to fully fund our 2016 drill program. We have no capital burden, no debt of any kind.

Who is Horizon Energy Partners?

COHEN: Horizon's team is among the most successful, experienced, and highly qualified in the industry. Jonathan Rudney, CEO, oversees all the E&P efforts. Jonathan is an industry veteran and was the co-founder of a private global exploration company that generated more than $300 million in free cash flow at its peak. His partners are former senior executives at Royal Dutch Shell, Texaco, Burlington, as well as advisers to KKR, Riverstone, Silver Point, and Carlyle.

Horizon's acquisition model is driven by revenue opportunities presented by the current low price environment. The model is simple: Strong demand for low-price oil is steady, even growing, offering incredible profit opportunities to those that can produce it profitably below-benchmark prices. Since we share the same E&P strategy and market outlook-and because of its operational experience-we wanted to be in business with Horizon. It's a near-perfect fit.

Scot, you talked about the depth of experience on Horizon's team. Tell me more about the leadership team you've assembled for Petro River and provide some context on their backgrounds.

COHEN: Petro River's president Stephen Brunner has more than 30 years of operational experience in the E&P arena. The last two companies he has helped lead were both NYSE-listed companies, one of which sold for $3.6 billion. The second was Constellation Energy Partners before it merged with Sanchez Production Partners (NYSE: SPP), duplicating his success in yet another huge exit that generated outsized returns for investors.

Brunner's agreement to act as president of Petro River serves as a strong vote of confidence to our shareholders and partners. How often does a former leader of two large independent, publicly-traded oil companies become a part of a microcap E&P like ours? What's attracted him? The assets. And the Horizon team.

James Rector, PhD, is our chief geophysical advisor. He is among the leading geophysicists in the country, a professor at the University of California, Berkley, and senior consultant to Chevron, BP, and Baker Hughes. He is one of the world's leading authorities on 3D seismic imaging. We've been able to acquire a substantial amount of 3D seismic data and intend to augment it with shoots of our own. There's nobody better at interpreting seismic. Jamie is a walking competitive advantage.

OGFJ: What about your background, Scot? How did you get involved in oil and gas?

COHEN: I've always been an investor and my quest for investment opportunities led me to the oil and gas industry. In my 20-year career, I've been involved in institutional asset management. I founded and served as principal of Iroquois Capital Opportunity Fund, a closed-end private equity fund that focused on investments in North American oil and gas. In addition to the opportunity fund, I also co-founded Iroquois Capital, a New York-based hedge fund. At its peak, the family of funds managed approximately $500 million.

OGFJ: Any big successes for Iroquois while playing in the oil and gas industry?

COHEN: Yes, we had success in E&P services and in a conventional play. With regard to shale-related investments, I paid a price for following the pack and chasing shale at very high break-evens, and that of course was an underperformer. But the lessons learned from those deals laid the groundwork for our investment thesis at Petro River. The teams we backed were chasing resource plays when prices were $80 per barrel. We quickly learned that the shale bonanza was not sustainable in a low-price environment and have adopted our current strategy to ensure we can make money regardless of where commodity prices are.

OGFJ: Let's dive into Petro River's domestic asset portfolio. What areas of Oklahoma are you pursuing?

COHEN: Our Pearsonia West asset area is located in Osage County, Oklahoma, where we own approximately 106,500 gross contiguous acres encompassing multiple project areas. Once slated for horizontal drilling, we are reprocessing 36 square miles of 3D to refocus on a shallow, 3,000- to 4,000-foot, vertical program. The asset hits all our marks. It's a proven, producing area with low-cost, high repeatability. And the sheer size of the prospect was very attractive.

As you know, the best place to find oil is where oil has been found. And our footprint is completely surrounded by legacy oil fields that have produced hundreds of millions of barrels in their lifetimes. The Burbank Field, for example, is to the southwest of our acreage footprint and has produced more than 400 million barrels of oil equivalent.

The second-best place to find oil is in a region you know. Steve Brunner knows this asset well, having drilled more than 300 wells during his tenure at Constellation Energy Partners.

In Pearsonia, commencing in Q4, we'll be drilling six vertical wells in relatively shallow conventional legacy reservoirs using modern 3D seismic surveys. We have identified hundreds of locations and management projects EURs (estimated ultimate recovery) between 30,000 and 100,000 barrels per vertical well. We estimate the cost to drill and complete a single well in Pearsonia is approximately $300,000 and lifting costs are in the $5 per barrel range, meaning we can generate significant returns for shareholders at almost any commodity price.

We believe we can recover approximately 6 million barrels. And, consistent with our strategy, the risk exposure to our shareholders is very minimal with dry hole costs estimated at $100,000 per well. If successful, these wells will pay back in less than 18 months even in a low commodity price environment.

OGFJ: You have two projects in California - both in Kern County. What does your program look like for 2016 in these areas?

COHEN: We're equally enthusiastic about both of our project areas in California. Grapevine and Kern County Field have low-risk developmental and appraisal opportunities in one of the states historically most productive oil-bearing regions. For example, our technical team believes Grapevine contains significant undiscovered oil. The prior operator did most of the work, spending $25 million on land, seismic geophysical studies, and drilling. The prior operator's program paid off and a material oil discovery was made in late 2014, but they lost the well due to mechanical reasons.

Petro River was able to negotiate with the new well owners and reassembled the project. We now own approximately 9,000 acres in Grapevine, and, after acquiring new 3D seismic over the area that is currently under way, we plan to re-drill the discovery well in late 2016. This potential discovery could contain as much as 10 million barrels, and other exploratory efforts could yield an additional 4 million barrels.

Since computer technology is so much better than it was 10 years ago, we are able to find areas that have not been fully exploited. So we'll drill this well at Grapevine, and, in addition to that, we'll drill a second well in what we believe is the core of Kern County Field. We own about 7,000 acres here and are currently finishing a complete remapping of the field using our 3D seismic data. This project is adjacent to the world-class Monterey source kitchen. Within a 20-mile radius of us, more than 10 billion barrels of oil have been produced. We believe the data and results from our field study will identify undrilled opportunities we can pursue when we drill our well in Kern County Field.

OGFJ: Petro River drilled a test well in the Larne Basin of Northern Ireland, an area that's been vastly unexplored by the oil and gas industry. What attracted Petro River to this basin?

COHEN: We believe we have a source rock that will be productive, and we will be shooting 3D seismic to validate our thesis. We drilled approximately 6,500 feet in the Woodburn Forest #1 well and discovered thermogenic gas shows that we believe will confirm huge potential once we make the decision to go deeper. At present, the well has been capped, and we are reevaluating 2D seismic and gathering more information for further assessment. We hold the onshore license for five years with no obligation.

OGFJ: Is there anything else you'd like to add?

COHEN: We have the team, assets, and we have the capital to execute our plan for our portfolio. We have zero debt and are fully funded to drill five more wells before the end of the year. We are one of the few public pure-play conventional companies out there, and we believe we have the right plan for success. Where most of the public companies in the sector are shale producers that are very price sensitive, we are in a position to profit even at $30 oil.

OGFJ: Thank you for your time.

Brian Brooks of EnerCom Inc. in Denver conducted this interview exclusively for OGFJ.