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Natural Gas Systems is experiencing success with their approach
of buying mature oil and gas companies and redeveloping those properties with a
combination of capital and technology
Natural Gas Systems, Inc.
820 Gessner, Suite 1340
Houston, TX 77024
Robert S. Herlin
President and CEO
Interview conducted by:
Lynn Fosse, Senior Editor
June 2, 2005
Robert S. Herlin, President, Chief Executive Officer & Director.
Mr. Herlin has served in the roles of President, CEO and Director since the inception of
the Company. He previously served as Chief Financial Officer and, subsequently, as
President and Chief Executive Officer for an oil and gas exploration company. Mr. Herlin
has 18 years of experience in the upstream and midstream oil and gas industry in
development, mergers and acquisitions, operations and finance. Previously, he served as
Vice President, Strategic Initiatives of Enron Liquids prior to 1997 and Director of
Acquisitions for several independent oil and gas companies. He has also led his own
consulting group focused on acquisitions and strategy. Mr. Herlin earned his B.S. and M.E.
degrees from Rice University and his MBA from Harvard.
Mr. Herlin has been involved in numerous transactions totaling more than $800 million. In
the course of his oil and gas acquisition work, he has evaluated properties along the Gulf
Coast, mid-continent, Rocky Mountains and Pacific Coast basins and led substantial
evaluation teams of professionals. Mr. Herlin created and led an operating group that
initiated and successfully completed a conventional horizontal drilling program with 28
wells. He was the lead consultant for a $65 million manufacturing company leveraged
buy-out and turn-around. In addition, Mr. Herlin currently serves on the Board of
Directors of Boots and Coots Group.
We formed NGS in 2003 to exploit specific opportunities in the maturing U.S. upstream
petroleum industry. Much of the oil and gas found to date in the United States remains in
place due to, among other reasons, depleted reservoir energy, well bore damage, low oil
and gas prices at the time of abandonment, or inadequate reservoir penetration and
drainage. NGS acquires such under-developed resources at a low cost and applies existing
and leading edge technologies to identify, access and produce incremental oil and natural
gas, particularly those resources not fully exploited due to inadequate penetration and
Herlin, what was your vision when you started with the company and how has that played
Mr. Herlin: We started in late 2003 with the concept of
buying existing, typically mature oil and gas properties. Our idea is to redevelop those
properties with a combination of capital and technology. We focus on properties with known
resources that are generally less than 7000 feet in depth and on-shore, and we have had
good success with that approach. So far we have made three acquisitions and have had
success with all of the acquisitions in terms of developing the reserves.
many have you looked at, and why did you decide on these properties?
Mr. Herlin: We have looked at a few dozen deals in the
course of the last two years. We focus on properties from $1 million to $15 million, which
is the ideal range. Those are deals that are generally not attractive in the market place
because they are small and out of the range of interest for the larger acquisition
companies. However, these deals are a little bigger than a private company may do. We have
good access to capital as a public company, and that helps us to get deals closed.
do you know in the area of technology that would make these particular wells feasible?
Mr. Herlin: Take the example of Delhi Field that was
the first property we bought; it was discovered around 1945 by two independents - MURPHY
and Sun Oil (subsequently Oryx). They developed the field in the 1940s and 50s
and it has been a mostly mature field ever since with generally little interest or
activity for the last two decades. At the last time of notable activity, the price of oil
was in the mid teens, the price of gas was $1.50 - $2.00. We now have much higher prices.
Current prices allow us to develop successfully oil accumulations of as little as ten
thousand barrels. By bringing capital to the table and sub-surface geology, we can
identify those kinds of opportunities. In addition, we are looking at applying additional
technologies such as enhanced seismic and others to help identify additional accumulations
of bypassed oil and gas.
mentioned three deals that you closed; will you tell us about the others?
Mr. Herlin: The others are more typical of the kind of
property that is bypassed and of little interest to the main stream. These include
stripper wells that make a lot of water and not much oil. The nice thing about them is
that these wells will be producing oil for the next ten, twenty, or thirty years; there is
very little decline. They make about a barrel a day each, with a hundred or more barrels a
day of water. The owners previously did not put a lot of effort into maintaining or
improving the properties. We are installing different pumps that are more efficient, can
move higher volumes and have lower maintenance costs. We are putting wells back on
production and standardizing the operations. We are installing a more efficient approach
to water handling facilities. We believe that we will be very successful there.
CEOCFOinterviews: Do you
care if you are looking at oil or gas?
Mr. Herlin: No, either one or both are of interest to
us. The opportunity to add value is the driver.
CEOCFOinterviews: Do you
own 100% of your properties?
Mr. Herlin: Yes we do. We currently own 100% of the
working interest and average a revenue interest slightly less than 80%.
100% of the working interest the only way you will do a deal?
Mr. Herlin: It is not the only way, but one of our
strong guidelines is to have operating control so that we do not depend on someone
elses schedules and time lines. We want to be in control of development activities
that we see as adding value. We have looked at other deals with less than 100% working
are the other guidelines for natural gas?
Mr. Herlin: It has to be an established resource. We do
not do traditional exploration; we work in areas with identified resources, pipeline
outlets and infrastructure. We are finding incremental ways to add to reserves and
production, such as looking for bypassed oil and gas. The typical example of an
interesting drilling program would include what we refer to as a develo-cat,
which is a drilling location near a producing well and with strong probable reserves. We
want to stay in areas that are relatively shallow; typically less than 7000 ft. in depth
in order to keep our costs down. We like to stay out of abnormal pressure scenarios where
you have to deal with higher pressures than normal, because that also increases the
operating risks and costs dramatically. At this time, we do not plan to go offshore,
because of higher costs and regulatory hurdles, for insurance and the cost of operations.
We focus on the lower margin, lower risk and lower return type of opportunities. We would
prefer 100 singles instead of one homerun.
there much competition?
Mr. Herlin: Yes, the oil and gas business is incredibly
competitive. Everyone is looking for an edge. The competition for the larger deals is
especially intense. It is difficult to get a good deal unless you have some intrinsic
advantage such as in technology or knowledge of the asset or in synergy by combined
operations. For that reason, we have chosen to focus on the smaller deals where that
competition is not as intense.
do you do with the oil you produce?
Mr. Herlin: We have one purchaser for all of our crude
oil in all of our fields. It is a very efficient market with quite a few purchasers. Our
oil is typically trucked to a refinery point or an oil pipeline point.
CEOCFOinterviews: Do you
hedge any of it?
Mr. Herlin: We are required to obtain, and have
completed beginning in March of his year, a hedge for fifty percent of our producing
reserves for a period of two years.
does outsourcing work for you?
Mr. Herlin: The management team has worked previously
for companies that incorporated all traditional oil and gas business functions. What we
found is that you spend too much time on activities that are not essential to your core
business. We decided to outsource those functions that we consider to be non-core and
focus on our strengths in value creation, allowing outside groups to provide the non-core
functions at a lower cost due to their efficiencies of scale. We outsource our property
accounting to a group that just does property accounting and regulatory filings for some
10,000 wells. Management focuses on what we think we are good at - buying properties,
developing them and in finding ways to add value.
is ahead in the next few years for Natural Gas Systems?
Mr. Herlin: Like all other public companies, we are
under pressure to grow. We need to get bigger to justify being a public company. We have
an intense need to grow internally and through acquisitions.
should potential investors know that perhaps they do not realize when they first look at
the company, and why should they be choosing to invest in Natural Gas Systems?
Mr. Herlin: The benefit we offer as a small company is
the tremendous opportunity and room to grow, whereas larger companies have to find and
develop substantial reserves just to replace their current production, much less grow. I
would say that our ceiling is relatively higher compared to larger companies. On the other
hand, we focus on a lower risk profile; we would rather have many small successes than
roll the dice on one big success. We are very much a risk/reward driven company.
closing, what would you like people to remember about Natural Gas Systems?
Mr. Herlin: We are pleased with our success today and
have high expectations to continue to grow the company. Those of us in management are
highly motivated to make that happen; our interests are fully aligned with the
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