Keeping Austin Weird, the Oil and Gas Way
The United States of America’s landscape is dotted with what people past and present have referred to as “oil towns.” However, the premier oil town in the U.S. is, of course, Houston, where a good portion of the domestic oil and gas industry is headquartered, and which is within 50 miles of where a quarter of America’s oil production is refined and turned into gasoline, diesel and various other petroleum products.
Other cities that are considered to be “oil towns” today or have been in times past include places near and far: Dallas, Fort Worth, Tyler, Kilgore and Midland in Texas; Oklahoma City and Tulsa in Oklahoma; Bakersfield, Santa Barbara and Los Angeles in California; Shreveport and Baton Rouge in Louisiana; Denver; Casper, Wyo. Farmington, N.M.; Helena, Mont.; Bismarck, N.D.; Pittsburgh; Cleveland; Traverse City, Mich.; and Anchorage, Ala.
If you asked anyone familiar with the industry’s history and current events to name some “oil towns,” they’d likely recall a few places mentioned above and perhaps other cities that have a history with this 159-year-old American industry. But chances are, you could ask 100 such people — or 1,000 — and not one would include the city of Austin, Texas, on their list of “oil towns.”
Austin, after all, is that “blue” town in the middle of a staunchly “red” state. It’s sometimes referred to as the People’s Republic of Austin, that place where residents all want to keep “weird” (“Keep Austin Weird” is the city’s semi-official motto). It’s known as a large college town whose main forms of commerce often seem to be music festivals and Texas Longhorn football, with an occasional Formula One auto race tossed into the eclectic mix.
Even though the state’s Permanent University Fund has taken in tens of billions of dollars in oil and gas royalties for almost a century and used it to subsidize tuitions and fund infrastructure at the University of Texas, and even though the original wooden Santa Rita No. 1 well derrick (which started it all) holds a place of honor on the UT campus, no one in their right mind would ever think to refer to Austin as an “oil town.” It’s a college town, a music town, a government town, a rapidly growing center of the booming Texas high-tech industry. But an “oil town?” No.
And yet, if you want to visit the headquarters of one of the most dynamic, fastest-growing and important oil and gas producing companies in the booming Permian Basin of West Texas, you have to head to downtown Austin to find it.
“We relocated our headquarters to Austin several years ago,” says Bryan Sheffield, the founder and current Chief Executive Officer of Parsley Energy Inc. “Being in Austin has really helped us attract and retain talented employees and made Parsley Energy a preferred workplace in the industry.”
“We love being in Austin. It’s a dynamic, vibrant city that fits the ethos of our company. We’re very connected to the community in a number of ways,” says Matthew Gallagher, the company’s current Chief Operating Officer who was recently named to succeed Sheffield as CEO in 2019. “And the academic presence is certainly helpful in terms of a strong pipeline of technical employees, but also more broadly in terms of an innovative and intellectual context for considering and advancing new ideas,” Gallagher added.
From its inception in 2008, Parsley Energy was a Midland-based company, which made sense given that its entire asset base was and still is focused in the vast Permian Basin of West Texas. But recruiting staff — both experienced workers and college graduates — can sometimes be difficult in Midland, especially during the industry’s down times, so Sheffield made the decision to move the company’s headquarters, and about half of the company’s workforce, to Austin, while still maintaining a large operations office in Midland. “We continue to have a strong presence in Midland and will always have strong ties to Midland as a family and as a company.”
Indeed, Parsley Energy didn’t just move its corporate office to Austin, it has also become a fully invested partner in the city’s culture and community, as evidenced by the announcement in mid-February that all 50 of the Austin Police Department’s bicycle officers would be outfitted with new safety gear, thanks to a donation from the company.
So, Austin might seem like a “weird” place to find the headquarters of one of the largest producers in the Permian Basin, but that’s just in keeping with the local culture. And for Parsley Energy, being in the state’s capital makes all kinds of sense, because there is nothing at all conventional or boring about this company.
A Multigenerational Oil Family
Despite being born into what Texans like to call an “oil family,” Sheffield did not start out with the goal of running an oil company. Sheffield’s grandfather, Joe Parsley, was the “Parsley” half of Parker & Parsley, an oil and gas operator that drilled hundreds of Permian wells from the 1960s to the ’90s. His father, Scott Sheffield, is the now-retired long-time CEO of Pioneer Natural Resources, a highly successful independent producer that is also one of the most active producers in the Permian Basin.
But Sheffield didn’t want to go into oil and gas right out of college. Instead, after obtaining his business degree from Southern Methodist University in Dallas, he moved to Chicago and became a commodities futures trader. As he told the Washington Post in 2014, “I never dreamed of becoming an oilman. It’s just this magnet that pulled me back.”
When we interviewed Sheffield in early February, he expanded on the oil family theme. “You know what’s funny is [that] I grew up around my grandfather Joe Parsley, who was an engineer, and also Hugh Sheffield, my father’s father who was also an engineer. He [Hugh Sheffield] spent much of his career overseas in Iran. I actually have a picture of him hanging on my wall from I think in the late ’60s, and he’s shaking the hand of the shah of Iran. It’s a really cool photo.” Bryan had asked his father, Scott Sheffield, to leave him that photo in his will, but Scott decided to make that gift to his son when he retired as CEO of Pioneer. Bryan chuckles at the memory. “That was the one thing I wanted if he ever passed — I didn’t know he was going to give it to me when he retired. My point is, it’s a long history, a family history in engineering, and I was the one that graduated with a finance degree.”
By 2006, Sheffield returned to Dallas to learn the oil business as an employee at Pioneer. It was an on-the-job education that built on a foundation of experiences he had gained while growing up. “I took a different path to the oil business than both of my grandfathers and my father,” Sheffield says, “but I think my observations in and around both of my grandfathers and my father, and after he built his company, have really helped. I remember as a kid, 12 years old — he’d drag me to these luncheons on Saturdays and Sundays while he’s with his executives’ board, working on the deals. Through time, in high school, or even in junior high, I was interning in the summers at Parker & Parsley. And then at SMU [as an] undergrad, I interned at Pioneer. So, I guess I just didn’t really appreciate oil and gas at the time.” But he was learning about the industry, forming a basis of understanding and judgment that would play crucial roles in his future success.
In 2006, the literal opportunity of a lifetime came Sheffield’s way from his grandfather, Joe Parsley, although initially, it might not have seemed like it. Several years in the commodities trading business convinced Sheffield that he had not yet found his life’s calling. At the time, he was living as a trader in Gibraltar, but as he tells it, he wasn’t exactly setting the world on fire. Sheffield says his income never exceeded $100,000 per year: “I was a scratch trader.”
At that time, Sheffield’s father was advising him to return to SMU to obtain an MBA. But his grandfather had another idea. He offered to bring Sheffield out to Midland to become the contract operator for about 100 vertical wells that had been drilled into the Spraberry Formation decades before, and were still producing some oil. By this point, they were stripper wells, each producing an average of about five barrels of oil per day, but they would provide Sheffield a foundation in the business from which to build.
Sheffield laughs at the memory. “When he said that I didn’t even know what any of that meant. Because I’m reading about [Alan] Greenspan and interest rates and how to construct hedges. So, I called my father and asked, ‘What’s he talking about — operations — I don’t know what that means? You think he’s asking me something I could build off of?’”
Scott Sheffield obviously saw the potential in the opportunity, and advised his son that it might be smart to spend some time at Pioneer, immersing himself in learning the business before trying his hand as an operator. Bryan agreed, and soon made the trip across the Atlantic back to Dallas. Once ensconced at Pioneer, Bryan received a whirlwind of on-the-job training.
“I started out at Pioneer focusing right away on accounting — understanding joint-interest billing and revenue — and then it was on to reservoir engineering to completions and the drilling department. I then went out into the field for about six months, spent time touring units and the drilling rigs, riding around with the foreman for the area. And then the Land department was the last part of my two-year stint,” Sheffield recalls.
Sheffield gives much of the credit for his learning experience to one of the foremen he spent time with, Paul Treadwell. “Paul Treadwell was the one out of all the foremen that I rode with, the only one that would take out a wellbore schematic and walk me through it.” The wellbore is a paper schematic showing what every section of the borehole looks like. “Every well has a different program, with how deep you set the cement, how deep the well is drilled, et cetera. And every well we visited, he went into the files and he brought out the schematic. He didn’t have to do that; he was the one foreman that enjoyed teaching me about what was going on in every well.” That eagerness to share and help guide fellow coworkers impressed Sheffield, and he resolved to instill that same teaching attitude into the culture of the company he eventually built. Treadwell himself was so impressed with his “student” that he soon left Pioneer to work with Sheffield to found Parsley Energy.
“That’s what I wanted,” Sheffield says, “I wanted to start the culture off right, where everyone that I would hire would teach, not close the door and worry about their own career and office politics more than sharing information with the person down the hallway.” That cultural spirit of sharing, teaching and continuous improvement has been a key to Parsley Energy’s ability to retain high-quality people during the company’s recent period of rapid growth and the relocation of the company’s headquarters to Austin.
When he left Pioneer in 2008 to begin operating those 100 stripper wells, Sheffield quickly became aware of his grandfather’s huge shoes he had to fill in the Midland/West Texas community. “One thing that was very important that I saw when I first got to Midland is that I had a reputation to uphold — my grandfather established that reputation, and his son-in-law Scott Sheffield continued it. I quickly realized that the most important thing is holding that reputation in Midland with all the mineral owners and surface owners, leasehold owners, working interest owners and investors. So that was real, the pressure, you know, and I told myself that you just need to be yourself and know that you were raised right and you know you’re good people, right?” Given where Sheffield’s company is today, that self-advice appears to have worked out pretty well.
Carpe POTESTATEM (Seize the Opportunity)
By 2009, companies began to apply the horizontal drilling and hydraulic fracturing technologies that have unlocked natural gas from shale formations throughout the country and increased oil production from formations such as the Eagle Ford Shale in South Texas and, later, from an increasing number of oil-containing shales in the Permian region. It suddenly became apparent to Sheffield that those hundred 2-barrel-per-day stripper wells he was operating sat on acreage that was atop an oil-based bonanza — specifically, a very sweet spot in the behemoth Wolfcamp Shale Formation.
During this same time, the price of crude oil had plummeted from a high of $147 per barrel to $35, and acreage in the Permian, along with drilling costs, had become quite cheap. With his trader’s instincts kicking in, Sheffield smelled an opportunity and began to buy up acreage and drilling rights adjacent to the lands on which he was already operating. To raise capital for his early acquisition and drilling efforts, Sheffield turned to family and friends, as his grandfather had done 40 years before.
One friend, Chris Kayem, whose family owned company, Tex-Isle Supply, Inc., had done business with Joe Parsley and Scott Sheffield since the 1970s, told Forbes Magazine in 2014 that “anything Bryan was going to do, we wanted to be involved with.” Obviously, the grandson had met his goal of maintaining the reputation that his forebears had established.
Kayem initially put up $500,000 in exchange for a 10 percent stake in Sheffield’s new company, and subsequently poured in millions to help fund the company’s early drilling projects. Parsley Energy was off and running.
In large part due to his family background, Sheffield had lofty goals for his company: “I always told our employees that all we ever have to do is do 10 percent of what Pioneer has done. Those were our goals every year as we were getting started. And so, that’s how I measure myself, and I thought those were big goals — very, very big goals — starting out as a company.”
Indeed, they were. Today, Pioneer Natural Resources is a company whose market cap exceeds $30 billion, and along with companies such as EOG Resources, Apache Corporation, Anadarko Petroleum and Noble Energy, is one of a handful of the largest independent upstream oil and gas companies in the U.S. It takes not only self-confidence but a real sense of audacity to have an initial goal of creating even 10 percent of what the management at Pioneer has created over the last several decades.
And yet, Parsley Energy has not only met Sheffield’s initial goal, it has dramatically exceeded it. As of mid-February, Parsley’s market cap was in excess of $8.3 billion, more than 25 percent of Pioneer’s. Parsley had 16 active drilling rigs in the Permian as of December; Pioneer, 23 rigs as of February. While Pioneer is the single largest leaseholder in the Permian region with a King Ranch–sized 750,000 acres held, Parsley currently boasts a very substantial leasehold of 216,000 acres. Sheffield’s company has long since left that “10 percent of Pioneer” goal in the dust.
Taking the Company Public
Sheffield’s early lease acquisition efforts grew the company’s leasehold acreage up to more than 100,000, but as oil prices began to quickly escalate in early 2010, the price of acquiring new acreage and drilling and fracking wells also rose dramatically. To keep his company growing, Sheffield needed a new influx of capital, another major goal he achieved in 2014 by taking the company public through an initial public offering (IPO).
That process led the self-confident Sheffield to experience a rare attack of nerves at the Howard Weil Energy Conference in March of 2014. The nervousness stemmed not from the fact that he would be discussing his company’s IPO but rather with who showed up unexpectedly to watch.
“The first investor conference that I went to was at Howard Weil,” Sheffield says, smiling, “and I was very nervous to present because this is one of the largest gatherings for presentation for CEOs. So, I’m sweating a little bit and I’m about to go up right after John Hess with Hess Petroleum, this 30-billion-dollar company. We’d just IPO’d; I’m 35 years old at the time. So, it’s pretty intimidating as it is, and then there’s this ‘tap tap’ on the back of my shoulder, and I look back and there’s my father,” he laughs.
“It was my first time seeing him since we’d done the IPO,” recalls Sheffield. “They’re in Dallas, I’m in Austin. I don’t see them too much and all his lieutenants were right behind him, staring at me. So I say, ‘Dad, what are you doing here, shouldn’t you be in your one-on-one meeting?’ and he says, ‘No I’m here to see you present.’ Right then, they called my name to go up there and I didn’t know what to do. My face was totally white, and I didn’t know if I was going to throw up or what. I’ve done a lot of presentations before; the bigger the crowd the harder it gets. But when your father shows up to watch you — that was hard.”
“The only thing that I could do was just break the ice [and] say, ‘Everyone, I’m just letting you all know that my big competitor, my father, Scott Sheffield, is in the crowd watching me. This is amazing, I can’t believe he came to my first presentation.’ Everyone just started to laugh, and that broke the ice.” But, as Sheffield put it, “It was kind of nerve-wracking.”
The IPO served its purpose, providing an infusion of capital that helped Parsley become one of the most active Permian operators in the market for acquisitions during the land rush years of 2015 through 2017. During that time, Sheffield and his team executed no fewer than four major acquisitions, with a total price tag of over $3 billion. Though the market for large transactions slowed during the second half of 2017, Parsley’s fourth-quarter 2017 investor presentation emphasized the fact that the company has continued to aggressively high-grade its positions by trading out of scattered properties with lower working interest ownerships into concentrated positions with higher working interests.
These concentrated acreage positions, located in one of the Permian’s sweetest of sweet spots, played a big role in ensuring that Parsley Energy not only survived the oil price bust but was actually able to see substantial growth from 2015 through 2017. “The IPO was well-timed against a backdrop of healthy oil prices and strong investor appetite for Permian Basin assets,” Sheffield says. “We used the capital we raised to jump-start our horizontal drilling program. Since then, we’ve grown production almost exclusively through the drill bit.”
“The Permian is still the place to be,” he continues. “Everyone wants more Permian exposure, but there’s only so much to go around. We’ve been fortunate through a series of acquisitions to accumulate what we believe is a premier Permian acreage position in terms of both quantity and quality. We’ve always focused on core acreage on which you can drill highly economic wells across commodity price cycles. We made an early bet in the Southern Delaware Basin, and it paid off handsomely. We actually called our initial acreage position in the Southern Delaware the ‘Gallagher prospect’ because Matt [Gallagher] was a big advocate of the transaction, even though it was a real wildcard at the time.”
Incoming CEO Matt Gallagher had just joined our conversation at that point (after concluding a meeting), and added, “That one turned out really well for us. We paid a few hundred dollars or so per acre a few years ago, and today acreage in the area transacts for many times that amount. But no one wanted anything to do with that area at the time. We saw something we liked and took a chance. There was a real risk [that] it would be money down the drain.”
Gallagher goes on, “Our other acquisitions have been a lot different — focused on what we felt pretty confident was some of the best rock in the basin. Focusing on the best acreage has enabled us to drill very strong wells, and that has been the key to our production growth. We’ve grown production more than 15 percent per quarter since going public, which is a tremendous accomplishment.”
The company’s assets today are exclusively based in the greater Permian Basin, divided between the Midland and Delaware Basins. The Permian Basin is an immense resource — DrillingInfo, Inc.’s CEO, Allen Gilmer, recently referred to it as “virtually inexhaustible, a near-permanent resource” — but some industry observers are currently concerned that operators have spent the last two years drilling up all the prime sites in an effort to maintain cash flow during the period of low oil prices. We asked both Sheffield and Gallagher to address that concern.
Gallagher spoke up first: “The Permian Basin is the premier oil field in the country. What makes it so distinctive is the presence of several distinct oil-bearing target zones, sometimes referred to colloquially as a ‘layer-cake’ of hydrocarbons. We have consistently focused on portions of the Permian with the most ‘stacked-pay’ potential, and even now are targeting new zones that are proving highly productive.”
“High-grading is often overlooked. Everyone drills their best wells first,” Sheffield adds. “Unless you have a very deep inventory of high-quality drilling locations, as does Parsley Energy, the wells drilled tomorrow may not be as productive as the wells drilled today.”
The Art and Science of Building and Keeping a Quality Staff
Building a company from scratch also requires simultaneously building a staff of people to run it. There is both art and science involved in knowing which disciplines to focus on first, the timing of making hires, and the ability to identify the right people who not only possess the technical skills to get the job done but are also good fits for the kind of culture you are trying to build. Sheffield talked earlier about his desire to build a staff filled with teachers. Fortunately, to achieve that goal, he was able to bring one of his main teachers along with him.
“There were just two of us at first — Paul Treadwell and me — and it was the most valuable education I ever received because we did it all,” Sheffield says. “We had to — from the office to the field.
As the scope of the company expanded, we added one person at a time. It wasn’t like we had people banging on our door to join our little ragtag outfit. I recruited people I could trust; people who brought expertise but were willing to pitch in across the board. First, we needed operations. Then we needed land and leasing. Of course, we had to keep track of the money coming in and out. Then we needed to figure out how to get more money to invest. Eventually, we grew to the point that we needed all of the traditional corporate functions.”
“Matt was one of the first [of a] handful of employees,” Sheffield continues, “and I’m really glad he was with us so early because he’s seen it all and we’ve experienced so many struggles and accomplishments together.”
Gallagher agrees. “The Parsley culture was cultivated early on. We were all so close and we all had so much riding on the outcome. Clearly, it’s impossible to retain the exact same dynamic when you have hundreds of employees, but even today, we emphasize cultural fit when evaluating new hires. We look for capable people with a thirst for learning who demonstrate a sense of personal and collective responsibility.” A willingness to teach and collaborate, a thirst for learning, a sense of personal and collective responsibility — this is the kind of company culture that management must be able to build to facilitate the sort of rapid growth Parsley Energy has achieved.
An Unconventional Transition of Leadership
And now, over the course of 2018 Gallagher will gradually take over the reins of this company that has just experienced this period of rapid growth, as Sheffield transitions into the role of full-time Executive Chairman for a year, and then Chairman of the Board. We asked Gallagher to talk about the company’s near-term plan to rationalize its current asset base and focus on executing the abundant drilling opportunities within it. Will the company continue to look for significant acquisitions where it makes sense?
“We probably have the longest inventory per share of our immediate peer group, maybe number two in the entire Permian Basin,” Gallagher begins, “so, no need for significant acquisitions at this point. We have an amazing team in place, and the top management has been together since pre-IPO. So, the plan right now is going to be more of the same with a little bit more of a lean toward the operational process, kind of a natural transition for our company’s model as well.
“We went through the large acquisition phase and now we need to pull that value forward through the drill bit. If you do it in a more moderated way through the drill bit, we have a little bit of extra cushion on our cash flow and more stable, predictable cash flow from that point forward. So, it’s really a nice timing for the company to go into, at a point where we’re the tenth-largest producer of crude oil in the entire Permian Basin,” Gallagher says, concluding that this is the plan the company will continue to execute throughout the next few years.
The company’s website mentions the fact that its asset base includes “abundant value yet to be unlocked.” We asked Gallagher to talk about how the process of unlocking that additional value works.
“We completed wells in eleven distinct target intervals last year,” Gallagher begins, “and there are still several promising zones we’ve yet to test. The resource potential on our acreage is truly astonishing. We’re working hard to figure out how to extract as much as possible as efficiently and profitably as possible. This involves evaluating different well spacing configurations, completion designs and target intervals. Our recent success in the largely undeveloped Wolfcamp C horizon in the Midland Basin is an example of unlocking value that was previously unrecognized.”
The method of a planned, gradual transition of leadership in the CEO position is a process that appears to be increasingly common in the energy sector in recent years. So often in the corporate world, leadership changes are sudden events that cause a great deal of disruption throughout the entire organization. We asked Gallagher to share his views on the advantages of this planned transition process.
“It is a real advantage, and sometimes companies don’t have that luxury and that ability,” Gallagher says. “We are just really fortunate that we do have such a healthy, productive relationship … that allows for that smooth transition to take place. The transition year gives me the chance to really walk in Bryan’s footsteps. I get to see it from his point of view and try to craft my own plan and approach from that perspective.”
Gallagher talked about the differing skill sets he and Sheffield bring to the role of CEO. “Everyone who works with Bryan knows that he doesn’t get enough credit for his operational prowess — it’s really good. But I do think he’s probably the 60 percent kind of business VP–financial focused and 40 percent operationally focused. That will just probably be a little bit of a shift to my background, which is probably about 60 percent operationally focused and 40 percent on the business/financial side. So, there will be a little bit of a shift. But overall, it’s really fortunate for a company to be able to have this nice healthy transition, and it will be a good time to just kind of take the best from both of us and to kind of mold that into the approach going forward.”
Like Sheffield and Treadwell, Gallagher also came to Parsley after having spent years at Pioneer. We asked him how his experience at Pioneer helped prepare him for his new role at Parsley, and how it prepared him for managing the company through its recent period of rapid growth.
“Where Pioneer is concerned, I couldn’t think of a better company or place to have started,” he begins. “At Pioneer, you know, you see around you people who have gone through tremendous growth and who have executed amazing, ambitious projects.” He pauses before continuing. “This will sound funny, but I think about times when I was with senior management at Pioneer and you’re kind of doubting your career and you’re ambitious and things are moving a hundred miles an hour. It’s seven o’clock at night and everybody is still working hard on an earnings release or some big project, but then to look around the room and see them pick up the phone to call their son and help him work through homework assignments, you see the humanity and the focus on the individual and the people, and you know that was placed first at Pioneer.”
“I got a lot of technical exposure there obviously, but I think just seeing that steadfast approach from their management team and then in the structure of family and just really helped you put things into the right perspective,” Gallagher points out. And of course, that all goes back to the kind of culture Sheffield and his management team have built at Parsley — a culture that Gallagher wants to continue to nurture and grow.
One of the most striking things about this planned transition in Parsley’s CEO position is the amazing youth of the men who are executing it. Bryan Sheffield, as of this writing, is at a ripe old age of 39. Gallagher, meanwhile, is about to become the CEO of an $8 billion market cap company at the age of 35. These are not the conventional sort of ages one normally associates with this kind of corporate story.
But, as we have seen, there is nothing conventional about the history of Parsley Energy, from its founding to its initial method of growth, then from its IPO to its two-year period of rapid growth, and even to the location of its corporate headquarters in the proudly weirdest city in Texas.
When you boil the Parsley Energy story down to its essence, you are left with these main themes: set aggressive goals and consistently exceed them, plan for opportunities and grab them when they are presented, instill a productive culture and bring in people who fit and will nurture it, and make sure there is a high degree of continuity in the senior management team to maintain and continue to grow it all.
Few companies in the oil and gas industry have achieved the level of success experienced by Parsley Energy over the last decade. And, as we have seen, few companies are as well-positioned for continued success into the future.
Photos By: Darren Carroll
About the author: David Blackmon is the Editor for Oil and Gas for SHALE Magazine. He previously spent 37 years in the oil and natural gas industry in a variety of roles – the last 22 years engaged in public policy issues at the state and national levels. Contact David Blackmon at [email protected].