Lone Star success
A former Colorado company has had plenty of drama in its past, but it is finding success as a small player with its Texas relocation
A Denver oil and gas producer moved to Texas three years ago and has since become one of the best-positioned small players in the Permian Basin.
Three years ago, a tiny Denver company called Lilis Energy was, like many small oil and gas producers, teetering on the edge of bankruptcy as crude prices plunged. That’s when Ron Ormand, a financier and oil industry veteran, joined the board of directors.
Lilis avoided bankruptcy, moved to San Antonio and sold its holdings in Colorado’s DJ Basin oil field, shifting its focus to the Permian Basin and buying up acreage at low prices as the energy bust scared off most investors. Today, after moving its headquarters to Houston in June, Lilis is considered by analysts as one of the best-positioned small players in the booming West Texas oil field, able to increase production quickly as crude prices rise and possibly heading for a big payday as it becomes a tempting acquisition target for large oil companies.
“Lilis is really one of the most excit-
ing stories out there,” said Mike Kelly, energy analyst at Seaport Global Securities in Houston. “It’s a huge opportunity to absolutely rip.”
Ormand, now chairman and CEO, is widely credited with getting Lilis to this point, avoiding bankruptcy while navigating a treacherous road of headquarter relocations and several CEO changes. Today, Lilis faces other challenges as it tries to operate in the crowded Permian, where companies are producing more oil than they can pipe out, oil field workers are in increasingly short supply, and costs are rising. But it’s nothing like what Lilis has already been through.
“It’s going to get worse before it gets better,” Ormand said of the shortages of men, materials and transport in the Permian, “but we’re going to be in good shape. We’re on a steep path of growth.”
Lilis’ experience meshes with the deal-making frenzy going on as the Permian stays on track to produce more oil than any OPEC nation except Saudi Arabia within five years. Companies are swapping land with rivals to build the best exploration and production blocks, cutting deals with trucking companies to move the oil, and racing to contract with pipeline developers to ensure they can move their oil and gas as soon as new pipelines come online. Ormand believes Lilis has checked all of these boxes.
After spending much of his career in investment banking focused on the energy sector, Ormand branched out in 2009 when he co-founded the Houston exploration and production company Magnum Hunter Resources, which became one of the fastest-growing producers in the earlier days of the shale boom. Ormand watched the money as chief financial officer while co-founder and CEO Gary Evans, a brash wildcatter, found the oil and made the deals.
Ormand left the company in 2013 for private equity, only to see Magnum Hunter move to Dallas and later file for bankruptcy during the bust. In 2016, the Securities and Exchange Commission hit Magnum Hunter and Ormand with penalties for a lack of financial controls dating back to 2011.
Ormand paid $25,000 in a settlement without admitting guilt, saying he just wanted to put it behind him. The company paid $250,000.
When the opportunity to join Lilis came in 2015, Ormand saw a new chance to leave his mark in the industry. He took over as chairman in the beginning of 2016 to help lead the move from Denver to Texas and the Permian.
Lilis bought a financially distressed Permian operator, Brushy Energy, and moved into its San Antonio headquarters. The acquisition put Lilis in the Delaware Basin, the less developed western lobe of the Permian that extends into New Mexico. Lilis has since increased its Delaware acreage by more than five times to about 20,000 acres, ahead of the land rush that has enveloped the shale play recently.
When Ormand become chairman, Lilis had just five employees. Today it has 30.
“Oil prices were falling dramatically, and the opportunity was to enter into the basin at a low-cost time,” Ormand recalled. “Typically, that’s the best time to get in, although it certainly takes some courage.”
But this success hasn’t come without drama. Controversy rocked Lilis last summer when its then-CEO, Abraham “Avi” Mirman, resigned after the SEC filed suit against him, alleging securities fraud for his participation in a penny stock scheme unrelated to Lilis. Mirman was accused of working to manipulate the shares of a small silver mining company in Toronto for profit — before he joined Lilis, according to the SEC.
Lilis promoted its president, James Linville to the CEO role, but he was out after about eight months. Ormand was already involved in the daily operations as executive chairman, so it made practical and financial sense to consolidate the CEO and chairman positions under him this spring, he said.
In the two years since focusing on the Permian, Lilis has ramped up its production from about 500 to 7,000 barrels a day, and Ormand says the company is just getting started. In the meantime, Lilis has negotiated deals to ship its oil on the EPIC Crude Oil Pipeline stretching from the Permian to refining and port hubs in Corpus Christi.
The pipeline is expected to commence operations as soon as mid-2019. Lilis also signed on with the Salt Creek Midstream system under construction to process the oil and funnel it to the main pipeline arteries such as EPIC.
With most of the Permian divided up among oil and gas companies, the only way for producers to expand their holdings is by acquiring rivals, analysts said. If Lilis can continue to show the value of its holdings by drilling productive wells, it could attract a lucrative takeover offer. RSP Permian, which holds 45,000 acres near Lilis — almost half of RSP’s total acreage — recently agreed to be acquired by Concho Resources for $8 billion.
Lilis has a stock market value of about $325 million, up from less than $50 million nearly three years ago. Lilis turned a small $7.8 million profit in the first quarter this year, compared to a $9 million loss in same period in 2017.
With the company’s move to Houston, Ormand said he expects to build on the company’s success by connecting Lilis to two of the best known places in the energy world. Now, after the headquarters moves, executive changes and near-death experiences, Ormand can sell Lilis as a Houston energy company focused on a premier portion of the Permian Basin.
“It’s a pretty simple story,” Ormand said, “once you get through the history and everything else.”