If you asked the average person on the street which company operates the most oil and gas wells in the United States, it’s a safe bet the most common answer would be ExxonMobil. But the correct answer to that question is actually a little-known company based in Birmingham, Alabama called Diversified Energy, which operates about 69,000 mature oil and gas wells with a heavy focus on natural gas production in the northeast and central parts of the country. I was able to spend an hour interviewing Diversified’s founder and CEO, Rusty Hutson, Jr., when he was in Houston recently for an investor day.
“I started Diversified in 2001 from scratch. Just 35 wells that I bought in West Virginia,” Hutson told me. “I’m from West Virginia, and at that time was working at Compass Bank in Birmingham.” A son, grandson and great-grandson of men who spent their careers in oil and gas, Hutson said he had no interest in following that family tradition when he entered college, where he obtained his degree in Accounting. “It was the last thing I wanted to do.”
But that initial 35-well stake – a package of mature, predictable low-maintenance wells that his father actually brought to his attention – has now grown into a complex empire with production in 9 states, including West Virginia, Pennsylvania, Ohio and, thanks a recent major acquisition, Louisiana, Texas and Oklahoma. Hutson was able to operate his initial set of wells as a sideline as he worked at Compass Bank through 2005, and gained a real respect for a business model that focuses on acquiring and extending the life of these mature wells.
“I think people have a misperception, because we started the company in the Appalachian conventional space, that that automatically you have a bunch of wells that are ready to die off,” he said. “That’s not the case. Conventional Appalachia is one of the oldest producing regions, but a majority of our portfolio has a lot of life left in it. These wells can go for 50, 60 years or more, and we have a lot of them.
“They’re not huge producers; each well may be doing 5, 10 mcf per day, but there’s not much to do to them. You go check them once a month and don’t have to spend a lot of money on them. That’s the general business model.”
Earlier this year, Hutson took that same business model and applied it the Haynesville, Barnett and SCOOP/STACK regions in the south/central part of the country. “That will be a big operating area for us for growth moving forward,” he said.
Unlike most upstream companies, Diversified is not in the business of drilling wells. “There are companies that are geared for drilling – they’re geared and tailored for that. And then there’s companies that are geared and tailored for operations. That’s what we are.”
As the oil and gas industry becomes increasingly focused ESG-related issues and lowering its emissions footprint, extending the lives of these mature wells in an environmentally-responsible way gains heightened importance. Having a well-capitalized, large company like Diversified Energy upgrading infrastructure and improving efficiencies in these maturing basins inevitably leads to lower emissions. By the same token, extending the productive life of existing wells lessens the need for drilling and fracking of new wells to meet the country’s energy needs.
“If it’s not us operating these wells, who is it going to be?” Hutson asked. “We’ve acquired a lot of these assets that other companies weren’t putting capital into these wells. We buy them; we maintenance them; we fix them; we enhance their production; we reduce their emissions; we fix pipelines; we get the gas into production. The key ESG story for us is we’re taking wells that other companies may not be producing as efficiently and getting more production out of them. And by operating and keeping those wells into production for as long as they can economically produce, that is less reliance on the drill bit.”
All of the states in which Diverisified operates have significant issues with orphan wells – wells that were operated by companies that went out of business and have not been properly plugged and abandoned. Diversified plugs more wells than any other company in Pennsylvania and West Virginia, and Hutson plans to continue operating in that mode in every state the company enters.
Companies in the oil industry tend to attract media attention as they grow larger, and Diversified has been no exception. One recent report carried a sub-headline claiming that “Oil and gas sites are a climate menace.” I asked Hutson what had led the writers to reach that conclusion.
“They took a University of Cincinnati professor out there and went to 44 well sites across 60,000 that we operate,” he answered. “They’ve never met me, never talked to me.” The professor, using what Hutson assumed to be an LDAR camera that can spot emissions that are invisible to the naked eye, was able to identify emissions rising from many of those sites.
“We do 100,000 site visits a month to well locations,” Hutson said. “We have a zero tolerance policy when it comes to emissions. Without the LDAR equipment on those locations you’d have never found these emissions. So that’s why we’ve put 600 more of those into the hands of our well tenders.
“All the emissions they identified were in line with what we have already reported.” he continued. “We fixed all of those examples in 3 or 4 days for very little total cost.”
Despite any controversies, Hutson plans to continue the work Diversified does. One of the driving reasons behind his determination is his belief that natural gas is more than just a ‘transition fuel,’ but must remain a crucial piece of America’s energy mix for decades to come.
“It has to,” he told me. “Natural gas is 46% of the power grid in the U.S., and we know that U.S. power demand is going to continue to go up. Even with an increase in renewables, natural gas is still going to have to be produced at a higher level than it is today. Period.” Data from the U.S. Energy Information Administration supports that conclusion, as seen in this slide:
“Administrations come and go, but I think natural gas will always be part of that transition and will be part of the energy mix going forward,” Hutson concluded.
If he’s right, then extending the productive lives of these mature wells will only become more important in the decades to come.