BUSINESS:

6 men set out to make it big in the emerging Mississippian

Daniel Smith wants to convince investors that he's standing on the ground floor of the next big oil and gas play, and that they can ride his new company all the way up.

But unlike the established players of the shale boom, Smith doesn't have a lavish corporate headquarters to court wealthy financiers. He doesn't have a drilling team on staff.

His entire company is a six-man crack team of energy businessmen who think they have their finger on a huge new energy opportunity. They call the company Petro River Oil Corp., and they've spent the last year gathering acreage in the Mississippian, an undeveloped play under Kansas and Oklahoma. Now they want sponsors for the drilling.

Their pitch: The Mississippian may not be big now, but when it is, you're going to wish you had a piece.

"This could be one of the largest oil-producing reservoirs in the country in a short period of time," Smith said. "We feel this could be the next Bakken. And it's much, much bigger than the Bakken. It's bigger than the Barnett Shale."

Smith was referring to the play's physical size; in terms of production, the Mississippian's "bigness" is still under debate. But salesmanship matters for Petro River, since there are plans to take it public by the end of spring. With that burst of capital, the company says, it can drill some of the cheapest shale wells in America, thanks to the Mississippian's shallow depth and yielding rock.

Smith's formal title is co-CEO, but having a small and experienced team means there isn't much of a pecking order. Smith himself comes from XTO Energy, an early innovator in shale eventually bought by Exxon Mobil Corp. for $41 billion.

His co-workers include a former head of exploration at a Venezuelan state-owned oil company, a Halliburton Co. veteran, a geoscientist and a money man -- a private-equity executive named Scot Cohen. Cohen manages the fund that has bankrolled the company so far.

It isn't the army of workers one would expect with a corporate giant in Oklahoma City or Houston. But with this blend of science and finance expertise, the group hopes to compete with those companies' efforts to turn the Mississippian from a juicy prospect into a moneymaker.

Petro River's story gives some insight into how today's fringe plays become tomorrow's mammoth plays. The Mississippian is one of the newest, and a handful of corporations, such as SandRidge Energy Inc., Chesapeake Energy Corp., Range Resources Corp. and Royal Dutch Shell PLC, have positions there already. But except for SandRidge and Chesapeake, the companies' drilling programs are tentative, including no more than a few dozen wells.

All have their reasons. Some are counting on the Mississippian to drive company growth. Others are drilling cautiously, hoping to hit a commercial well that fits into their larger portfolio.

All feel pressured by commodity prices and the fragile economy, knowing this is not the time to blow money on exploration that just yields dry gas.

Still, there's a faith in the Mississippian's fundamentals.

It sits much shallower than other shale plays, resulting in much cheaper wells. In the Bakken, for example, drilling depths can run as deep as 10,000 or 15,000 feet; the Mississippian sees depths between 3,000 and 6,000 feet.

That allows operators to use smaller, lower horsepower and less costly rigs. According to research firm IHS, the average Bakken well costs $8 million to $11 million to drill, but the average Mississippian well costs $2.9 million to $3.5 million.

SandRidge is the play's leader, by far: It has made the Mississippian the centerpiece of its shift from gas-heavy assets to oil-and-liquids-heavy drilling.

Don Warlick, an independent consultant in Houston, called SandRidge one of the "momentum players" that will determine the Mississippian's fate as an emerging play.

He rates the Mississippian a "moderate risk" play overall. While no one is mass-producing oil and gas yet, there's a strong sense that it's there. Operators have seen scads of data from vertical wells, drilled throughout the 20th century, that were abandoned because they were thought to be tapped.

But the only way to know for sure is more drilling.

"I think of plays, they can be characterized largely by momentum players. Who's there? Are there some big, smart guys there?" Warlick said in an interview last month. "But the early nature of this thing has to be taken into account. Call me in six months and we'll know more. ... I think by midsummer the Mississippian will validate itself or perhaps give pause."

The team

Cohen, Petro River's financial guru, is quick to smile. Part of his job, after all, is to court powerful capitalists -- Wall Street banks, asset managers, independent investors -- and convince them he's a step ahead of America's energy boom.

He's a rare species on Wall Street. If most of energy investment is driven by large funds, large companies and major plays, Cohen styles himself as a venture capitalist: a prospector digging for hidden gold in the oil and gas world.

He's done the mainstream thing before, buying into promising companies and counting on them to deliver profits. But in 2007, he sensed that U.S. oil and gas was a huge, unknown opportunity that would take a different kind of approach.

The targets were tiny, underfunded oil and gas wells across America: wells with 80 percent of their resource stranded in the earth.

"It's owned by what we call mom and pop. Individuals that can't afford proper science, can't afford proper teams to come in and evaluate what they have," he said. "They know they need these assets exploited, and they just can't raise the capital."

Without capital, they couldn't use the new techniques and technologies that would soon drive the shale boom: things like hydraulic fracturing, horizontal drilling, 3-D seismic imaging.

Cohen pitched the idea to investors, organizing some $300 million into a new group, ICO Fund. Instead of buying into companies and trusting them to deliver returns, this fund would be more active, driving companies' actions and results.

But financiers alone couldn't run an oil business. Cohen needed expertise.

"The reason why I'm in this business is that the margins in this business are incredibly profitable if you get it right," he said. "Science coupled with finance is really, I think, the only way to invest in this business, unless you're just buying the big companies ... you need to be able to assess what the other side's telling you."

Daniel Smith's phone rang.

He was working out of his hometown of Longview, Texas, putting together deals on local oil and gas wells and feeling happy with his lot.

Smith was putting his background to work. He had spent seven years as an operations engineer at XTO, directly participating in the designing of a shale-busting secret sauce at a time of tremendous innovation in the industry.

Even today, he remembers being dumbfounded that it worked. "It was a phenomenal and exciting ride," he said.

But Smith had an entrepreneurial itch. In 2004, he had struck out on his own to run smaller, more informal drilling operations. He could do it in his own stomping grounds of eastern Texas.

Smith picked up the phone. He fell in with some businessmen who saw a new entrepreneurial gambit: the Mississippian. Five months later, he found himself talking to Cohen about making a big play in this as-yet-unknown energy reserve.

They were entranced by how quickly it turned a profit. It was cheaper to drill than other plays, and it seemed heavy on oil and natural gas liquids, two commodities in heavy demand.

"We were very familiar with a lot of the different plays," Smith said. "It had the highest IRRs, or internal rate of return, of any play that we had seen anywhere."

The pitch

Petro River hopes those numbers -- some on the edge of believability -- will reel investors in. A recent company presentation claimed that one section of the Mississippian shows the highest IRR of the top 28 U.S. oil plays.

But Smith isn't just pitching the play. He's pitching himself and his colleagues as experts who can find the play's "sweet spots" and avoid too much natural gas. In the gassier spots, he said, even the Mississippian's economics drift into mediocrity.

Smith and Cohen say their track record shows they're ahead of the curve. As soon as they saw the math, they claim, they snatched Mississippian acreage well below today's prices. They arrived early enough to get acres in the $20-to-$100 range; by the time the corporate giants arrived, prices had reached the $300 mark.

Today, Petro River has staked out some 100,000 acres. It's a small bite compared to SandRidge's 1.85 million acres, of course; even Encana Corp., which places less emphasis on the Mississippian, holds 360,000 acres. But Smith and Cohen know that if Petro River is successful, it could become an attractive buyout target for these larger firms, especially if they become more optimistic about the play.

How and when would that happen? It's a question of what the "momentum players" do, and that remains murky.

SandRidge, in particular, has devoted its full energy to the play, recently coining the slogan "Growing with the Mississippian." Investors have protested SandRidge's corporate governance and the speed of its shift to oil and liquids, but one thing they haven't questioned is the potential of these assets.

"Despite the repeated missteps, the current Mississippian Lime assets offer significant promise," TPG-Axon, the hedge fund that is SandRidge's top shareholder, said in a critical letter to the company in November.

For others, the Mississippian rates as more of a side project. Chesapeake, bedraggled by its financial burden, is trying to arrange a less-costly way to drill there -- or to sell the assets wholesale, allowing greater focus elsewhere. Other companies have cautiously increased their rig counts.

Paul O'Donnell, an energy equity analyst at IHS, called that a good sign for the play: Some of these companies are known more for prudence than risk.

Still, he said, one shouldn't overstate the Mississippian's potential.

"It's going to be an add-on asset for them, it's not going to be a game-changer," he said. "It's not going to be like a Bakken or Granite Wash or Eagle Ford, but I still think it's a significant play, and it's going to be economic given its lower costs."