''We never dealt with a bank that was trying to give money away."
J.D. (Jakey) Sandefer, Sandefer Oil & Gas Inc.

It's a long way from a one-man operation in Breckenridge, Texas, to heading up a 145 person organization on the 23rd floor of the First City Tower in Houston.  J.D. (“Jakey”) Sandefer, III managed to pull it off without getting all impressed with himself.

A second-generation oilman, Sandefer is founder and head of privately held Sandefer Oil & Gas, Inc.  He's been knocking around the Texas oilpatch since 1959, when he graduated from the University of Oklahoma with a business degree. From ‘59 through ' 75, it was a seat-of-the-pants show. On a ''deal-by-deal'' basis, he figures he was involved in 300 to 400 wells during that time frame. ‘‘We were just getting a deal here and selling it there and running hard,” he recalls. Meanwhile, he was making contacts and learning the hard way. It didn’t hurt that his father was one of the most respected wildcatters in the state.

In 1978, he moved to Houston and decided to form an oil company. Sandefer wanted to get the “right team together and get a more sophisticated source of financing” after all those years of scrabbling.  He did so in a big way.  Sandefer Oil & Gas, officially incorporated in 1980, had a $55 million exploratory budget last year. It deals strictly with institutional and industry partners.  He won’t name them in print, but they are biggies.

In a rare interview, Sandefer talks about his exploratory philosophy, supposedly anathema to big conservative firms these days, and offers an insider's perspective on institutions.

Investor: What's the mood around Houston for the oilpatch in '84?
Sandefer: Well, the people I’ve talked to in the exploration end of it feel like these are very opportune times. They're very excited about it.
You talk to the people in the service industry and drilling contractors, they're still hurting. But they can see things starting back. Drilling prices are starting to firm up and they've gotten rid of a lot of their competition. Same in the mud business and pipe business. It’s definitely picking up again.  From our standpoint, which is strictly exploration and production, we’d just as soon see it stay like it is. The cost of doing business is quite low. For our friends on the other side of it, we're glad to see the whole thing turning.
It's not a healthy situation when you've got people in any facet of the industry about to go out of business or really hurting.

Investor: Given the recent collapse of First National Bank of Midland, the second largest in U.S. history, what's the energy lending climate in Texas? Have terms gotten tougher?
Sandefer: Yep. When you get a speeding ticket, you're not gonna drive quite as fast for awhile. That's what happened to them here. They got hurt, and they're looking at deals a lot harder now. They demand much better documentation and collateral.

You know, it was one of the biggest shocks of my life that some banks out here did the things they did, dealt with the class of people they did. Some good solid people got hurt, but I don't think the majority of real good banks did that. We never dealt with a bank that was trying to give money away.

Investor: Sandefer is known primarily as an institutional outfit. When institutions first started getting into oil and gas deals back in the early '70s, some got burned badly. Do you find you're dealing with a far more sophisticated group now?
Sandefer: Probably. The ones that got burned, and I understand there were some, are not going to ever be back in this business. This is a very complex business. It’s understood by very few people. A lot of the institutions did not have people qualified to make those types of investments. They wouldn't take the time to come down to the oil centers and learn. The ones that have done it right are very satisfied. It's like a crap table. If you're on the house's side long enough in a gambling casino, you're going to make money. The odds are set in this business. You get with good people, or don't select the right people to get in with.  It's a historical problem in this business, with institutions and individuals and everybody else.

People don't really understand. It takes time to see the results of an exploratory program.

Investor: Sandefer's a bit different in its exploratory philosophy. Most other firms are going after safer stuff --development, infill, and offsets. Why exploratory?
Sandefer: People who drill low-risk prospects are drilling stuff they can sell. They can get partners. [Currently] there's a stigma of risk attached to exploratory drilling, a stigma I just don't agree with. I don't see where people are going to make a greater return on development drilling. Now, if you could find a low-risk, high-return prospect, sure. We do drill some of those. But you can't go out and just stumble across those in your overall assembling of prospects. People that have those are going to drill them with their own money.

I don't criticize anybody with those types of programs. To each his own. But I think any successful company has made it by exploratory drilling.

Investor: Could you expand on that?
Sandefer: You spend your exploratory dollars one year, and you drill maybe 50 wells. You get 10 discoveries. Then you're going to take the next two years developing those discoveries, So you're three years down the line before you really have the proven reserves, and the income comes back to show the results of the program.

Most people are used to seeing in their investments, especially in a stock or bond, after a short period of time, what their rate of return is going to be. Our exploratory discoveries feed development prospects.

Now, the last thing I want people to think is that ours is some sort of a 'get-rich-quick' program, or that we're promoters. Our target rate of return is l8% to 22% after tax.  Based on our programs to date, with average success on the development programs for fields we've found, we will be well within that range.

Investor: Your first big joint venture program was in ’81. Is it on a yearly basis with a piece of each prospect?
Sandefer: Yes. We try to encourage people to go into a three-year program with the option of renewing each year. They have the option and we have the option if they're not making good partners to get out at the end of one year. But we like to think that they have sufficient knowledge of the business and staying power to stick with us for three years. That's what's really necessary to get the results of an exploratory program.

Investor: Can a wealthy individual hook up with you?
Sandefer: Oh yes.

Investor: One with a couple of hundred thousand?
Sandefer: No. We don't like to take a partner with less than $5 million. And we like to think that he's got the $5 million per year, and the resources to increase that if he's satisfied with the results.

If you're going to invest $10 million, say, in our 1984 program, we always tell you to expect to put in another $10 million over the next two or three years developing the properties we found with your initial capital. That will usually run dollar for dollar. Are you with me on that?

Investor: Yes. What's your drilling budget in '83 versus your planned budget for '84?
Sandefer: We've got a $55 million exploratory budget in '83. We're hoping for somewhere between $60 million and $80 million in '84.

Investor: How do you structure your deals?
Sandefer: Do we really have to put that in there? Well, basically we have a 25% reversionary interest on a prospect-by-prospect basis. Your standard midfield quarter carry.

Also, Sandefer Oil & Gas, me personally, and some of our top officers, participate just like any other of our joint venture partners. At least, to the extent of the money I can spend.

Investor: In what basins or regions do you concentrate?
Sandefer: We'll spend probably 50% of our budget in South Louisiana, 40% in the Gulf Coast of Texas and 10% in Oklahoma. We're looking for high-potential prospects. The only way to become a major producer is to explore like the majors do, and that's looking for large potential prospects. We'd like our prospects to average about 2,500 acres with potential reserves of 75 to 90 billion cubic feet and a couple of million barrels of oil.

Investor: Final question. If you had one piece of advice to give to investors in this industry, what would it be?
Sandefer: Number one:  I’d make sure that the company you're investing with, or I should say the people who are handling your money, have something at risk personally.

Number two:  Get to personally know the people who are going to be spending your money.  Sit down across the table from them. See if the chemistry is there. See if their organization is in place. Check their track record and experience in spending other people's money to find oil and gas.
I have never understood why people who are smart enough to make a lot of money in their own business will turn around and invest with someone who’s totally incapable and has no reputation in this industry. That’s never ceased to amaze me.


Jackie Sandefer