In recent years, many North American E&P agendas have been dominated by a quest to tap unconventional resources. In just five years, from 2004 to 2008, U.S. shale-gas production has practically tripled, to a whopping 5.5 billion cubic feet per day. As domestic unconventional expertise has grown, major oil companies and international E&Ps have launched shale-focused acquisitions and joint ventures in the U.S. And, drawn by the rich resource potential and upside, a number of North American players have begun developing unconventional resources overseas.

Europe has been a magnet for unconventional-gas development since about 2008. While the scope of its full resource potential is still being evaluated, the potential gas in place has attracted numerous E&Ps with historical roots in the U.S., including TransAtlantic Petroleum Ltd.

Matt McCann

“We’ve chosen not to face the issues that you would have regarding access to rigs and other necessary infrastructure,” says Matt McCann, chief executive, TransAtlantic Petroleum Ltd.

The company is led by Malone Mitchell III, chairman. He built Oklahoma City-based Riata Energy Inc. (which became SandRidge Energy Inc. in 2006) into one of the largest privately held E&P companies in the U.S. The TransAtlantic management team includes Matthew McCann, chief executive; Scott Larsen, president; Gary Mize, chief operating officer; and Hilda Kouvelis, vice president and chief financial officer.

Since its inception in 1984 and through 2007, TransAtlantic has held a mix of domestic and international assets with projects in Texas, offshore Nigeria and Benin, and onshore Tunisia and Egypt. It also has assets in Morocco, Romania, Turkey and the North Sea. In 2007 the company exited its U.S. operations entirely, though its corporate headquarters remain in Dallas.

“We intentionally made the decision to go overseas because we felt our opportunities were greater there,” McCann says.

“Turkey imports over 95% of its oil and gas. The fiscal terms are good and the business climate is attractive. In terms of oil and gas exploration, the area is historically underdeveloped. Turkey’s areal extent exceeds the size of Texas and New Mexico and has only had a few thousand wells drilled. In stages of development, it compares to Texas in the early 1950s. Its numerous Tertiary basins are largely undrilled.

Selmo Oil Field

TransAtlantic views Turkey as having the best reserve yield per dollar invested with the potential for discovering world-class fields.

“For these reasons, TransAtlantic views Turkey as having the best reserve yield per dollar invested with the potential for discovering world-class fields,” he adds. “TransAtlantic intends to pursue these largely untapped resources with Western technology and with its long-time strategy of vertical integration.”

TransAtlantic’s unconventional focus is centered in Turkey’s Thrace Basin, on the European side of Istanbul.

Today, TransAtlantic’s unconventional focus is centered in Turkey’s Thrace Basin, on the European side of Istanbul. Pro forma its acquisition of Zorlu Enerji Elektrik Üretim’s E&P operations in Turkey, TransAtlantic holds in excess of 1 million net acres in the Thrace Basin. By year-end 2010, management expects to reach daily production of approximately 12.5 million cubic feet in the Thrace from conventional gas pays. The company plans to drill 20 wells in the basin during the same period.

McCann adds, “In the Thrace Basin, beyond the shallow conventional gas, we’re focused on tight-gas sands. To successfully execute on this project we knew we needed the right rigs and equipment. We needed to get everything mobilized, and we knew we’d have to do it ourselves, especially the frac equipment.”

The company expects to mobilize its frac equipment by midyear, which will launch the execution phase of the project. At that point, management plans to add one rig per quarter, starting in the fall of 2010. By year-end 2011 TransAtlantic could have up to five drilling rigs focusing on tight gas in the Thrace Basin. With the ramp-up in activity, the company expects production to increase dramatically.

“We also have some meaningful exposure to shale gas in southern Romania along the Bulgarian border, and we plan to drill a well to test the quality of those shales during the next 12 months,” says McCann.

In eastern Turkey, the company is in the planning stages of an 18-well program in Selmo oil field, and a six-well effort in the Arpatepe/Paleozoic oil trend.

Of its entire asset portfolio, the clearest low-risk upside to large production growth is going to come from tight-gas sands in the Thrace Basin, McCann says. And its planned acquisition of Zorlu assets, for $100 million, will be a significant driver of production growth throughout 2011.

The Zorlu acquisition changes the company’s makeup, according to Neal Dingmann, senior vice president, equity research, Wunderlich Securities Inc. “The acquisition not only adds approximately 7 million cubic feet equivalent per day, but the assets are likely to add an additional 10 million per day of production that is awaiting connection to a pipeline,” he says in a May 26 research note.

In May, Wunderlich raised its price target on TransAtlantic’s shares from $4.25 per share to $5. A big part of Dingmann’s production-upside confidence is derived from anticipated completion of the Zorlu acquisition and continued exploration and development successes.

“Western procedures could have big impact,” Dingmann notes. “We believe Turkey is an untapped oasis as no reservoir has ever been fraced, so it should be a material event when fracture stimulation begins to take place in the Thrace Basin. In addition, acidizing has already boosted the Arpatepe-1 well materially. We believe other Western procedures such as cementing, wireline logging and 3-D seismic should continue to boost production.”

In April, TransAtlantic announced a joint venture with Turkey National Oil Co. targeting unconventional resources in both tight sands and shales. Through the transaction, TransAtlantic picks up two blocks. One is in the Thrace Basin, where management has identified old shale wells in several different structures. The other block is in southeastern Turkey.

“We’ll fracture stimulate the tight sands and shales in the hopes of turning these old wells into gas fields,” says McCann. “This joint venture with TPAO is a big piece of our unconventional story.”

Shale Evolution

There has been some debate over how quickly the shale plays are going to develop in Europe. Challenges to exploration and production there require a somewhat different approach be taken to unconventional-resource development.

E&P companies must access land in Turkey differently than they do in North America, as the Turkish government owns all of the minerals. To pick up open blocks, a company will typically farm in to another company’s block or make an acquisition.

Some operators in the area have also faced challenges with access to rigs, land, water reserves and available infrastructure.

“It’s going to take several years before the industry has enough equipment positioned to move from the science phase to more meaningful development in Europe,” McCann says.

“One of the reasons the industry has been able to react so quickly to the shales in North America is because the country has very clear regulatory procedures to move through, and there’s little question about where wells can be drilled. Also, there’s adequate equipment. Even when we experience equipment shortages in North America, there’s still enough available for most purposes.”

Because drilling equipment isn’t as readily available in Europe, TransAtlantic adopted a vertically integrated strategy. This allows the company to advance its tight-gas-sands play and test shales faster than players that don’t have their own equipment.

“Running into difficulties as you’re drilling a well is not unlike having a heart attack—the sooner you’re treated the better off you’ll be. We’ve faced a number of challenges operating overseas, but most of them have been related to not having the right equipment at the right locations,” says McCann.

“When we first acquired an interest in TransAtlantic and visited Turkey and our other operating countries, we realized that if we were going to succeed, we were going to have to replicate the vertically integrated strategy we had at Riata Energy, where we were able to internalize the cost of equipment, reduce development costs and improve operational flexibility. Getting the right equipment where we need it has taken a long time, but the fracture-stimulation equipment we’re bringing over will be one of the final pieces that will allow us to run as we would like.

“We’ve chosen not to face the issues that you would have regarding access to rigs and other necessary infrastructure. We don’t have to worry about giving revenues to an outside service company.”

Turkey imports about 3 billion cubic feet of natural gas daily using infrastructure that bisects TransAtlantic’s operations. Management expects that this in-place infrastructure will reduce transportation issues.

As for finding costs, McCann says his team is an industry leader in keeping them low.

“A rule of thumb could be $1 million per thousand meters. If you’re drilling a 2,000- to 3,000-meter well and you encounter good-type gas sands, you could encounter 3 to 4 Bcf of gas…The prices that players would need to receive in the U.S. would be similar to what we’d need to justify drilling and let us receive a return on the capital invested. Where gas prices are now and where we expect them to be puts us well north of receiving a return on capital invested.”

However, the eventual initial production and estimated ultimate recovery rates for the company’s pending wells in the Thrace Basin remain significant questions.

“Through the older wells on our land, we know the gas is there. These wells have tested gas at high pressure and low rates. But until we frac the wells, we won’t know if the flow rate will increase by 50% or 500%.”

Though there are pronounced challenges for operators targeting international basins, McCann notes that the opportunities in Europe are attractive.

“It hasn’t been obvious to people in the past to chase these opportunities, in part because the right technology and equipment weren’t always there. But today Europe is priced right for the management teams willing to take the risk.”

Contrarian E&P

TransAtlantic’s efforts have been supported by several investments during the past few years. Madison Williams and Co. and its predecessor firm, SMH Capital, worked closely with TransAtlantic during the past year, starting with a C$162-million common stock placement in June 2009, and another common stock placement of C$113.5 million in November 2009.

TransAtlantic’s stock price increased after both of the equity placements last year. The first private placement of public equity priced at C$1.65 per share. In early 2010, TransAtlantic’s stock price reached a high of US$4.10 per share.

The company used the proceeds of both offerings to fund drilling and development programs, primarily in Turkey, and to pay down debt and support future acquisitions. During this period, Madison Williams’ sales, trading and research teams actively followed TransAtlantic as it continued to execute its innovative business plan.

Sylvia Barnes

“Malone Mitchell’s modus operandi is to dovetail self-sufficiency on the service side with upstream exploration and development expertise,” says Sylvia Barnes, managing director and head of energy investment banking, Madison Williams and Co.

“TransAtlantic is the type of company which Madison Williams particularly appreciates having the opportunity to support,” says Sylvia Barnes, managing director and head of energy investment banking.

“The company has a unique operating and growth strategy that demands thoughtful consideration in order to be fully appreciated. But once the effort is made to understand Malone Mitchell’s strategy, the potential benefits are evident and exciting. We see TransAtlantic as having an innovative and bold contrarian approach that focuses on overlooked and/or underdeveloped regions of the world, using modern U.S. drilling technology to improve recovery factors in conventional international onshore reserves. It operates in countries that have stable fiscal regimes and are net importers of oil and gas, and has integrated expertise and capabilities on the service side, as well as E&P.

“Our firm also recognizes the importance of TransAtlantic’s seasoned executive management team, which has a substantial stake in the company, and whose interests are directly aligned with the company’s long-term success.”

TransAtlantic has a wide range of attractive growth opportunities ahead, particularly in Turkey, Barnes says. She also expects the company’s integrated approach of combining expertise in the upstream and service sides will continue to allow it to control its own destiny and achieve superior operating results.

“Malone Mitchell’s modus operandi is to dovetail self-sufficiency on the service side with upstream exploration and development expertise. It was a valuable strategy at Riata Energy, and has proven to be almost a necessity for successful results internationally. Malone has gained respect internationally, and has cultivated cooperative relationships that we expect will support future growth initiatives.

“Our expectation is that energy-savvy investors will continue to appreciate the strengths of TransAtlantic’s contrarian but low-risk conventional international oil and gas story.”