OilVoice Interview with Adino

Below is an interview with Adino Energy Corporation's Chief Financial Officer, Shannon W. McAdams, discussing the company background and their current activities.

1. How and when was the company created? What was the vision and strategy behind its conception?

Adino Energy is developing into a leading oil & gas exploration company in the small cap space. Our strategy is to acquire mature leases with low cost, low risk development upside. We're focused on creating a solid base of cash flow and reserves on which to build the business. Our approach is careful and deliberate - we never want to take a risk that we don't fully understand and we won't risk too much capital on an individual decision relative to our capital base.

The Company has been through several iterations as a publicly traded entity; however, the oil & gas exploration and production business is currently the company's primary business and source of growth.

Adino entered the E&P business in the third quarter of 2010 through the acquisition of a group of privately held entities. The acquired assets included oil & gas leases, production equipment, a service rig, a drilling rig and associated equipment. It was a good basic set of assets, but needed a lot of work. We spent the fall of 2010 methodically organizing and developing the assets and creating the foundation for a viable E&P company.

2. The Company is focused on mature properties with long lived reserves and development upside. Doesn't that carry an element of risk considering the redevelopment costs will be significant and also the possibility of depletion.

Our strategy is part of the broad industry trend toward redevelopment of older oil fields. It's easy to forget, but a lot of reservoirs were originally tapped when oil was below $3 per barrel. In that kind of price environment, operators would produce the easy oil and then plug the wells. They left a lot of oil in the ground. Today we have much higher oil prices. Combine that with major advances in production technology and it makes a lot of sense to go after the oil that was left unproduced during the last round of development.

Any business carries risk and oil & gas is no exception. One of the advantages of our strategy is that it's relatively inexpensive to de-risk a project. At each step from lease acquisition to workovers to development drilling, the Company can invest a known and relatively small amount of capital. If at any point along the line we find something we don't like, we can shut down the project and move on without losing too much money relative to our available capital. It's not about an absence of risk, but rather about understanding the risk and weighing it against potential rewards. That kind of approach takes discipline, but it pays off in the long run.

You mentioned depletion risk and it's an excellent point. It can hurt an E&P company in a variety of ways from cash flow to the balance sheet. An important aspect of our strategy is that the decline curves are typically very well established in the fields where we're active. This minimizes (but can never eliminate) the depletion risk for our projects.

3. Please tell us more about the current acreage the company holds, its focus areas.

Our primary focus is the Eastern Shelf of the Permian Basin. If you think of the Permian as a giant bowl, the Eastern Shelf is along the edge. The productive formations in this area are thinner but closer to the surface, which means that development costs are much lower. Even when IP rates are below 10 bopd, the IRRs can still be very impressive because of the relatively low upfront investment.

When we entered the E&P business a little over a year ago we had 119 acres under lease. Today we have 719 acres and are negotiating for more. Our current holdings are in Coleman and Runnels Counties in Texas, but we're evaluating opportunities in a much broader area.

4. Is the company looking to diversify its interests in future? Say for unconventional resources?

As an E&P company grows it naturally moves up the food chain in terms of the size and complexity of projects. We fully expect Adino to follow this path, but in carefully controlled steps. We've come a long way in the last year in building our operating team and preparing to take on larger challenges. Stay tuned - you should hear more about this in the near future.

You bring up an interesting point about unconventional resources. Those plays require very specific technical expertise and a pretty good sized balance sheet. The typical strategy that small E&P companies use for unconventional plays (particularly those that are publically traded) is to "participate" in wells with larger companies through a small working interest ownership. This creates opportunities for loud and somewhat dubious promotional activities, but usually doesn't do a lot to enhance long term shareholder value.

Rather than wade into a fight with much larger and better established companies in the unconventional plays, Adino is more likely to make use of the technology that they are developing. The application of horizontal drilling and advanced fracking techniques to conventional reservoirs has the potential to transform the economics of many redevelopment projects. This represents a huge shift and we plan to be part of it, to the maximum extent that our expertise and capital base allows.

5. In April 2011, the Company sold its oil & gas drilling subsidiary, Adino Drilling, LLC, what was the reason behind the sale.

When Adino entered the E&P business, we acquired a drilling rig as part of the deal. For organizational purposes we placed the rig and associated equipment into its own subsidiary. There was an obvious opportunity to get into the drilling business, so we invested some time and capital in the rig and used it to drill our first well on the Leonard lease.

One of the biggest traps that a small company can fall into is trying to do too many things at once. It became clear to us pretty quickly that we would need to make substantial investments in both people and equipment to make a strong run at the drilling business. We objectively evaluated our expertise and the potential returns on capital and chose to focus our time and resources on the E&P business. When the opportunity came up, we sold the drilling subsidiary.

6. How are the funds placed this year?

In early October we received funding from BlueRock Energy Capital for a five well drilling program on the Leonard and Brandt leases in Coleman County. We spudded in the first well the week of October 17 and plan to complete the program buy the end of the quarter.

Receiving backing from the team at BlueRock is a huge milestone for Adino. They are a group of savvy industry professionals who have made a lot of money for their investors over the years by identifying promising small companies with good management. Their vote of confidence goes a long way toward confirming our strategy and the quality of our people and assets. With some initial success on this drilling program, we expect to continue developing projects with BlueRock's backing for the foreseeable future.

7. Any key investments the company is aiming?

In the near term we're focused on increasing cash flow. We're deploying capital for shallow development drilling and operating our leases as efficiently as possible. This is the hard work - the basic blocking and tackling - that's required to build a solid base for growth and our team is pushing every day to make it happen.

8. What attracted you to join Adino Energy? Please also share the key milestones you have reached since you joined the industry and Adino in particular.

I met Sonny and Tim (Adino's Chairman and CEO, respectively) while working for a boutique energy advisory firm where they were a client. They're great guys and we worked together very well. In 2010 Adino was looking at strategic options, including entry into the E&P business and they hired me as an advisor. I came on full time in the fall and officially took over as CFO in January of this year.

One of the things that really attracted me to Adino was the opportunity to be deeply involved in building an E&P business essentially from scratch. As you would expect in a small company, I do a lot of different things for Adino depending on the requirements of the situation. My role has developed into a combination of CFO and COO - I raise money for the E&P business and then go to the field to deploy the capital. If that doesn't get you excited about your job, you need to find something else to do!

Here's a summary of the major milestones we've achieved: 2010 - Acquired the E&P business, raised a first tranche of capital, organized the business and executed a workover program on the Brandt leases. In the first half of 2011 we drilled three successful wells on the Leonard lease and completely overhauled our E&P team. We spent the third quarter of 2011 refining our field operations, finalizing a development plan and working with capital providers to fund growth. At the beginning of the fourth quarter of 2011 we closed funding on a five well drilling program which we are currently executing. Stay tuned - thing are getting exciting now! You can sign up for updates on my blog at http://mcadams-energyfinance.blogspot.com