Oil & Gas Masterclass: How to Evaluate Energy Investments - Part 2

Hello, future billionaires, and welcome back to the Invest Like a Billionaire podcast. Today is part 2 of our oil and gas masterclass. So as I mentioned last time, we just recently hosted a webinar diving deep into the world of oil and gas investing. We brought on our guest Jeff Mahager, who's got a 40-year track record and experience in this space and diving deep into all the nuances of oil and gas investing. And so this is a continuation of the webinar that we did. We're going deep again into the technical things to look at when you're looking at opportunities in oil and gas, the different ways to invest in oil and gas. We talk about the risk factors. What are the key things that you need to be aware of to avoid Ponzi scheme and to not invest in a scam or a bad operator? And really the key things you got to understand as an investor. And then finally, really breaks down at the end here, where is the opportunity? You know, and Jeff's experience for the past 40 years, seeing the ups and downs, everything in between. Where is he seeing the opportunity in 2023, this year, to partake in, participate in the oil and gas investing space. So not going to want to miss this. This is really, really good stuff. Hope you enjoy. This is the Invest Like a Billionaire podcast where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you'll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra-wealthy, discuss economics, and interview successful investors. Looking for passive investments done for you? With Aspen Funds, we help accredited investors that are looking for higher yields and diversification from the stock market. As a passive investor, we do all the work for you, making sure your money is working hard for you in alternative investments. In fact, our team invests alongside you in every deal, so our interests are aligned. We focus on macro-driven alternative investments so your portfolio is best positioned for this economic environment. Get started and download your free economic report today. One of the things I wanted to kind of talk about too is just the different ways to invest in oil and gas, right? Because not every deal, not every, you know, drill type is the same. Right. And so there's lots of different ways and types of ways to invest in oil and gas. So first, can you talk about what is the difference between, you know, mineral interests or royalty interests and working interests? Right. Those are probably the two big categories of, of ways to invest.

So a mineral interest in basically, if you think about it from a real estate perspective and again, sort of on a surface perspective, you, you, you have ownership of surface real estate, but then there's also mineral ownership. And typically, you know, somebody owns the minerals. Sometimes it's the same person that owns the surface, owns the minerals. Sometimes they're bifurcated, um, or a split estate is what they really call it. Um, like out in Colorado or Wyoming, You might have somebody, a rancher that owns the surface, but the Department of Interior, the BLM, really owns the federal government, really own the minerals. So in that case, you know, you got to go out for us that are looking to try to develop oil and gas. We typically go out and try to take a lease from the mineral owners to be able to lease that space however many net acres that they own so that we then can drill. And you, you know, you, you typically need, depending on what the reservoir size is and what your economics are, you typically need X, let's just call it 100 net acres to be able to drill a well.

Okay. So, so just like, just like I think about somebody who is a land investor here in the city and They may go out where they think the city might be expanding and you go buy a bunch of farmland and you're hoping at some point the city will grow into that and the value of that land will go up and you will make a lot of money doing that. And that's very similar. So people can do the same by buying mineral rights of land and hoping that someone ends up wanting to produce it. But it's kind of passive, right? It's very passive and it's very it's a kind of a waiting game, right?

Correct.

But I know a lot of people that are, that are offering those kind of investments.

What would you—

if you're going to buy a royalty interest investment, what would you— what should you be looking for?

Well, you should be looking at development. Obviously, your, your, your mineral ownership or your royalty ownership in an oil and gas well is really only valuable if the product gets produced. Produced. Yeah. So you really need to get produced. So the couple of things that I'd be looking for is, number one, who's some of the active operators here, some of the folks that are drilling in the area where you've got the mineral ownership. The other thing I would be looking for, particularly if it was natural gas and even for oil for that matter, is what kind of infrastructure is in place to be able to get your natural gas or your oil to the marketplace. Because that's one of the things that sometimes—

area—

and you only can get paid if you can get your product sold. Okay.

Now, you have not done a lot of mineral rights investing in your 40 years, right?

So no, why not? Because we've always sort of taken leases. We've not really— we've not— we've always looked at it as we much prefer looking at owning a working interest in a well.

Right.

As opposed to a royalty. Now, we do— I mean, full disclosure here, we have about a— we have a royalty interest in about 750 wells in southeast Kansas. Okay. So you do like—

you do like royalty?

Yeah, that we've had for a long time and have— they've done a good job and we've got good operator down there that produces and operates the wells. But, but we haven't been active in trying to pick up or trying to buy mineral interest. It's generally more of a passive kind it's much more passive and a waiting game. And you— it's very land intensive because you've got to go. And it's more, in my idea, my way of thinking, it's a little bit more speculative because you're waiting, right? You're waiting for the game to come to you, right? As opposed to you going out and playing in the game.

There you go. Yeah. Okay. So, so typically you as a royalty— or someone who would come and then lease this from you, and the idea is they would, they would agree to pay you a royalty for producing your land, the minerals in your land. You get a royalty for that. And that lease is generally— and so this is an operator is going to lease that up and then those leases are traded as well.

The leases are traded. Typically what they do is they come in and they'll give you a 3-year or 5-year lease and they'll say, hey, I'm going to pay you a lease bonus, you know, I'm going to pay you You know, as an example, a few years ago there was a hot play down in Texas where mineral owners were getting, you know, $100 an acre, a mineral acre for their acres. A couple of operators came in a mile away, proved up the resource. All of a sudden they're selling for $10,000 an acre. So for a lease, for a lease. Yeah.

So, so the leases are traded actively and this is where you buy leases. This is, this is what you like to do primarily, right? Is you'll buy leases.

Correct.

And those leases typically have to be held by production, right?

So yeah, so you pay— so you'll pay for a lease bonus, and then you typically have 3 years to 5 years to drill on that lease. And as long as you're producing and paying the royalty owner who you've leased the minerals from, uh, you know, and this is kind of a contractual term, but contract quantities or economic quantities of revenue, then that lease typically stays in effect.

And if you stop producing, then that lease is in question or it's lost.

Correct.

So one of the things you have to do, and this goes back to the land piece of this, is if you're looking at, well, what are the rights? Do you have a valid lease? You got to one, look at ownership and you got to look at production. You got historical production and see, has this— have they met the terms of the lease?

Yeah. You have to look at production, make sure that the lease is in good shape. You also have to do just to make sure, you know, the title is in good shape and right. And you have to go to the county. A lot of the times we have land people that go to the county courthouses to make sure that the people that own it say they own it.

So there's this phrase called land people in the real estate. It's called title companies, right? Who go and make sure the title is square. And, and they also check production and make sure that it's, that the lease is valid. So it's a it's a lot of work. I mean, for a certain, you know, piece of dirt, you know, there's quite a bit that has to go into this to make sure that you actually have a real asset there, right?

That's true.

Okay, so talk about operating, non-operating. We talk about that. So we've talked about, you know, working interests and mineral interests and, you know, kind of more of the working interests are more active, more play the game. The mineral interests are more passive, you know, passive. You wait for the game to come to you.

Yeah, I think one of the most— Talk about operating and non-operating.

Yeah.

On the working interest side, I think one thing to think about it is working interest pays for expenses, mineral interest or royalty interest don't. Gotcha. So, um, whether it be development costs and our monthly operating expenses, working interest pays expenses, mineral interest don't. Um, so the difference between a non-operated working interest and an operated working interest is that Just as it sounds, you've got the operator who is Devon, uh, Exxon, Chevron, Continental. Uh, they're operating their working interest, whatever they typically have. I mean, not always, but typically have the majority working interest in the well, and that would be called an operated working interest. You also have people that kind of come in that have taken a lease with some of the mineral owners who then have the opportunity to participate in a well that gets drilled on a working interest basis, but as a non-operated working interest. And so they own the— they have actually an undivided ownership in the well, but they're just not the operator.

Okay. So just to give an example, so you buy a lease from, from a royalty guy and you agree to pay him a certain royalty percentage, and then you'll partner with, let's just say Devon, who is a big major producer. Right. And they'll take an 80% operating working interest or they'll, they'll basically buy your lease from you or they'll operate your lease for you. And you get 20% of the revenues and they get 80% of the revenues. Is that right?

Correct.

And you share the costs 80/20, correct?

Yeah.

And you share the revenues 80/20.

Correct.

So, so you're kind of riding along their coattails and letting them— they're kind of taking the lead. They're kind of— they're doing the producing, they're determining the revenues and the expenses. But you're getting a cut of it.

You're getting a cut of it. You're, you're bringing something to the table a lot of times because if you're in a large area with them, they're doing some capital allocation, they're doing some risk mitigation. So they don't want to take 100% of a well. Not very many, not many owners or operators really want to own 100% of the well.

Explain that.

Because you're taking a lot of risk. I mean, it just depends. You're like, you know, you like your like anything else, you'd like your dollars to go farther, right? So, and sometimes because we have— because sometimes you're working interest owners, we're an example, might have a highly technical group as they're thinking about drilling. They would be running ideas by us in terms of drilling.

So they actually like partnering with you. A lot of cases we've had a lot of good because you guys are very good engineering firm and during geology. And they like to bounce it off you and you maybe bring ideas to them, right? And say, hey, we're looking at this spot right here. We think this is where the, where the, where the pay is.

Exactly.

One of the cool things with this, you know, with the mineral interest, a lot of times you're having to, you know, buy land in hopes of new production coming down the road. But a lot of times you can go and buy existing production that's producing current cash flow and then you kind of alluded to it, but you have the right to participate in new drilling, but you don't have the requirement to do so. Right. So break that down a bit because that kind of gives you a lot of flexibility in what you want to be able to do.

Right. So you, you and we've done this. I mean, as an example, I think I told you we did a deal in Colorado and Wyoming. We bought into, you know, 400 producing property. We took a non-operated working interest in 400 wells. The operator and we owned about 100,000 net acres together. We put together a joint development agreement with the operator. They really liked— we liked the way they operated. They liked the way that we identified new assets or new targets to be able to drill. And together we drilled about 100, 120 wells.

And, and you chose whether you wanted to participate in those or not.

We chose whether or not we— there was— we, we did. We weren't obligated to. So that's the optionality piece that we really like.

They say we're going to produce Well A and they're saying, hey, do you want to take your 20%? You say, nah, I'm going to pass on that one.

On the flip side, we might really like an area that they say, ah, we don't really want to, but we think, boy, it makes a lot of sense to develop this, particularly because of commodity prices. You can propose a well. So it goes both ways. You can propose a well and then they have to make a decision on whether to come in.

And if they pass, you can go find another operator.

You can find another, you can find another operator or find another partner. That's for sure. Yeah.

I love it.

So talk about just the types of drilling. I think, you know, the common thought is the wildcatting, you know, where you're going, you're just exploring new areas.

I want to go drill it.

Let me just pick this spot and see if there's oil there. Right. Versus, you know, infill is like— I'm going to put my rod out there.

That's right.

Yeah.

Yeah.

And so a lot of these things, you're going into an existing basin, you know, in a non-op working interest, you're already buying production. There's already a good amount of development in the acreage. And a lot of times you're participating in more infill drilling, which, you know, is more just kind of filling out those, those children wells, right?

Correct. You know, right now there aren't a lot— like I mentioned before, I mean, 10 years ago there were 3 or 4 different plays where there was a lot of exploration going on, where there just hadn't been very much development and companies were coming in with a geologic idea and drilling what we call wildcats or exploratory wells. And there's a place for that. That's obviously high-risk, high-reward type stuff. But for us, we like to stay in areas where development has already— geology has already been proved out.

The minerals are well-defined. I mean, the basins are well-defined and we all know what their characteristics— they know where they are.

Correct. And so you, you, you come in and you're taking that geologic risk off the table, right? There might still be some mechanical risk, there might still be some commodity price risk for sure, right? But you're taking the geologic risk off the table. And as Ben said, you're— you know, the SEC or the SPE, Society of Petroleum Engineers, comes up with some terms that try and give investors a sense of how to how to understand risk. And when you're talking about reserves, they, they put a— the term proved in front of. So it's proved developed producing, that's wells that are already producing. There's proved behind pipe, that's reservoirs that have not been completed but are in a wellbore that is producing in economic quantities. There's proved developed non-producing, a well that has been drilled, looks like the reservoir has been established, but it's not producing yet. And then there's proved undeveloped. And that basically means it's kind of the way to think about it is geography. You know, you've got— it's a proved undeveloped location, meaning, you know, there's for sure oil down there.

You know exactly, you know how much, you know, pretty accurately how much oil is down there.

And there's an offset well that has demonstrated it can produce commercially.

Right. So if you're drilling into proved undeveloped, you don't have geology risk. Basically, it's, it's, it's their minimum.

Mother, Mother Nature will put faults and folds and all kinds of things in place.

But yes, you mean completion percentages are pretty high, right?

I mean, above 80% is the SEC wants an investor when proved undeveloped reserves are reported to have a sense that these are less risky than wildcatting. Right.

Sure. I think it's just an important thing to note because as you know, people are probably seeing more deals and opportunities come across their emails to really dissect what are you really investing in. There's a lot of folks out there that are selling kind of drillco opportunities.

Correct.

And these are— you're going in and it may be infill, may not be infill. Drilling, but it's— you're just going and drilling and you can have 100% return. You also have a 0% return.

So what— so a lot of people are selling this. I don't know why this is super popular, but literally one drill, like you're going to cooperate in one drill hole.

Yeah, I'm a little sensitive to this because this is where, you know, oil and gas investing can get a bad name, particularly for some people that don't understand. You might have an operator who might only have a 5% working interest in a well, but he's now trying to sell 95% because of the geologic risk. And so he's trying to get some, some other folks to come in to prove up, de-risk it, and then he gets to keep 100% of the offsets. So those are the kind of games that get played, and that's where our industry can get a bad name. So just caution people to be careful about that.

What are some— maybe just some yellow flags to you if you saw something like that? Like what? For someone that's not sophisticated, you know, how do you—

how do you assess an operator?

What are the questions to ask?

I guess if an operator didn't have a majority of the working interest, well, that's one. What's my ownership if the well is successful? What's my ownership in well 2, 3, 4?

Yeah, if that's, you know, So, so meaning they could sell you one well and you get all the capital for that and they go off and, you know, run with this 2, 3, 4. You don't get any of that.

They go turn that one off now that's proven it and go drill a new one that they get 100% of.

Yes.

Yeah. Very interesting. Well, it's kind of shift a little bit. We've kind of been talking about a lot of these, but just the risk factors, right? So talk about, you know, the bigger, big picture environment, talk about some of the technical terminology. And technology. But now as investors, you know, this obviously we're here because we think there's opportunity here. But for investors that are kind of new to this space, you know, what are some of the key things that they need to be thinking about? We've put a little list here together that we talked about beforehand. And so you want to start with the geology. We kind of hit that a little bit, but it always starts with rock.

You got to have rock that has the ability to produce hydrocarbons. So that's Number one. So you got to have the geology and it all sort of starts with geology.

And from an investor, a passive investor standpoint, who's not a trained geologist like you, hasn't been in the space for 40 years and they see you do— what questions do they ask to ascertain like this is good geology versus bad geology, right? Like it's kind of—

well, part of it is, you know, what's producing around it. Yeah. So what's been producing around it? Is it How much reserves have been— what would have been the qualities, the qualities and the quantities of oil or natural gas that's produced out of the reservoir and track record of the operator of, you know, success of the past wells that they've drilled. And yeah, and, you know, all the financial stuff. Did they bring, you know, they have a budget for drilling. Did they meet their budget or were they over? Were they under? All those sort of things. So The geology, it always starts with the geology, starts with the rock. I think the other, the biggie, obviously, that's, yeah, hard to control Mother Nature. You can understand it, you can understand where she has, you know, the oil and gas. Um, the other thing it's hard to control is commodity prices. Obviously you can do some, some control of that, some mitigating with hedging, and we always try to do some hedging. When we get into our projects because it just creates a baseline of cash flow. So commodity prices are always a big risk.

Just, they're all over the map and we really never—

particularly now with all the volatility going on, you know, with, you've got all kinds of things going on globally that are coming at us. You mentioned it earlier. The, the, the, the other big one I would talk about is regulatory, which ESG, um, you know, just what's happening, you know, in some areas of the country, big swaths of mineral acres are being taken off the table. I mean, can you imagine, um, you know, in Oklahoma it might take us a month to get a drilling permit. When we were in Colorado, it might take us 3 years. To get a drilling, to get a drilling permit. So regulatory issues are a big factor. ESG issues are a big factor. And so we, we've, we tend to gravitate towards areas that you can work with very easily with the state and local authorities.

And you alluded to this one earlier, but what's the infrastructure like, right? What's the transportation? Because you can pull it out of the ground.

Correct.

But how do you sell it to, you know, the pipelines or the end user? And what's the, what's the capacity, right? Especially for, for natural gas and NGLs.

Correct. Yeah. So there's, there's areas right now that are, you know, probably the best play in North America is the Permian Basin. Uh, it's got some of the best economics, but they have, they just don't have much natural gas infrastructure. And with the oil production comes natural gas production. And in a lot of cases they're flaring.

Uh, describe what that is. Yeah.

So they're just, they're, they're venting and lighting a match and putting them in.

And you see these big towering flames, correct, in the middle of the field.

Correct.

Yes. So they're taking money and lighting it on fire because they can't—

they can't—

they literally can't take it out of there.

And because they just don't have enough infrastructure. Yeah.

And let's talk about petroleum versus natural gas a little bit. So, so, you know, petroleum is very high density and so it's easily transported by trucks and other things and It's economic to do so. The problem with natural gas is it's loose, right? It's, it's built to gas and it's difficult to transport and it's hard to store. Hard to store.

You have to have natural gas storage fields, which are basically depleted natural gas fields to store it in.

And so most of the natural gas that's produced, there is actually a pipe going from the wellhead to the midstream producers who are basically taking this gas and packaging up and selling it. And so if there's not a pipe, you know, then you can't do anything with natural gas except vent it and light a match or flare it.

That's right.

And who wants to do that? So natural gas ends up being highly localized.

It does.

Right. America's producing a ton of natural gas, but a lot of it, unless there is infra— literally pipes, it can't be used. Now, this is why you're seeing natural gas prices in Europe.

What, what are they?

What is natural gas prices in Europe right now?

There's, you know, if natural gas, right, was trading when I left the office at about $2.33 in the United States, the United States, in Europe, I think it was about $7 or $8 per MCF. Right.

And so 3 times the price.

3 times the price. And I think you're starting to see a little bit. We don't— boy, I tell you, we started a business in 2005. I got to tell you the story. We started a business in 2005. And it was basically, you know, Alan Greenspan came out and said, testimony to Congress, that the United States has 10 years of natural gas supply left. And so you saw all of these liquefied natural gas platforms that were being built to bring liquefied natural gas into our country from Saudi Arabia or from Russia or from, you know, some of these And again, with some of the things we've been talking about with the shale revolution technology, the access to technology, the access to capital, you know, we have this horizontal drilling, we've got this completion technology that within 2 years, you know, we have a 100-year supply of natural gas.

Yeah.

And so now we're talking exporting. Now we're talking about all these LNG to export. That's right.

And talking about LNG, so what LNG is, so guys, you'll take in natural gas from all these little pipes coming in from these producers and they compress it and they cool it and compress it and cool it and compress it and cool it until it turns to a liquid.

It comes with—

it's like taking air and turning our air into a liquid. So it's very, very cold.

Correct. Okay.

And then they put it on special ships that keep it cold and then they move it somewhere else and then they, then they, then they re— regasify it at the location. So very expensive, very difficult to do, which is why natural gas, again, it is inherently a local commodity.

At the end of the day, it's a local commodity. But I think you'll start seeing more and more markets, particularly what's happening over in Europe, open up to North American liquefied natural gas.

Yeah, but how much liquefied natural gas is actually— as a percentage of the natural gas market, how much is liquefied?

Not very much.

Yeah, it's a teeny tiny—

it's just a And the number of refineries, I mean, we don't— we have a limited number to refine it and to build one and to, you know, create a whole more capacity to—

you mean LNG production facilities?

Yeah.

Yes.

Yeah.

That's not right.

That's a, that's a 10-year— yeah, that's a 10-year bet to build an LNG plant.

Yeah. And even the gasification plants are not easy. So all this stuff, the infrastructure just, just isn't, isn't quite there. All right. So we wanted to hit, hit that a little bit.

Yeah, I think we hit most of those. I think while we're on, we have a great question here from one of the viewers here just talking about pricing. You know, price has been very volatile over the past several years, ranging from $35 to $120. You know, we're kind of in the midpoint right now. And, you know, not that we want to put on our prediction hats here, but, you know, talk about what are you seeing from the price environment We talked a little bit at the very beginning of some of the supply-demand things going on, but do you see the possibility, you know, there's more upside here in price? And also just maybe discipline in as you're underwriting deals and evaluating opportunities, it has to make sense in the current environment and in a worst-case scenario, right? So talk a little bit about just pricing and how that impacts what types of deals make sense.

So yeah, there's a tremendous amount of, we're talking about oil.

Oil specifically.

So Yeah, oil being a global commodity, which we've talked about, you know, right now we are— and when we underwrite a deal, we think about current prices and everything's got to make sense at a current price strip. Do I think there's upside? Yes. I think the big upside is going to be driven by demand in China. I think you've seen you know, it's always sort of this supply-demand thing. I think there are some countries, um, big OPEC countries, Saudi Arabia, who try to control prices with, um, cutting. You saw that they were going to cut their production by 1,000 barrels a day, a million barrels a day, and, um, they, um, it was a yawn because the market's already got baked in that there's going to be companies or countries like Venezuela and Iran that can make up, make that up very easily. So right now our world oil production is around 99.7 million barrels a day, and our consumption is around, I think it's 96.6 million barrels a day. And so that little gap is what's keeping this volatility in check. If we see anything move on the consumption side with China, with India, with South America, I think you'll see prices go up.

I think let's talk about the due diligence. So, you know, everyone had no— knows someone who lost money in oil and gas investment. So Give us a couple of the, what are the mistakes investors have made and some of the egregious mistakes or some of the things that, you know, operators have done poorly or wrong or dishonestly that some of the biggest ways that people are getting creamed that you've seen.

Well, I mean, it's hard to, you know, from a nefarious, you know, there's just some nefarious people out there that, You know, I'd be— I would be leery of somebody that says that they've never drilled a dry hole because that typically doesn't happen. But the main thing that I would say is that folks that don't show a real sort of bent towards the technical, that don't give you a technical or an economic reason, a technical and an economic reason to make an investment. If it's just because, you know, prices are going to go— keep going up, up, up, up, up to, you know, $120 a barrel, that's probably— you can't— you know, that's probably not a good, good reason to make an investment. So those are— those are the technical piece. The economic piece to me are where some people sometimes they the lack of due diligence in really looking at the geology, looking at the engineering, looking at the infrastructure, looking at what happens at different price sensitivities. And that's where people can get burned.

Yeah.

And I mean, depleted wells and this something people can buy this and start hawking. I mean, there's a lot of dishonest people in this space.

There is. I mean, you know, when we first started our first business back in 1992, you know, we went and we talked to some folks about at the— at the— in Topeka about starting a business, starting and what are some of the pitfalls. And they told us a story about a guy named Johnny Rocket who was in Kansas and who was selling oil and gas leases to, you know, investors. And he would bring all his investors out to the land and he would turn his well on. And then all of a sudden you could hear the natural gas coming on and he would light it, light it, and it would be flaring, this big flare of flame. And so everybody's great, this is great. So they get money and then all of a sudden they find out that Johnny Rocket had tapped into a local pipeline where gas was coming out. There was just even no well there. And that's one of the things that— anyway, so those are the—

yeah, so there's plenty of shysters.

And I mean, we just, we just saw a big Ponzi scheme that was shut down by the SEC, carbon capture.

And they'd raised how many? $250 million from investors to do carbon capture, having this technology supposedly they'd go under these things and do carbon capture. And it's all a big fraud. It was nothing substantial about it. So there's plenty of— there's plenty of fraud out there, which means the best way to— is just get honest people, get good operators.

If it sounds too good to be true, it probably is. Right. And so, I mean, there's, you know, one opportunity I heard about is they're going to go create a whole new technology. It's, you know, going to go and go into these Marcellus Shale plays that you can't go into right now and extract, you know, 100x returns basically. And, you know, it's all proprietary. They can't tell you the whole method because they've got patents pending. It's like, Those are the kind of things, right?

Everybody's got a lot of secrets. Stay away from— yeah, we met a guy who claimed to be able to find, you know, you know, a gram of gold in every, every play sand out there.

Oh yeah.

And yeah, he was, he was convinced.

I mean, yeah, FBI was after him. He was always looking over his shoulder.

Yeah.

He was the guy. Yeah.

It's just, those are, those are frustrating deals. Yeah.

Well, let's shift to some of the fun stuff, you know, kind of the, the last section here we wanna talk about is, um, tax benefits, which shouldn't drive the decision to invest in a deal, but there are some pretty attractive ones. As investors, you can participate in some of these tax benefits, which are mostly depletion and intangible drilling costs. And can you talk a little bit about just what that is? And I guess mostly the IDCs.

Yeah. When you drill a well, obviously you're drilling a well and there are tangible and intangible costs. Typically the tangible costs are equipment or pipe that goes into the ground. Uh, some of the intangible costs are the actual completion work, the fracking, the bringing the well on, uh, the services that it takes, the geologists on site. And some of those are all intangible. So, um, right now you can, as part of the IRS tax code, you can deduct, you know, those costs if you're participating. There's also a— you mentioned, Ben, depletion. And there is a— and I think it's by play, and it might be by state— a— for every molecule, oil or natural gas unit that you produce, you can deplete— you can take— you can have a depletion by unit based on how much production is net to your ownership. So those are a couple strategies that I know give people comfort for taking and for taking the risk.

Sure.

Of participating in drilling and/or producing oil and natural gas.

Awesome. I think kind of—

why don't you explain that a little more, how it works from an investor's—

yeah, from an investor standpoint. I mean, you know, there's different ways to invest in these deals, whether it's, you know, as an LP or as a GP. And you can potentially take these losses against, you know, most of the time it's against passive income, but sometimes you can take it against active income.

So, and meaning you're a doctor and you have a high W-2 income, you're making several hundred thousand dollars a year. So losses produced by an oil field that are, that are intangible losses. I mean, it may be producing cash, right? but you actually can deduct the losses against your active income.

Yeah. So to the extent that an oil field produces losses, right? If it's not having producing cash flow and you're active in the, as a GP, you can take those against active income and write those down. So it can be very attractive for, you know, the high income earners. Now you are taking some additional liability, right? You have to sign on as a general partner, but you know, that can expose you to some liability, but generally it's somewhat minimal. And there are points in time where you can kind of convert to become a limited partner to, to remove that. And then I think kind of the last big thing I want to kind of wrap it up here and maybe consolidate some thoughts on just what are you seeing right now? What are the best opportunities that you're seeing in the market in, you know, kind of the 2023? Yeah.

2023, um, you know, we've had a little bit of a, you know, we had this big run-up in commodity prices in 2022, and we've, we've had a little bit of a dip. And where I think personally, this is, this is me talking now, I think that there are some really good opportunities. I think you're, you're starting to see players that are rationalizing their portfolios and larger oil and gas operators or companies and will be looking to divest. And I think, you know, where prices are, because you don't have to pay for the upside and because there is a fair amount of volatile risk in the pricing, you can buy cash flow streams for a very attractive discounted value.

Yeah.

So that's one of the things that we see that we're looking at, a range of returns.

Obviously, this is just big picture. You know, this— a lot of factors go into this, but what kind of the range of returns you're buying production at and then what are you kind of seeing on a production stand or new drilling right now?

Just sort of on metrics of what's happening in the A&D markets, most oil and gas production is right now being sold at, taking the cash flow, discounting it at a 15% discount, and then buying it with— making that the purchase price and getting—

did you hear that, guys? I mean, what that means is you can buy an oil field and the cash flows will be around 15% returns without, without debt, without leverage at all. No leverage. And add a little bit.

Yeah.

If you added, you know, 80% leverage on the— like, you know, real estate, the returns would be insane. So obviously nobody's doing that. You don't need to do that.

And because you're, you're, you're purchasing at this kind of, you know, good value, the, the upside is not really baked into that. So your upside is kind of just the gravy. And a lot of times you expect a higher rate of return when you're doing new drilling because of the additional risk. So ranges of IRRs there can be 30% plus, 30% to 50% depending on what the reservoir is.

And you're typically seeing an IRR on a new drill of around 50%, isn't that right?

Around 50%.

Yeah.

So, so meaning you drill a new hole, you'll typically see a return in about, in about, you know, 50% of that in 2, 3 years. Yeah. You'll see a return in 2 years, which is insane. And then it continues to produce for many years after.

Correct. That's, that's to me the opportunity right now is to buy a cash flow sale at a pretty good discount and then you get the upside. All of the undeveloped locations or undeveloped acreage that come along with it.

So you're not paying for that. You're not paying for the undeveloped locations. You're paying for the producing at a killer return.

And why is that the case? Largely because we don't have the competition right, right now, because private equity flood the market and some of the pensions and endowments who have been traditionally the companies that have come in to make these acquisitions aren't there, right? So there's a, there's a lack of capital.

Yeah, yeah. It's, you know, and I mean, to the point, what's Buffett been doing?

Well, yeah, he's, he's been buying up a lot of, uh, oil stock. He's been, uh, been very active in, in betting, betting big.

There's just actually a value investor.

He's a value investor.

Honestly, it's a value play right now.

It is. Yeah, yeah. Well, yeah, thank you all so much for, for tuning in here. And for those that are still here an hour and 20 minutes later, we commend you for listening to the whole thing. Hopefully it brought a lot of value. And obviously it's a little bit longer than some of our webinars, but there's a lot to cover and a lot to kind of unpack for folks. And, you know, if you are interested in learning more about oil and gas investing, we do have some projects kind of coming down the pike. And so I'd encourage you to join the Investor Club on our website or on our podcast website. So you'll see it at the top there, it'll say Investor Club at the top.

AspenFunds.us. Yep, Investor Club.

Yep.

And if you're on the podcast website, thebillionairepodcast.com, Investor Club at the top, and be sure to jump in there and get first notification of future deals. And with that, Jeff, thank you so much for coming here in studio and sharing your—

an hour and 20 minutes. Very good, man.

Time flies.

Okay.

When you're having fun.

You guys are fun guys to be around.

Awesome. Thanks so much. And thanks everyone for tuning in. Appreciate it.

All right.

Take care, guys.