Is Now A Good Time To Invest In Oil & Gas? With Thomas J. Powell

Foreign welcome to the Next Level Income show where it's our goal to take your income, investments and your life to the next level. I'm your host, Chris Larsen. You can get a copy of our book for free@nextlevelincome.com just click on the book link. Today's show is sponsored by MFin Summit, coming up on January 21st through the 23rd. It's a three day information packed event for multifamily investors with over 1,000 attendees and over 50 speakers, including yours truly. You'll hear from experts about finding deals, raising capital, underwriting strategies, selecting markets and so much more. To get your $100 discount, go to mfinsummit.com and enter the promo code NextLevel in all caps. Next level in all caps. Whether you're new to multifamily investing or a seasoned investor, you do not want to miss this event. Visit mfinsummit.com today. On today's show we have Thomas J. Pal. Thomas leverages a 30 year career including founding and running a multibillion dollar mortgage banking company. Tom is a leading financier with extensive experience in private equity, commercial banking, investment banking, alternative asset management and corporate finance and governance. He has a proven track record in raising capital and institutional capital, investment and credit risk analysis, risk mitigation, portfolio management, distressed debt recovery and deal structure. Tom, we're so excited to have you on the show today. Welcome, Chris.

Thank you. That is a mouthful. I tell you. We got to cut those bios down a bit.

Yeah, yeah. We can always edit it out but oh, it's just your background's impressive and I love you're coming to us here from Tahoe today.

I am. Just before we head out on the ski hill which is great. Awesome. And I tell you what, I'm very blessed to live the lifestyle that I live and the career that I've had that enables that me and my family. And we're proud to be able to share that with others.

Absolutely. And that's why we're so excited to have you on the show, Tom, because what you just said aligns exactly with our mission here at Next Level Income. So for those in the audience who you're new to, if you don't mind, share a little bit more about your history aside from what we heard here in the bio.

Absolutely. I'll briefly since it's now winter. I grew up by the time I was 12, my sisters were raising me because of different of my parents and so I started my first company when I was 12 to help cover the bills and get heat to the house that period of time. So I've been a lifetime entrepreneur as well as a corporate guy as well. I did a stint at Wells Fargo bank in Silicon Valley in the 80s. I graduated in finance and MBA and was able to work with raising the kids and build the businesses. In the early 90s we went through what was my first recession as an adult and what was critical about that was I was working at World bank in a really highly valued office with investors that had money and wanted to have returns. And CDs had dropped from earning 18% to now they were moving down towards 10. And I had developers and other startup companies that needed cash and were willing to pay a higher premium. And so we started marrying the two. I left the bank and we started our very first fund in 92 and that became what could be my career in the alternative space. So we've been doing this for just shy of now, 30 years. I've been in finance over 30 years and we've structured deals across the world. Offices in Leviticus, London and Hong Kong and Boston and today now in San Francisco and Dallas. So great career. I get to see a lot of deal flow which is fun for me. And the oil and gas is I think what we're talking about today, which was interesting venture for us over these last better part of seven years now. So it's been interesting.

Yeah, I love it. And I write about in my book, I watch my parents go through the SNL crisis. They were both with a construction company, JD Construction. Back in the day it was Jimmy Dean sausages construction arm and someone like yourself that has seen the dips across multiple markets has a lot more perspective than some of the capital that we're seeing flowing in today.

We've been asked that when my oldest daughter runs the company now, so I'm more of the gray haired guys, board and leading direction but she's really in the trenches every day. And one of the things that I really like that she asks during the interview is tell me when you got bloody.

You know, we don't want to hear the success stories, we want to know when something didn't work because that's really the telltale. And I think that as a company that's what we do. We've been through so many ups and downs as a private equity firm. Instead of just being a direct investor, you have a management team that has over 50 people, several JDs, PhDs, MBAs that not only have education, they have experience. Our general counsel is actually a former bankruptcy Trustee. And why that's important is because you know how to structure deals on the other side so that if something doesn't work, how do we make sure that it works through for the investor's best interests?

Yeah, I mean, it's so important. I think the most important thing you can ask whenever you're looking at an investment, in my opinion, is what's the worst case scenario and how do you get out of it?

Absolutely, I'd agree.

So, a little story. So I met Stefan Toth, your partner with Homebound Resources, who I was an investor with starting back in 2014. And I got involved. We had a couple oil wells down in Texas. And I just remember watching the oil price soar up to $120 a barrel. I was just licking my lips. It was fantastic. And then like so many things, do they return back to normal? And we watched oil prices tumble first down to 60 and then 50 and then 40 and then sub dollar 30 a barrel. And I thought, I talked to Stefan about the strategy and I thought, is this going to be a disaster? And it ended up the strategy that they had laid out with Homebound was risk mitigated, and we ended up still doing very well, even in that market.

That's great to hear.

You know, kind of funny thing is.

I met Stephan initially through another business partner for helping them reposition some of their real estate assets. So we'd actually, when CMBS Mortgages came back Vogue, we looked at some of their assets and said this would fit into that portfolio. And we did one of the first broken condo projects that got sent to Wall Street. That said Stephan wanted us in the oil and gas business. And at the time, oil was above 100. And I said, I'm not interested in being in oil at 100. And we joke about this. He said, well, it's going to go to 200. I said, yeah, I think it's going to go to 32. And what was great about that is Pablo Cortes, who's with him today, ran out of the room across the hall, came running back in and said, I've been in the analysis at $45 oil and we're still profitable. And I'm like, now you guys have me, so we'll be positioned to buy as the market tumbles. And that's what we.

Yeah. So talk a little bit about why the partnership with Homebound and how the strategy is different than some of the other options that are out there.

Tom, great question. There's a number of different pieces. One again, inserting a private equity firm into the mix. And that when Stephan said to look at doing the capital for the oil and gas, I said, there's going to be a couple things. In most oil and gas companies, the engineering side of that finds what's called.

A prospect and then they promote it. They actually take much of their profit right off front in delivering that to somebody else. Said Stephan. We're not going to be able to do that with our investors because we are aligned with our investors. If you make money, you only make money if the investors make money. And the only way we really get paid because we don't charge a fee for our services, is to have profits come out of these deals. So that was the first alignment of structure. The second was extreme transparency. So in the alternative space, you generally don't have a lot of transparency. So we use a third party administrator called nes. We also have audited credentials. And so those pieces are really important. And then lastly we bring in what's called third parties, actually due diligence. So the latest one was Bowman Law that came in and they verified that what we say in the documents is actually what's being done. And the team members that we say and the properties that we have across the board, that's, I think, different than most of the oil and gas companies that are raising capital other than the public's. So we run more like a public company gets private.

Yeah, that's fantastic. And the layers that you guys have as you do the due diligence on these, again, it's a lot of the same stuff that I saw back then. But tell us a little bit more about when you, you and your group decided to enter the oil and gas space and specifically why.

So I had been involved in the oil space, wasn't even called oil and gas back then because tax laws changed in the 80s and I was a high income W2 person and my accountant had recommended investment for me. And so that's also why when Stephane approached me, I said, no, I really don't like oil and gas. It's not transparent. The operator seem to make all the money and the upfront guys make all the money and the only thing I get is a tax deduction. And that's where again, we progressed with that conversation of saying, let's change how the oil and gas industry could be done. And we look at it. I said, you know what? For most private investors out there, their single first investment was almost a single, almost always a single family home. They bought a rental property or they moved out of their house and turned it into a rental property and they understanding the alternative investment space. So we've got a multibillion dollar experience in commercial real estate. What you're doing, what homebound is doing, is very similar to what a developer does in the real estate space. So you think about they assemble a number of lots or they take land and they make it into a higher density for multifamily or however it goes, they assemble that, there's huge value add to that, but there's not really value until the buildings go up and tenants or occupants actually live inside that. And so oil and gas is very similar. They assemble the properties, they produce the oil and then they prove the reserves. And so just like real estate, it's a similar deal to the last point of that. It's so similar to real estate, most people don't know that you can actually 1031 from a piece of brick and mortar property to oil and gas and vice versa.

I didn't know that. And we just finished up an interview with Bill Exeter who has one of the oldest 1031 groups in the country. I gotta go back and look at that. That's awesome.

When you think about it, we're right on the border of California. And so when people can 1031 exchange out of high taxed California into Texas properties that only have essentially the railroad commission tax. They like that.

Oh yeah, that's beautiful. You see a ton of people moving out of California down to Texas as well with their feet. Yeah. So you mentioned the tax benefits. So my book talks about multifamily being the holy grail because of the. The ability to have passive. The ability to control appreciation and then the tax benefits, which is kind of like icing on the cake. So tell us a little bit about the tax changes back in the 80s, Tom, and what they are today. And are there still good benefits if you're a W2 earner when it comes to the energy markets in the United States?

Absolutely. And Chris, we start actually at taxes. So for our investment thesis, we're always looking at taxes first. How does it either impact taxes going up or how do we mitigate taxes? Then we look at current revenue, then we look at gains, and then we look at exit. So our four pieces that we're looking at. So in the energy space, specifically in the oil and gas space, since Carter's time, you've been able to write off what's called the intangible drilling costs, which is essentially everything that's below the ground and all the intellectual capital that goes into it. So all the geology and everything there. And it generally works out to be about 70 to 80%.

Okay.

So you get to write that off the year you make the investment. So right now, when November and December is when a lot of people are doing their tax planning for 2020 still. And for most investments, it's too late, but they can actually make a look at what those are going to be and offset those. Or maybe they want to roll a traditional IRA into a Roth IRA and they can use this to offset that. President Trump made it even better during his time, which will sunset in 2022. But for right now, this is the law, which is. It's actually 100% write off the first year. So you make a $250,000 investment, you get to write 250,000 off your top income.

And that's even for W2 earners.

That's for W2. And including state taxes, too. So for our California investors, they love it, which is where a large group come out of. And you do not get alternative minimum tax. There's no basis that hits into alternative minimum tax.

Yeah. So I love this, and this is an important fact that I want to underscore. So if you're listening and you've not seen this space before and you're familiar with real estate, you say, well, that's great. We have depreciation. We can offset our income. This is an investment that you can invest in. And in the year you invest, apply it to your W2 income. I think that's what is very important. And the next level income strategy is how to make more money, keep more money, and then grow your money. So I love how you guys start with the end in mind.

Yeah, that is exactly what we do. And Chris, for your listeners, we do have a white paper that we produce, has all the Internal Revenue codes. We can't give tax advice specifically because there are occasions where it doesn't work for everybody, but in most cases it does. And I like telling this story in that my tax for. Because we do have properties in California, I have an office in California. And my California tax went from a 4% to a 0%.

Wow.

Through tax strategies. So for California.

So that was.

It wasn't 0% for the IRS, but it was for the state, which was great.

14% is a big savings off the top line. And for our listeners, we'll also. We'll make sure we get that white paper from you guys. Tom. And we'll put that in and distribute it with podcast or link it in the show notes as well. Because I think that is super important. And I came about oil and gas the same way you did, making a lot of money. Somebody said, oh, you should look at oil and gas and when you blend it all together, it makes a meaningful impact in the analysis of this. So you said that the 2017 tax law changes or sunsets in 2022. As we're recording this here, we're right before Thanksgiving, which I appreciate you making time, taking time away from your family to do this here. We're going to get this out before the end of the year. Any anticipated changes as we look at potentially a new administration here in 2021.

There'S always the concern about what will happen in regulatory both from if President Biden holds to one of his campaign pieces was they're going to stop fracking on federal lands. What that would do, that would diminish actual supply, which would cause prices to go up. And there's no other way that it's going to happen without that. He can't banish on private lands, not at a federal level. So the states can do that, not the federal. And it's not in the country's best interest. There's a good study out there that shows that the taxes from oil and gas are actually the number two revenue generator for the federal government, right behind income taxes. So they have an incentive and that's why they give these tax incentives for going out there and finding oil and gas. The other history repeats itself kind of look is when President Obama came into office, he was absolutely going to be the green energy president and get rid of those nasty carbon fuels. And what's interesting, if you looked at the statistics, that's exactly when you were talking about your investing is we doubled US Production of oil and gas during that time. We actually moved from being energy dependent on the eastern side of the world to being energy independent and being a net seller. And that's all during President Obama's time. So they can talk about one side, but what they actually do is going to be a different piece.

I think it's important you look at all of the above strategy. I live in Asheville, North Carolina. We had a Prius, we had solar panels, our roofs. I'm a fan of using all different types of energy. And I think when you look at taking a country from energy dependence to energy independence, the flexibility that you have with foreign policy, to me it seems like a real benefit for the country.

It changed the balance of power and I will tell you that. So our house is geothermal and solar. I drive a Tesla. And so yes, I definitely am still part of that. How we do we invest in everything from geothermal to solar. And near you we have a half million square feet that serves the Volkl power plants, which are power plants. And so we're across the board in energy. It's just nothing actually is at the same level as oil and gas.

Yeah. And I mean hopefully the country continues to diversify and do that. But I think this is an important thing. The other thing, your website, your company has a tremendous amount of resources for investors. So if investors want to educate themselves. I've been very impressed with the content you've put out there. One of the things I noticed in one of the videos, Tom was I forget which one of your partners said it, but they talk about you guys being a technology company that happens to be in oil and gas. And I look at the strategy and I feel like how do you guys make money buying these wells that have some cases previously been drilled?

Yeah, it's great. It's data. I'm a data geek. So by that. So when you can show me good data and make better decisions and consistently use then that data to go back and see were our decisions did we have a good outcome or did we have a pour out which pieces didn't fit that model and how can we look at it.

And one of the wells that we.

Use as an example which is still in portfolio is called the Mina M.

I N A I was in there. Yeah. Well that investment was at time a $600,000 investment that they wanted to not complete. But Homebound said our data says we should be completing this and so we'll put in the extra money and put it in those investors for a 600,000 roughly investment made over $5 million. And so that again goes to the data and they don't always work out that way. That was a home run and prices were up above $100. And there's a lot of different positive things about it, but those are the putting on black, sometimes more so strategize against how not to have the all on black and then you zero out. So it's how do we do multiple wells and you can do a bunch of singles at 35 and $40 oil and still be very profitable and have a really good outcome. And then when you get a home run, it's fabulously phenomenal.

Yeah, it's like the Moneyball strategy and that's, you know, I look at that and you know, being an engineer, Tom, by training at least same thing. It's like, well, if you can reliably get singles or maybe some doubles and then and still be very profitable and not have to depend on hitting it out of the park every time, to me that is a preferable strategy, especially when it comes to something that can be highly variable. So right now as we sit today, where are oil and gas prices?

We're sitting in the low 40s, which is still a depressed market relative. The IMF International Monetary Fund did a study of what it takes for most countries to be able to do what it is that they do. So in the United States, oil and gas is a big part of it, but it's not our dominance. Saudi Arabia, Russia, it is their dominant piece and especially Saudi Arabia and they've put so many social programs into place that although they produce at about $12 a barrel, they need $85 a barrel according to the IMF to actually break even on their budget. So what is. There's a natural push up and Russia needs a little more than $40 a barrel. Homebound produces at less than $20 a barrel. We do have slides that we can show that and where that data comes from, but it's a really interesting piece. So where we see the natural. The other quick, just little piece is in June of this year the United States hit its largest ever amount of oil that was in reserves at the time. So we had excess reserves and generally they follow each other. So usage and reserves are really close to each other. And we had a big glut of oil. We have burned through that entire glut. As of October 31st, we are back down to our six year trailing average of what gas is used. We're back to 97% of usage and demand pull through. And here's the challenge. There aren't enough in the field to replace what oil we're using out of our reserves. So it is very likely that you're going to see a big price increase coming the first quarter or we got to get the rigs back into the ground.

Interesting. So is this a good time to invest right now?

Who's listening in on this? Chris had a great saying back in April. He said this is what it feels like to buy low and sell high. We never really know what the future is going to hold and when we try and forecast it. But I will tell you, in my 30 plus year career of investing, I've never seen an opportunity that's this great. And we're involved in tech. We have a tech fund, we have a real estate fund. We've made A very nice living and good wealth. We became a family office because of what we were able to build. So single member, family office. And truly what you said about your lifestyle, it provides freedom and opportunity and just great travel. But today is the day, and that's why I'm doing these shows is because now is the time to be investing in this space.

Yeah. Again, following it for about seven years now and seeing the ups and downs. I didn't know much about it, but I will tell you, when you make a bet on a space, it encourages you to learn a lot about it over that period of time. So that's one of the reasons we wanted to have you on today, is to educate investors. They've had a lot of questions around this time and a lot of concerns.

I'm going to step back just to one thing you said too, Chris, if you don't mind. On the tax strategies, my daughter reminded me that this last week we're spending the last 45 days of 2020 meeting with the accountants and the attorneys for doing our next three years of tax strategy planning. Because part of the things about the oil and gas is you can actually use it in this year, but you can actually move it forward in future years. That is one of the strategies that we're personally employing right now.

Interesting. Yeah. And again, we've had multiple tax strategists on the show. If it's something you're interested in doing, you guys can take a look at the website and go back and look at some of those things. Again, like Tom said, we're not accountants, but certainly we, we follow every opportunity that we can to optimize our tax strategy. So I know you guys have been on a big buying spree on the operations side here. What are your plans going into 2021? You said we need more wells in the field. How have your plans shifted, I guess is a better question over the past year from a year ago.

Well, so when we put out, and that's actually why we had another third party come in after post Covid. So we had two third party come in and do that's of the program and say, you know, give us the opinion of what the strengths and weaknesses are. We had Bowman Law come in in.

June and what they found was that.

Our strategy that we put in place a year ago became even more profitable because it gave us the dry powder and the ability to acquire wells that are better quality than what we were actually into being able to get. And that's because there are companies that are having to unload their best product.

In a bad time and it allows us to be able to forward. So from a revenue standpoint, we anticipate a really good year in 2021. And from a valuation standpoint, we're seeing that we're just really some really nice, high quality products.

Well, I think that goes back to what we were talking about a few minutes ago. Whereas if your strategy works and you're hitting singles and then you enter an opportunity like we've seen in the market right now, the strategy just works even better.

Yes. I think I use the analogy of how many people listening on your show bought real estate in 2006? Many did. And how many sold in 2006? Sold our mortgage bank in 2005. So it was a great time for us to exit the program.

Right.

And we had that. It was a company that had been around since 1972, just stellar, stellar company. That was the time then to have dry powder. And then as we came into 2010, that was the time that we were able to acquire a lot of real estate, which was great. So it's kind of the same way now.

No. And there's some great books I've referenced in the past. The Secret Life of Real Estate and Banking is one. And if you follow these trends are cyclical. We talked about the savings and loan crisis. You can go back all the way into the 1850s and see these sort of. I can't speak as much to the oil and gas side of things, but certainly when there are opportunities, we've got.

Great graphs on them and can share with you as well that show how cyclical it really is. And we are in that V shaped recovery.

Yeah. Awesome. So Tom, I know you're out in Tahoe. We share affinity, a passion for skiing. We've talked about your business plans. Where are you going to take travels here over this winter?

Well, I was in Austria when the lockdown first happened. We were skiing with my father in law. My father in law's just shy of 80 and he's still one of the top rated skiers. So we enjoy being able to do that. I still coach at for Vail and so we'll be spending a large amount of time on the hills here as well as getting to Aspen and Jackson and we'll see what else other ski things we can get. So that's kind of the big deal for me is we're in ski season, which is what I live for.

Awesome. Well, maybe we'll see each other out on the mountain there in Colorado here in a couple Months, that would be great. So a question we ask every guest that comes on the show, Tom, is if you can go back to your 25 year old self, pull your side and give you some advice, what would it be?

Thanks for giving a heads up on that. First of all.

I've sat here for a couple minutes waiting for guests to answer. So now we just say, hey, just a heads up.

Just a heads up. I'm reminded of when I was a young man, I read the autobiography of.

Benjamin Franklin and one of the pieces that he put in there when he was talking to his nephew and then to also John Adams was essentially bark less and wag more. He didn't say those words right. That's essentially what he was saying. He was saying give people a wide swath, don't be short with people. And if I could go back to my 25 self and even my 50 plus year old self, I still say that is that be kind because we don't know what everybody else is struggling through and understand that errors happen. And as long as it's not an error of intent, it's an error of a mission or something else, then move forward and let people have their struggles in their life. So that's mine.

I love it. Our number one family rule is be kind. And I think in this time that there's a lot of contention with politics and different things. It's terrific advice. Just to remember, be patient, be open and arguing with people, you don't always get where you want to go.

We had a great experience. I don't know if you know this, but my family and our company, we adopted a polling place. So on election day we paid our team members to go and actually be poll workers from 5.30am till 10.30pm it was interesting depending upon and we had variety of political parties and beliefs and everything else in there, but everybody got along great. It was a wonderful experience and it was really nice to give back in that scenario. But it was also heartening to say we didn't care which side they were voting for. We cared that they were voting. It was very exciting.

Absolutely. It's such a wonderful thing we have in this country and you look around the world and it's a real privilege and I feel very grateful to be in this country and I feel very grateful to have you on the show today, Tom. I really appreciate the time with the audience. If people want to learn more about Resolute Capital Partners, they learn more about some of the educational materials we talked about. Get your white paper. What's the best way to find you guys?

You know, it's a great question. I'm not really the one who knows that, but Blue Capital Partners is our website, and once they get signed in there, I think they may have to come in and let you know that they're coming in behind what's called the firewall. There's a lot of materials that are in front of the firewall that allows them to learn about what we do and who we are, and then they should best come through, I think, through a connection with you.

We'll have a link as well to that. So if you want to check out some of those educational resources, learn more about what Resolute Capital Partners does, you'll be able to check that out. So once again, Tom, I want to thank you so much on behalf of our audience for the value that you're providing. I wish you the best during the holidays here. Hope you have a great afternoon on slopes.

Chris, thank you very much.

Take care.

My pleasure.