Robert Leonard  2:18  

How and why is the oil and gas industry so lucrative yet so inaccessible to everyday investors?

Grant Norwood  2:26  

That’s a great question. I guess it’s lucrative because 91% of our transportation is still powered by petroleum products, 5% biofuels. You wouldn’t have biofuels without petroleum products. I still, in a roundabout way, would make that 96%. 

Those couple of percentage points that are made up by electric when it comes to transportation, it’s still 40% powered by natural gas, which is still a petroleum product. 

It’s lucrative because it’s relevant because we need it. Why is it inaccessible? Well, I guess you could get on Google and search, “how do I invest in oil and gas?” and a bunch of stuff will pop up, but I don’t recommend doing business with those companies. 

They’re what I would refer to as promoters. I guess by all intents and purposes, I can’t really say I’m not… but I’m not the typical promoter where I’ve got a maximum of 12% markup in my projects. 

If somebody wants to get in on something that is directly generated, most of the time, you’re going to be paying 200% of the cost for 75% of the interest. That’s just the way it is out there. It’s inaccessible to good deals. It’s not like it’s inaccessible all together. However, you want to get with somebody that’s got your best interest at heart and to find that is rare.

Robert Leonard  3:39  

How can an everyday investor, like myself, and those listening to the show today, start investing in the oil and gas industry outside of just investing in publicly traded equities that we’re familiar with?

Grant Norwood  3:50  

I guess we would have to cross paths somewhere. This is how we cross paths, but indicate some interest then I would get you some information. If you can make sense of the information, then you could jump right in. If you couldn’t, then either myself or my team will walk you through it until you feel comfortable enough to make an educated decision. If you think it’s a fit, we’d be glad to have somebody like you or anyone else that wants to go down that road with us.

Robert Leonard  4:16  

What exactly is it that we’re investing in?

Grant Norwood  4:18  

It’s actual wells, to make it short and sweet. We drill a hole in the ground and we drill in areas that are known to produce oil. It goes much deeper than that. Geology is super complicated. I’ve got it broken down and put into models and things that your everyday guy could understand. Though you actually own interest in the wells. 

If you own 5% interest, 5% profit goes to you. If 10%, 10% goes to you. That is actually what you’re investing in. Now there are wells of all different sorts. There are shallow wells, deep wells, vertical wells, and horizontal wells that have to be fracked. 

There are also old wells that you want to go back into and you feel like on the way down, they passed a better zone than the one they went down and produced from. We’re going to go back up the hole and perforate somewhere along the way down where we feel like there’s more oil. So there are all sorts of wells and that is what exactly you would be investing in. 

Robert Leonard  5:16  

To invest in a project like this, are you investing in an individual project, you’re investing in a specific business, you form a new entity for every well or how does that structure work?

Grant Norwood  5:26  

We form a new entity for every project. A project can be one or two wells. My current project is ten wells. We created an entity. It’s direct participation so we act as the general partner and you act as the limited partner. If I did a really bad job, you could all get together and vote me out. However, I try to make sure that that wouldn’t happen because we really try to do the best job we can. 

The reason we’re doing multiple wells is it cuts down on the risk. The wells we drill, we’ve got about a 95% success rate as an industry. Our company has a 100% success rate. 

The last five wells we’ve drilled have all turned out really good. We are drilling ten wells, and those wells are held in an LLC. It’s called direct participation. It’s an easy term to Google. You can learn all about it. You directly own an interest in assets and an entity and you have rights to the tax benefits. You have rights to revenue. You actually own that asset. 

However, what it allows us to do is act as the general partner, meaning that we oversee the day to day operations and use limited partners. 

What’s good about this is you can invest and basically own a piece of a business, but it’s hands-free. The only work involved for you is writing the check filling up paperwork, sending it off, sitting back, reading the emails, logging into the portal, keeping track of it from time to time. You can do it every day, you can do it once a month. You can just wait for me to call you and make sure you’re still alive. 

Beyond that, all you have to do is walk to your mailbox, pick up your check and carry to the bank. That’s the benefit to the direct participation structure is we do all the work while you sit back and just collect checks.

Robert Leonard  7:10  

It’s really interesting to hear this parallel because I host two podcasts. One is all about real estate investing. Often there we talk about syndications in real estate, where you buy large apartment buildings and there’s the same structure. You have your GPs and your LPs. 

Oftentimes we talk about being each one. Being the GP or being the LP. It sounds like this is very, very similar, except for investing in an apartment building that produces cash flow, you’re investing in a well that produces cash flow. You’re essentially still getting that same mailbox money. It’s really interesting to draw the parallels between two different assets that are still essentially doing the same thing.

Grant Norwood  7:42  

Yeah, it’s along the same lines. Our target rates of return are just far above. It carries a little bit more risk, I’d say than an apartment building, but the apartment building is still depreciating, just like the well is still depleting. I mean, you’re going to have leases appreciate the same way you would have the real estate appreciate. But what you make from month to month, you’re talking about a return annually that we could probably beat monthly when everything’s going well.

Robert Leonard  8:11  

Are you actually doing the well drilling yourself? Are you subbing out that work to another company? Is that what we’re investing in?

Grant Norwood  8:19  

It’s going to be a mix between the two. Sometimes we do it ourselves. Sometimes we’ll partner up with a company that we feel can do a better job than us. 

A lot of times it will be ourselves because they do not want to always share in the opportunity at costs. What you get with us that you won’t get in other places is more interest for less money. 

Now there are set costs for drilling and there are set costs for operating. You want to be as close to the true cost of the project as possible because ultimately, the more your basis is and the lower your interest is… Low basis, higher return. Higher basis, lower return. 

Whenever it makes sense, we will partner up with somebody but like I said, a lot of times if the deal is economic, they charge an arm and a leg for it. So I would say most of the time we do it ourselves.

Robert Leonard  9:10  

It almost sounds to me like you’re a GC, a general contractor for construction projects. However, you raise money for every single project rather than generating revenue by building something for another party, like building a house for somebody or building a warehouse for a company, whatever that may be. Instead you’re creating or building an asset, a well, and raising money to do that. 

Grant Norwood  9:31  

That is correct, currently. Earlier on we pursued smaller opportunities and we funded it completely internally for I was incorporated. I funded it myself and many times I’ve been an investor in the past. It took investing with different companies to kind of really learn what to do and what not to do. 

I would say in a way it’s kind of the same thing. We put the money together, we go drill the wells, and the goal is to profitably produce American energy. But for a long time, we did not accept outside funds. It’s just a capital intensive business. You’ll always have more opportunity than you do money. So it just depends on how big you want to go.

Robert Leonard  10:12  

How does investing passively in a deal like this differ from buying, just buying easily publicly traded oil and gas companies like Exxon Mobil or Chevron?

Grant Norwood  10:21  

To compare by equity, Exxon Mobil and Chevron, to buying interest in a project, such as mine, or one similar is you directly own interest in assets versus just equity in a company that has similar assets. While we’re in the same business, you’re just taking part in two different things. 

This is to create cash flow, that would be to buy equities that you hope to sell for a higher price at a later date, and maybe clicks and dividends along the way. But those dividends are usually miniscule. Buy low, sell high on stock, you will probably do all right. 

However, you’re also open to any kind of financial trouble that happens to that company. Then falls out of favor with investors and the price goes down, then you lose your money. 

I guess the thing is you’re directly owning an asset that is cash flows, that’s liquid because it uses cash flows. You have a way out and that cash flow has value. 

Robert Leonard  11:19  

You mentioned that in your projects you earn, you can earn up to a monthly return that is higher than even most people’s annual return. What are you seeing for passive investors returns generally and these types of projects?  

Grant Norwood  11:33  

I said that in reference to real estate investing. You get into a real estate project, I’ve seen where guys have returned as low as 1% or 2% annually. I’ve seen where they’ve returned as high as 15-17% annually. 

We hit a well in November and it returned 100% in three months and 12 days. So that’s a company record for us. I hope we break that record soon. We also just turned on a well, June 15. The first two weeks that well became online, it returned 7.6% of the investment. Then for the month of July return, north of 15%, just barely north, but it was north. 

What I’m saying is when you consider it a win, breach a 10% return on real estate, maybe it appreciates 3-4%. We’ve done that in months and quite a bit more on certain occasions.

Robert Leonard  12:22  

With returns that can be so strong, why aren’t more people doing this? Why isn’t the strategy more broadly adopted?

Grant Norwood  12:28  

Most of the time companies are charging 100% markup and they’re only letting you get 75% of the interest after they text 100% markup. To me, that’s what you call a bad actor. The industry is full of them. It’s a shame that it is but it’s not often that companies are able to do this.  

I feel like what we’re doing for our direct participation programs and just the area that we’re drilling in is we’re going to start getting a lot of attention because of the wells that we’re hitting and because we’re making returns today. I think the price in the old days was around $36.30. The kind of returns that we’re generating right now, companies can’t do that at $70-80 a barrel. 

I guess since other people just can’t do it, they’re struggling just to stay alive right now. Typically, in West Texas, Oklahoma, North Dakota, those guys need about $40-45 a barrel to breakeven. We just fell below that point and if we stay there for another three or four weeks, you’re going to see them shut wells in because they can’t run them at a loss month after month. 

With the amount of debt they’re all carrying, I don’t think that they can do it really very long at all. They’re already underwater so much that it cannot create cash flow. They can’t create a bigger deficit than they already have.

Robert Leonard  13:45  

For somebody to invest in this type of deal, do they need to be an accredited investor?

Grant Norwood  13:48  

They do. Now there are certain types of projects where they don’t, if they *inaudible* out right or if they want to buy it, where we issue it to them, but then they’re liable for the liabilities involved. If they don’t want to be held on to the LLC, then yes they could purchase interest not being credited and indirectly own it. 

However, for direct participation, yes, you do have to be accredited. I would say, if you don’t have a liquid net worth of over a million dollars or you haven’t made $200,000 a year in the last three years consecutively, then maybe one day, we’ll be able to have this conversation and bring you in on something. You’ll be satisfied with the results. 

Though if you are an accredited individual and you do have investment capital, this is something worth considering. Put your money to work, diversify your portfolio. You don’t have to come in guns blazing. You can start out with a minimum position of $10,000-20,000.

Most of my guys are 50 hundred thousand and up, but it’s accessible to someone who does not want to just dive in the pool but dip a toe in.

Robert Leonard  14:50  

Are the increasing green initiatives and the transition to renewable energy a major risk for the traditional oil in the gas industry and their underlying companies? What are these companies doing to prepare for this change?

Grant Norwood  15:02  

You have some companies that are buying into that idea. Then you have companies that are. Like I said earlier 91% of transportation is powered by petroleum products all across the board. 

Then 5%, that’s made up for biofuels that also took petroleum products to create all the way from the planning to fertilizing, to harvesting of the corn and other things that they use to create those biofuels all the way to the blending into actual petroleum products. 

No one can run off solid biofuels alone. 

Then the few percent that electric does make up, it is still powered by 40% natural gas and that number is even growing. As they retire more coal plants and as they decide whether or not they’re going to retire more nuclear plants, it’s not getting replaced so much by wind and solar. It’s getting replaced by natural gas. 

I think a good thing for people that are concerned with that is… I think Bloomberg, it was about a month ago, published a statement that Governor Newsome in California put out saying, “You know, we might need to sober up on this green initiative.” 

They’ve had rolling blackouts in parts of California. I also read another article today that they’re expecting to have more. It’s been a hot summer. As the sun is going down, air conditioners are still running. So they couldn’t support the grid. They retired too many different fossil fuel generated power plants. 

Whether it’s natural gas, coal, or whatever you have that they had to retire in order to make room for this new green thing. It didn’t hold the test. They put it to the test and it failed. I don’t know if that’s just because we had a really hot summer over there or if that’s just a sign of things to come. 

When they’re at their peak hours, they don’t have a way to store the surplus energy that they’re creating. Until they get that figured out, I don’t think that we’re going to change anytime soon. 

If they had it figured out, maybe 20 or 30 years from now, there’d be a real threat to the industry, but they’re still a long way off. So for now, in the foreseeable future, I don’t see any threats. 

My mentors… I always talk about my mentors. They’re great people. When they were my age, I’m relatively young. When they were my age, the big threat was nuclear power that it was going to replace everything, this was renewable and didn’t create pollution. The best thing since sliced bread, oil and gas is doomed. 

Well, then you had Chernobyl and a couple of other instances where people thought, “Hey, we should incorporate that but maybe it’s not the saving grace we were hoping for.” 

So that was the thing that stood to challenge oil and gas in their day. This is the thing that stands to challenge oil and gas today but I think overall, we’re going to need an all-in energy strategy. There’s a lot of third world countries trying to catch up with the world. A third of the world has no power at all, another third of the world has power but not enough. Then there’s our third of the world that has all the power they need. 

As these other countries and our sort of globe start catching up with the world, they’re not going to turn to high-cost renewables. They’re going to go for the cheapest avenue possible and pans down on this spot for the cheapest.

Robert Leonard  18:04  

Since June of 2014, when oil was about $115 or so, we’ve seen the price of a barrel of oil drop between $40 and $60, with a low of $19, as recently as of April 2020. How do these depressed oil prices impact oil companies and how does it impact the investments that you’re making?

Grant Norwood  18:25  

I’ll start with other oil companies. I would say that most of them set out to put a project in motion when prices were $115 a barrel. The last thing they were thinking about was $40. Then yet $19 a barrel when they set out to do it. There have been quite a few bankruptcies this year, as a result. 

If you can’t make money at $40 a barrel and far below that, then you’re going to be in trouble. I just don’t think they considered the reality that was to come when you have high prices like that, everybody wants to drill. Almost every project, economics, things are good, people are making a lot of money so not only do they take on extra costs, when they go into a project. 

Also, not only do they give off big bonuses, pay fat salaries all across the board, but they think it’ll never end. 

Then you’ve got the guys that are what I call promoters that fall in love with the idea of oil and gas. They put a company together and they couldn’t tell you the first thing about geology. They have never been on a rig floor. They don’t know much about the financials. They just know that, “Hey, this guy sold me a piece of a deal and I can go sell it to the next guy for a lot more money because everyone sees the prices at the pump. They see the prices per barrel per MCF. This is a great way to make money.” So then they jump into stuff and a lot of things get drilled that never should. 

A lot of people get involved in the industry that never should and prices like these, it’s like a cleansing. It cleans up a lot of those bad actors and it makes people realize they should have been more prudent. I mean us personally if oil is at $12 a barrel, we are turning a profit at $18 a barrel, we return 100% of the investment. Then returns get pretty good north of $30.

Robert Leonard  20:08  

We’re talking about low prices, but people listening to the show may have even heard the term or “negative oil prices” on other major financial media outlets. What does this mean and how can oil have a negative price?

Grant Norwood  20:22  

It was more of a technical mishap with futures contracts expiring. You had traders going, “Okay, well, I’m going to have to take a delivery of this. There’s nobody to buy this from me. I’m going to have to actually pay somebody to take it off my hands because I know where to store it. I don’t want to take delivery of this physical product. So what are we going to do?”

Then for less than 24 hours, you saw the price will go negative but I don’t know if that’ll happen. Again, I doubt it will happen. Again, if it does, it won’t be very long. No matter what we were still using 75 million barrels at the bare bottom per day. That was with all the planes landing and most people sitting at home on the couch. That just shows you how transportation makes a big difference in demand but it’s not the only thing that we use hydrocarbons for.

Robert Leonard  21:08  

We’ve talked about how the prices of oil have come down so much. You’ve even talked about how you’ll still be profitable at much lower prices than even today. I find that really interesting, because I would assume and like I said at the top of the show, I’m not an oil and gas expert by any means. 

However, I would assume that a very well-capitalized, financially stable, publicly-traded company that can tap the public markets for more capital if they need it, would be able to do this at a higher scale, more efficient than a small company like yourself. So how are you able to be profitable at such a low price for oil when a large publicly traded conglomerate can’t?

Grant Norwood  21:41  

It’s really about location. Usually, if someone’s talking about location in the oil industry, they’re talking about West Texas, Oklahoma, North Dakota, Louisiana, but those areas, you can make a lot of oil, but they also make a lot of water, and water is very costly to dispose of. That eats into your margins greatly. 

If you’re producing, let’s say, 300 barrels of oil and 400 barrels of water, well, you got a truck that has water. The distances that will run you is about $5 a barrel and you’re making more water than you are oil. You’ve got to pay $2 a barrel to dispose of it. There’s $6 a barrel, and you’re making more water than you are making oil. 

Let’s just say an average pumper, which goes by and checks out on the wall every day. He’s going to run more money in these popular areas, service work is going to run more money in these popular areas. Royalties are a big thing that people have to consider. 

Where we are drilling, we pay landowners a 15% royalty on every barrel that we take out of the ground. We sell a barrel for $50, they get a 15% royalty. In West Texas, these popular areas, they’re paying a 25% royalty. I’ve even seen it as bad as %30. So you’re shouldering 100% of the cost for the well. You’re shouldering 100% of the cost to produce the oil but you’re only taking home 75% and in crazy cases, 70% of the revenue after covering all those expenses. It eats into your margins. 

When we go into a project, we’re very agnostic. When it comes to where we drill, we’re just worried about what it costs to get it out of the ground. Our well cost is about 10 cents on the dollar for not the exact same well, but targeting this same kind of formation.

What I’m speaking about is horizontal drilling and hydraulic fracturing. So they’re spending anywhere between $8-15 million to drill these wells out in West Texas. Then they’re only making about two and a half to three times the amount of production we’re making but they’re also spending a lot of money hauling water. They’re spending a lot of money paying royalty owners. While we have those costs, they’re just minuscule compared to what they’re paying.

Like I said, $11 and we’re breaking even on returning a profit. Then $20 that’s when we pass the hundred percent rate of return. With $30 it gets interesting. Should we see $50 or $60? Again, like I said, our company records three months and 12 days. 

Though a hotspot to us is just drilling right next to EOG resources or pioneer or having drilled on a lease where several million barrels have been produced because they might have had $115 oil price when they produce those barrels. More oil will get produced on leases than not whenever prices are that high. 

Like I said, we plan for times like these because we put our own money into these projects. They’re dealing with public capital. They’re borrowing to drill their wells. I got started in this industry, with all my own capital. I know how it feels to invest in something and it’s great at $50-70 a barrel and then you wake up the next morning and it’s $40 a barrel. You’re going, “Oh, I thought I shelled out everything I needed to for this project. Now they’re sending me a bill instead of a revenue check. What is this?”

So I’ve designed it around what happens when prices go low because trust me, it’d be a lot easier if I picked up the phone and say, “Robert, John out in West Texas, COG is drilling next to us, man. They’re making so much oil out here. It’s going to be great.” 

It’d be so much easier to convince you when I can show you those big companies out there, but I’m not. If we talk after the show, I’ll show you I’m not. Just because it makes more sense with your own money to do that and a lot of them are just trying to drive up share prices by saying they’re producing thousand barrels a day well, but they’re not telling you that they’re not producing it profitably. I guess that’s how we’ve come to a lot of our conclusions.

Robert Leonard  25:33  

I guess one of the most interesting things that I found out of what you just said is how are you able to negotiate such a smaller royalty than a big conglomerate? It would seem that they’d have more bargaining power and could go to somebody and negotiate at a much lower royalty rate than somebody small like yourself. How is that possible?

Grant Norwood  25:49  

Well, like I said, we’re agnostic when it comes to location. If we’re not worried about being in the hot spots where everybody’s hot to trot about because of high production rates, no matter the cost, there’s less competition in the areas we go into. We can put an entire 640 acre drilling unit together for the price that is actually less than the price of one acre out of the 640 acres needed in West Texas. 

Right now, the A and D markets are kind of depressed, but you still saw Noble get acquired by Chevron a couple of weeks ago. I need to check the figures and see what they are paid per acre, but about 18 months ago you could just open any oil and gas publication and see the price land out in West Texas to drill on trading hands for anywhere between $25-50, back it up about two years.

You saw several hundred thousand plus dollar an acre transactions happen. Where we are people, know there’s oil out there, there’s been drilling for generations, but they’re happy to have us.

We’ve got a good reputation where we are. It’s not in its higher demand. They’re happy to have us. They would rather have us drill on their property than their neighbors.  They’re willing to take what we’re willing to give them and we’re fair with them: 15%, we cover 100% of the cost. They don’t have to and their 15% comes off the top. it’s not after we pay our expenses to operate the well. 

Position royalty is great. If there’s not a lot of competition out there, and they don’t lease to us and give us preferable terms, then they stand to not get oil drills on them at all. 

In West Texas, people will pay just about any price for those leases and under just about any terms. Many of these companies are hurting because they spent all this money on acreage that they can’t even afford to go and drill. They were able to borrow the money for that acreage.

The prices turn the way they turned and now they can’t go suck off the tee a little bit more to get enough money to actually drill a well. If they can’t do it within the first three years and their lease expires, then they have nothing. 

It’s unfortunate what’s happened out there. Just so much money has been given to these companies.

Chesapeake is a great example. At one time, they had over 10 million acres under lease and quite a few rigs running but they had so much acreage under lease, they couldn’t possibly drill it all before the lease had expired. So where they borrowed all this money, because their CEO at the time, Aubrey McLennan, he never found an area he didn’t like.

He thought how to even just with a hutch, he was going to lease that property. They didn’t have the bandwidth to get out there and drill all the acreage. Then a lot of the acreage they picked up, they really didn’t think too hard about. They didn’t evaluate it well enough. Natural gas went from $10 MCF down to $4 MCF. 

Then down to three, then where it sits right now is $2.40. They bought it without the thought in their head that these prices today might not last. Like I said, it could have been a little bit more frugal, and a little bit more choosy.

Robert Leonard  28:46  

Grant, thanks so much for coming on the show today. I found this topic super interesting. It’s not one that I’ve really studied a lot or really even given much thought. I think a lot of the audience is going to be in a similar position. Thank you for coming on and sharing all your knowledge. 

For those listening today that want to dive into these topics a little bit more, what resources might they look for? Where can they connect with you further?

Grant Norwood  29:12  

I would say the Oil and Gas Investor is a great magazine. It’s just an industry publication. There’s a lot of great information in there. It keeps you up to date on current events within the industry, exciting new areas, kind of like the one I have. I’m sure we’ll be in it before too long. We’re actually trying to keep the cat in the bag as long as we can. So we can pick up more acreage under favorable terms. 

However, there’s going to come a point in time where the talk at the coffee shops is loud enough that everyone realizes what we have on our hands and rushes out here. You’ll be seeing me there but you can go to my website, NorwoodEnergyCorp.com. I got the little thing if you want to get some information directly from me or one of my team members. Office lines are listed. You can leave a message. They might answer for me. I’ll be happy to speak with you.

There’s a lot of different good sources. There’s the Oil and Gas Journal. There’s actually a really fun show so it’s purely entertainment. There’s some accuracy to it but I wouldn’t go by anything and make any decisions based on what you watch on that show called Backyard Oil. It’s kind of a lot of fun. It’s kind of like Pickers or Pawn Stars. I mean, it’s about the same quality and speed as those two shows. It’s a lot of fun.

If you want something a little bit more technical and I bought these shows both off Amazon and another one is Boomtown or so. That’s more like day to day field things. We go through a lot of the same things that they do on that show, but like I said, Backyard Oil is just for entertainment. Boomtown is a little bit more technical, but still far below.

Anything you’ll get if you come to me directly. So if you have interest, or you want something to diversify your portfolio, or just use up your returns, if you’re investing in real estate, and you’re getting 10% per annum, take a fraction of what you have in real estate and let me show you what I can do with it. It’ll probably top that with just a fraction of it.

Robert Leonard  31:05  

Well, Grant, thanks so much for providing that list of resources. I’ll put a link to all of those in the show notes. So you guys can go check those out whether to be more technical and learn about it or if you want just some entertainment to learn more about this industry as well. I think that’s a cool dynamic and different set of resources that we can go and use the learn from.

Grant, thank you so much for that. If you’re interested, be sure to reach out to grant directly on his website. He was very generous to offer his phone number and also to speak with you guys directly. So if you want to take advantage of that opportunity, I highly recommend it. It’s not always that you get the opportunity to speak directly with the guests. Take advantage of that if you have a chance and are extroverted enough to make that phone call. 

Grant, thanks so much for coming on the show.

Grant Norwood  31:45  

Of course, Robert, thanks for having me.

Robert Leonard  31:47  

Alright guys, that’s all I had for this week’s episode of Millennial Investing. I’ll see you again next week.

Outro  31:53  

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