Grant Norwood (03:30):

So I kind of learned the transactional side of the business and you have to know what you’re doing and find value in order to capture that arbitrage. Through doing that, I actually befriended several operators. One had a very interesting play in the Illinois Basin and we’ve teamed up for the last two and a half years now. So now I’m kind of between the capital sourcing side, the leasing side, and the actual hands-on operations within our organization.

Robert Leonard (04:03):

Some people listening to the show are probably wondering why are we talking about oil and gas on a real estate show. So I want to talk about how oil and gas and what you’re doing is similar to real estate syndications and compare the two because I think a lot of people listening are probably pretty familiar with real estate syndications. So take us through the different strategies of real estate syndications and then compare that to what you do with oil.

Grant Norwood (04:30):

The friends I have, when you source capital and you do your own kind of syndications, you meet people that do the real estate as well. So what they’ve conveyed to me and what they’ve offered to me and what I participate with them in, it’s usually three different strategies. So it’s either development play which is unimproved land kind of starting from square one. Maybe it needs to be repurposed, it’s lacking permits, infrastructure, it’s capital intensive. It’s a long way to cash flow, so that’s strategy number one. Strategy number two is going to be a value play. You’re looking for something distressed, run-down, it needs [to be] transformed. It needs an infusion of capital of some sort. You’re discount shopping. So that’s strategy number two and then we move into a yield play.

Grant Norwood (05:20):

So a yield play is already cash flowing, and that cash flow there is kind of worth it to you to just kind of kick back and milk it, you’re okay with the risks and you just want to sit back and milk the cow and hopefully it doesn’t go dry and you get the return you’re expecting. That is exactly what we do. Obviously, it’s not the same in the sense we’re building properties that we’re going to lease out, but in our development plays, you’re moving into an area that has little to no infrastructure, you can’t drill a well and have no market to sell the product to, so you’re starting from [the] square on there. Sometimes you have to involve more than just yourself because it’s a completely different business to take the product to market, but we’re kind of starting with nothing and the reward is great enough that we’re willing to get in there and put in place everything that needs to both produce the oil and then get it to market.

Grant Norwood (06:15):

Then also moving from strategy one to strategy two, the value plays. We do look for … Instead of maybe distressed assets, it’s more distressed operators that really need capital to just survive. We just went through a tremendous downturn. We saw the lowest oil price in history. I doubt we’ll see it again, but it puts so many people out of business that it was a great time for value plays. If you’re looking to do that now, you’re late to the party. But last year, that was the move. So you could go and maybe the asset is cash flow positive. That might be the only bargaining chip that they have to sell something to make their interest payments, just whatever have you. You can pick this asset up, maybe you infuse a little bit of capital, maybe you just sit on it, kind of like you would in a yield play, but last year was perfect for that.

Grant Norwood (07:12):

Now when you get to the yield play, in our business, a lot of times it’s cash flowing, you do most of the time have to put some capital into it. That’s one different thing from I guess real estate is maybe in some cases you don’t have to add any capital to it. That rarely happens in oil and gas. Obviously, we’ve got our operating costs and stuff like that, but there’s a lot of routine maintenance and you inherit something and you have your way of doing it, so it does take a little bit of capital infusion but for the most part, you’re just buying it for what it’s making, it’s beating the market so you’re happy. It’s got a lot of life left to it so you’re happy. But those are those three strategies.

Grant Norwood (07:58):

So we know how they’re alike and then if we’re going to draw the line there and go, “Okay, where is it different?” Well, oil is an ever-diminishing return. So day one, that well is kicking out let’s call it 200 barrels a day. Now if that’s day one, maybe day 30, it’s kicking out 250 because it’s still cleaning up a lot of things downhole. They’re real fresh. But from the time it hits that plateau, from then on, it’s ever-diminishing.

Grant Norwood (08:29):

I would say really where the similarities end is with real estate, maybe you’ve gotten the wrong zip code and the neighborhood went down and what you could rent it for went down a little bit, but it’s not going to be at the rate that oil diminishes. But the benefit to still being involved in oil is [the] rate of return. So although you know you’re seeing a steady, hyperbolic decline, 5% on top of the remaining 95% on top of the remaining 91 points whatever the fraction is percent, although you’re experiencing that, your returns can be double-digit percentage points each and every month. So you might wind up at the end of year one with anywhere between 100 and 400% return. Now those are dramatic numbers but it does happen, you have to be very calculated to experience that. It’s regular for some companies, it’s not regular for other companies. Some of them get lucky and hit one every now and then and then some of them do it almost every time. So I think the main thing to know is just the rate at which your return goes down is different but the reason we still do it is because it’s a short cycle high yield, so where if you’re in real estate and you’re looking at it over a generation, you’re probably going to win. If you’re looking at something in oil, you’re planning for the same return but in the next couple of years.

Grant Norwood (10:05):

So I guess if you got that down, then the development time in my opinion is faster. Now, if you go back to strategy one like we were talking about there’s nothing there. Maybe they’re comparable. It takes time to build roads, pipelines, in and out, permits, everything of that nature. But if there’s a little bit there, you might … Where if you’re doing one of these big real estate syndications, let’s call it kind of commercial residential, you’re probably going to be in the development phase anywhere between two to four or five years, where you could be finished with your well in two to three months. So it’s really just speeding up that value curve and your time value of money and that’s kind of where we win.

Grant Norwood (10:54):

Now another thing we don’t have to fall back on is the asset itself. So in the event [that] you come up dry on a well, it’s done, you lost. In real estate, you’ve still got the dirt there, you’ve still got the asset, it’s tangible, you can touch it, you can find value of some sort. So that’s another thing where we have the disconnect. So it’s like high return, semi-high reward versus good return, you’ve always got something to fall back on.

Robert Leonard (11:26):

Why is there pressure on Exxon and other big oil companies from governments and activist investors? What is The Greenpath?

Grant Norwood (11:35):

On The Greenpath, everyone’s really pushing towards renewable energy and that I think is a good strategy. I think that long-term it’s going to hurt your everyday man because you’re going to pay more for your power, you’re going to pay more for all of your other commodities as well. Because when you try to replace oil, it goes into so much more than just energy that you’re not really thinking about, “Okay, all the fibers in my clothes, they need petroleum.” So everything from clothes to building materials to plastics, everything in our everyday lives gets more expensive. So when you make the companies like Exxon kind of make their big cuts, then what you’re doing is you’re taking the power out of the free market and you’re putting it in the hands of these state-run companies in the Middle East and South America and a few other places. So you’re giving them the control of the price. So what it’s actually going to do is it’s going to hurt your consumer.

Grant Norwood (12:42):

I’m not going to try to get political on whether or not climate change is real, but I will say that human flourishing is important and until we find a replacement for plastics, glass, everyday household items, we don’t have an alternative and would caution against people supporting that before you have that alternative because what you’re going to do is take these companies that kind of keep prices from going haywire, you’re going to take their ability away to produce this commodity and it’s going to hurt everything down the line as well. So I think that green energy is great, I think that we need it, I think that oil gets more expensive to produce after you get more and more of the low-hanging fruit. So an all-in energy strategy, take some of the load off of oil, give an alternative because we need it for other things. I mean that switch may never happen. Renewable energy still only makes up 3% of the energy mix, and you would have thought from the last 36 months to the present, it would have made huge jumps with all the new capacities being brought online. But all it’s really done is kept up with the increase in demand and I would say that we’re throwing just about everything we’ve got at it now so until there’s a viable solution, I would caution against it, and maybe even flip the script a little bit and say we do need it.

Robert Leonard (14:14):

What is the impact going to be and how is it going to impact the industry? How does it impact you specifically with what you’re doing?

Grant Norwood (14:22):

Really it doesn’t impact me at all. Like I said before the show, when oil was at 30 last year, we were still drilling. A lot of people need 45 to 55 per barrel just to break even. So it doesn’t affect me personally at all. But I will say that there are a couple of million families, where they have less than higher education, that live great lives that are employed directly by my industry. I think if the green energy industry can find a place for those people to work it would be great. It really impacts the people that work for the public companies, us smaller operators, we can’t compete with their salaries, pensions, benefits, because we just don’t have that scale. So it’s going to affect them because they’re going to have to humble themselves and accept what we can offer or hopefully green energy is going to have a place for them and I think in some cases it does.

Grant Norwood (15:19):

So where I started out picking up leases, doing [inaudible 00:15:24], helping landowners, they call that a landman. They’re going to need that to build these wind farms and these solar farms as well. So I mean I’m glad that there’s going to be a replacement in the jobs market that’s hopefully at least semi-equal. Because it’s hard to tell somebody that, “Hey, what you do for a living, it hurts this or that, so you’ve got to find another way to support yourself.” As I said a second ago, not everyone that’s making good money, supporting their families, and living the middle-class life has higher education. So it’s going to put a hindrance on their lifestyle.

Robert Leonard (16:02):

Are you worried, just generally speaking, outside of just The Greenpath, when we think of Tesla and SolarCity and all these other popular green energy, solar energy type companies, the move to electric vehicles. You hear a lot of countries are even saying, “We want all of our vehicles to be electric by 2025,” or whatever the case is. There are manufacturers that are going and saying, “By this date, we’re only going to have electric vehicles.” Do these types of trends and things like that worry you or are you not so much concerned because you know oil and gas are in so many products, even of those vehicles that are electric, you still need oil in the rubber for the wheels and things like that? How do you think about this overall as somebody involved in the industry as a business owner?

Grant Norwood (16:47):

I mean, to be honest, I would say that there’s a lot of chatter about this in my industry because it’s so mainstream that amongst colleagues, they almost have to say it’s not possible to build themselves up and not feel bad about it. I think that the ones that are doing so almost believe it is possible, or they wouldn’t be going, “Oh yeah, there’s no way, there’s no way.” I know there’s no way. I know there’s no way so I rarely bring it up and that’s mainly because it goes into so many other products. You take big oil and you start flipping their boards over to where they’re not funding new big projects and you cut out 25% of the world’s supply and you take very light-duty cars and trucks off the road and you demand 15%. There’s still a deficit. The price of oil will still go up. It will still get used so I mean everything, if everyone drove a Tesla tomorrow, you’d see demand go down 15%, they keep pushing on these boards to cut out spending on new projects, you’re going to see supply drop a lot more than you’ll see demand drop, so I’m not worried about it in the slightest.

Grant Norwood (18:07):

One thing that concerns me and maybe a few other Texans is we had that crazy freeze in February and they’re telling you unplug your electric car. So in the event that’s all you have to drive and you can’t charge it and we were all kind of stuck at home for about two weeks, there’s things to be concerned with not having something that’s reliable. I guess the main thing to take away from oil and gas and why we need it is the word reliable. Come hell or high water, you can use it, it will work in almost all conditions and you can’t say the same for the alternative. So I’m honestly not worried about it.

Robert Leonard (18:50):

Like stock prices, no one can accurately predict the prices of commodities. But if you had a crystal ball and you could see into the future, where do you think oil prices will end [in] 2021? Why are industry experts expecting triple-digit prices by the end of 2021?

Grant Norwood (19:07):

Well right now, we are seeing our inventories drop anywhere between four to eight million barrels per week. We’re going on eight weeks of that. So we’re at a deficit now, today when we’re recording this, we’re two days after OPEC decided that we’re going to increase production by 400,000 barrels each month until we reach four million barrels and I think maybe that will keep the lid on it so we don’t see $100.00 oil. My call for the end of 2021 is going to be somewhere between $65.00 and $80.00. I know that’s a wide range, but there are so many factors that I really think it’s there, other than the fact if the experts are saying it, I like to be a contrarian and kind of go, “Okay, well if they’re predicting that, maybe people will start spending more on development and hey, what’s that going to do? It’s going to put more supply out there.” So I really think that [the] $65.00 to $80.00 range is where I’d place my money.

Robert Leonard (20:10):

What is really causing all the volatility with oil prices over the last few years and even more recently?

Grant Norwood (20:17):

I mean it’s always supply and demand. There’s so much political risk and it’s like … Certain countries’ oil goes to certain places. So if you have a bombing in the Middle East and they are supplying Country X or Country Y, now that oil’s got to come from somewhere else. Maybe it’s the United States, so you see that gap between Brent and WTI close for a little bit. It’s really so many factors involved. Like obviously the pandemic, no one was traveling. Air travel was down. Air travel makes up a tremendous amount of demand. But at the same time, you had so many people using masks, gloves, more medicines, a lot of precautions, and that all takes oil. There’s no telling how much more oil would have dropped if disposables didn’t go from 3% of the demand mix all the way up to 9%. Like it’s not one factor or another. It’s just the market as a whole, what direction things are going, if we’re having any tensions between two countries, if there are any sanctions. Right now if they were to lift the sanctions with Iran, you’d see oil probably drop-down to let’s call it $50.00 a barrel only because that’s about four million barrels a day off the market. OPEC’s going to slowly and gradually bring another four million barrels back.

Grant Norwood (21:40):

That’s the entire deficit, and to me and some others, that $50.00 mark is a balanced market. We’re off balance right now today, we’ve had a slight drop down to $67.00, where on Friday last week, we were at $73.00. So just that little [news 00:22:02], now watch, you’re going to have one more week of inventory numbers where we drop inventory numbers, we’re already below the five-year average for what we have in our petroleum reserve. One more week of five million barrel deficit, that little news, it will get washed out and we’ll be back above 70.

Robert Leonard (22:20):

Not knowing a lot about oil, I mean I admit I’m not an expert by any means, my guess would be that your biggest concern would be Tesla and electric vehicles and things like that. You’ve talked about you’re not really worried about that. So what is your biggest concern? What do you worry about in this industry?

Grant Norwood (22:40):

As far as an alternative coming up and competing with us or just as a whole?

Robert Leonard (22:46):

It doesn’t necessarily have to be an alternative. But it could be anything. When you look at your business, what stresses you out? What worries you? When you think about the oil and gas model that you’re using, what is a risk for you that you stress about?

Grant Norwood (22:58):

I mean so we’re not going to be dealing with shareholders saying, “Hey, we should move away from oil or anything like that.” But the political environment could shift. Where we are primarily in Texas or the Illinois Basin, everything is in our favor. But maybe a few elections later, it’s not and we have to deal with what they have to deal with in Colorado and New Mexico where you have to be so far from any dwelling or structure that you might have 20,000 acres that you plan to drill 80 wells on and they pass one rule and your 80 well inventory cuts down to 15, and you paid for it like you were going to be able to drill 80 locations. So I think for me, not worried about demand, not really worried about capital or anything like that. It’s really just going to be political risk.

Robert Leonard (23:50):

If we do hit the price levels you think we’ll see, or the triple digits that industry experts expect, what are the indirect effects of that on the listeners’ everyday life? Walk us through the two different scenarios. So if we hit your prices versus if we hit the experts’ prices, how does that impact listeners’ everyday life?

Grant Norwood (24:10):

I mean I hope I’m right because, in some people’s opinion, we are very much recovering from COVID. When you look at the price of homes, when you look at the stock market, it doesn’t seem like it so much. But there are a lot of people that are recovering and the price of goods, transporting those goods all the way down the value chain. Who wants to recover when the cost of everything is inflated? I would hate for it to go to triple digits for one, transportation, if you don’t have your Tesla, obviously you’re going to be paying in Texas $4.00 at the pump, where you are maybe $5.00, $5.50. I don’t think anybody likes that and maybe you’re a high earner and it doesn’t really affect you, but [for] most of the people around you it does.

Grant Norwood (24:59):

So I’m really hoping that we don’t hit triple digits. From an operational standpoint, we do just fine. We make great profits anywhere between $40.00 and $60.00 a barrel and it keeps a lot of the riffraff out of the industry. There’s like a feeding frenzy, it’s kind of crazy. People lose their minds when you have $100.00 oil. You have a lot of people that think this is easy, that there’s not a ton of risk to consider to get in and really break their pick. At $100.00 oil, you’d think they’d do that at a lower price because there’s not as much take home when you find it. But there’s just such a desire to drill that a lot of mistakes get made at $100.00 oil. The competition for services regarding the operations, there’s a lot of people vying for them. So for me, I’d much rather have a $60.00 environment. I can get my wells drilled in a timely manner. We make great money off our wells. Everything just hums, prices at the pump are good, prices of all goods, because they all are hauled by truck, rail, it doesn’t matter. The price of everything is lower and that’s good for everybody. I’m not one of these guys that just wants to pad their pocket at the expense of everyone else. So I definitely don’t want to see triple digits.

Robert Leonard (26:24):

I mentioned that I’m not an expert by any means but I know that you drill differently than the conventional way. You use horizontal drilling. Explain to us what horizontal drilling is and how it differs from conventional drilling processes.

Grant Norwood (26:39):

You want to think of beneath the surface as like a layer cake. You’re going through these different layers of sediments. You’ve got dolomites, you’ve got limestones, you’ve got shales, you’ve got sands. So as you go through them, conventional drilling, they are looking for sands, limes, dolomites, and things with a high permeability. That’s the ability for things to flow through it. So take a bottle of water, pour it on the beach, it’s going to soak up and dry fast. That’s high permeability. Pour it on the concrete or on your sidewalk, just anywhere, solid and it’s going to sit there. So most of the time conventional drilling, you’re going into something like I made the reference to on the beach. It’s soft, it’s permeable, it flows really easily. So you only really have to drill vertically into it. Sometimes you use different simulation measures but nothing too dramatic. With what we do, our formations are tight like concrete. So we’ll drill down to them, we’ll kick-off, a directional service comes in and takes over and keeps our wellbore within a formation as they drill horizontally.

Grant Norwood (27:46):

So we’re drilling in this tight formation. We do frack. That’s the big bad word we’ll get into in a second. But we do frack. So we drill horizontally through it and then we frack the well. So fracking, you’re taking sand, the chemical in it is what you use in your laundry detergent, you still wear those clothes, it’s not going to hurt you, and we take water. So what that does is these hydraulic pumps, there’s no dynamite or anything like that. These hydraulics pump the sand out into this formation that’s like a very thick oil-saturated sponge that needs to be broken up. Well, it breaks under this pressure and it frees the hydrocarbons. So it’s not dangerous or anything, it’s unconventional, it’s kind of what people refer to it as, and it’s just because it’s … I wouldn’t say it’s new, but it hasn’t been mainstream for a very long time. I mean we’re probably going on about 16, 17 years where the industry as a whole is more focused on unconventional horizontal drilling more so than they are conventional drilling, at least here in the lower 48. It’s different because they don’t have to get that desperate in the Middle East, they have it very good, they don’t have to drill as deep, there’s plenty of oil, and they’ve got a lot of inventory. But here in the States, we have to get a little bit more creative.

Grant Norwood (29:05):

But once you establish your cookie-cutter pattern with good economics, the good thing about the way I do it is it works over and over and over again. Almost to the point of about a 95% success rate, and that’s comparing to a 60% success rate when you talk about a conventional well. The geologist does the best job he can, we have seismic, we have all kinds of different imaging and all that, but at the end of the day, you can’t help where the dinosaurs laid down and died. But when you’re doing these unconventional horizontal measures, you’re going into things that are like blanket formations that cover large stratigraphical areas. So your risk of loss is much lower.

Robert Leonard (29:50):

What is the risk-reward of horizontal drilling versus conventional drilling? How does this impact the production and lifespan?

Grant Norwood (29:59):

We get there and we frack, right? So we’re creating that permeability that’s missing. So what does that mean? It’s like shaking up a soda can and poking a hole into it. It’s all going to shoot out fast. Now when you’ve got that natural permeability and it’s a decent reservoir, it’s going to keep going and keep going. Does it have that oomph in the beginning? No, not as much. But it’s steady for a long time. So you go into a good conventional well, you’re hoping to see your funds back in 24 months and then over the next 15 years, in most people’s books, they’re looking for a four to six, seven, eight, nine, ten x.

Grant Norwood (30:42):

It really just depends on their strategy, what they got the acreage for, if it’s part of a bigger development. But when you’re going horizontal, you want to speed that value up, your returns that you’re aiming for are the same, but you’re going to get it all in a short period of time. You’re still going to have returns. You’re still going to have a well that’s still going to be flowing for the same period of time. But you’re going to have that steep drop-off in your first several years and then the idea is you drill the well, you get your capital back several times, you’ve still got a well sending you money, but now you can go drill two new ones with the house’s money. So that’s the two strategies. One is long and steady, one is much quicker, but it dies out faster.

Robert Leonard (31:29):

In a real estate syndication, we have to vet the sponsor, meaning the person putting together the deal as well as the deal itself. How does someone who is interested in investing in oil go about this? Comparing this to real estate, instead of a syndicator, how does the investor find the right oil driller, and instead of the property, how does the investor find the right well?

Grant Norwood (31:53):

So really if you get with the right company, they’re not going to put you in the wrong well. So how do you find the right company? I mean I would say consult a consultant, speak with one. As soon as you put the word out or get on any of these forums or reach out to companies, they’re going to be responsive, they’ll let you know what their plans are, what they have coming. I would get a third party to give you an opinion on a project. So many things look flashy and if you don’t have any experience in that area or their experience is limited or if they think that everything [inaudible 00:32:34] is great but it may or may not be. I mean I would consult an expert honestly. Because you can make a tremendous amount of money in this business or you can make a few bad decisions and lose a tremendous amount of money in this business. You just want to mitigate your risk.

Grant Norwood (32:49):

So obviously there’s the need to check the person out. If they’re in Texas, it’s very easy to get records of what they’ve done, what their wells are like, and compare their pro formas to their actual results. One place you could go to is The Railroad Commission. If you’ve never been on it, playing with that site for about an hour, you could probably learn to navigate it pretty well. Oklahoma, you have the Oklahoma Corporation Commission. Most states have some form of it. I’d say that outside of Texas and Oklahoma, you’re going to wind up having delayed data in other places. It’s not as up to speed, so you might be able to pull everything as recent as 2018 in let’s say Kansas just for an example.

Grant Norwood (33:38):

So if their proforma is showing you x and you’re wanting to go, “Okay, let’s see how many times they’ve done this successfully.” You’re working with 2018 before, hopefully, their luck has been that consistent. Maybe in ’19 and ’20 they did what they’re showing you, so it’s a little bit harder to verify, and a third party can reasonably tell you if they’re overestimating. I mean if you had my LinkedIn and the people I’m connected to, you’ll probably see reservoir engineers, some kind of geologist. You’ll find places to consult and you’d be surprised at how open people would be to helping you and if you’re considering a $100,000.00 investment, what is it to pay a guy $500.00 to look at something for a couple of hours and give you some good feedback? Then you can take that feedback to the company, see what their response is. If it’s negative from the consultant, and base your decision on that.

Grant Norwood (34:36):

I do think it’s worth it to whoever might be listening or considering this, just because like I ran through the returns. I know us millennials, we’ve had a good run in the market. We’ve got cryptos, we’ve got all these things, but money historically doesn’t work like that. If you’re beating the market which some people consider that anywhere between six, eight percent a year. You’re doing phenomenal, and if you can get the right oil deal and you can do twice that, each and every month, even if it only lasts for two or three years, I mean you’ve done what no one else has been able to do and it’s very lucrative so you don’t want to miss out on those opportunities and it’s worth the little bit of research to make sure you get with the right company.

Robert Leonard (35:21):

One concern that I personally have with oil is the potential involvement of governments, and I guess you could define that as political risk, which is what you said is probably one of the biggest things that stress you out. Now I suppose we could see this in any industry, even in the most popular industry right now which I’d argue is tech. But how does government involvement in oil production affect the success and future development of domestic oil production? How does it affect the price of energy and basic materials?

Grant Norwood (35:53):

It’s the transportation of those materials, it’s the fabrication of those materials. Everything along the way is affected. I mean if it costs a guy more to get to work, it costs him more to run his chainsaw or his lumberyard or whatever, it’s going to affect the price of that lumber. They fabricate that steel, the price of coal, whenever you’re making steel, it goes up. They’ve got to transport it whether it’s by ship, rail, or truck. I mean when it costs more for transportation and we’re only considering everybody driving a Tesla car, maybe that new truck, but we’re not considering 18-wheelers, we’re not considering ships, we’re not considering planes, we’re not considering anything outside of light-duty vehicles. Just all along the way, it runs your costs up. So just your shipping. So the government affecting it, I really have not seen even in the worst of political climates, like anyone, once a well is established, disturbing it. So you might experience some difficulties doing new developments, but once the well is there you’re fine.

Grant Norwood (37:01):

So the worst thing that somebody like you if you’re considering it could fear is, “Hey, I’m making great returns, this is awesome, I want to keep going, I want to pile more into it,” and the opportunity goes away to get more of it. So do more drilling. Expand your operation. You could get cut off on that but your investment so long as it’s done with is secure. They’re not going to say, “Hey, you need to shut that well off, shut that well in. We need you to get rid of it.” They might say, “Hey, you can’t do anymore.” If it’s a long-term project, I would make sure that if for whatever reason, before they finish, they can’t complete it, that they’re not going to gouge you for syndication costs when they have to return your funds. That’s one thing to consider. So New Mexico is a great place to drill. They’ve had some hiccups with permitting and stuff. If somebody puts everything in place, you participate with them and hey, they get told, “Nope. Can’t do it.” Make sure that what portion of this is going towards syndication costs in the event that you can’t come through and complete the development. That’s really your only political risk is not getting to do more. In California, there are tons of wells. I wouldn’t want to try to drill one now, but I’d love to own the ones that are already there.

Robert Leonard (38:22):

To keep comparing real estate to these oil deals that you do, I want to talk about taxes and I know neither of us is a CPA or a tax professional, but just from a high level, tax benefits are one of the main reasons that people like real estate. It’s not the only one but it’s very commonly one of the very first reasons that people mention. So what tax benefits and incentives are available when someone is investing in an oil deal like what you do? How is it similar and how is it different from real estate?

Grant Norwood (38:51):

So if you drill a brand new well, you have tangible costs and intangible costs. So the tangibles are going to be the surface equipment, the things you can pull out of the hull, and that can all be salvaged. The intangible costs, that’s the man-hours, that’s going to be your rentals of the equipment. Basically your cost to lease the surface, build the roads, all the things you can get any value for long after the wells plug. They let you write off 100% of that the first year against all active or [inaudible 00:39:25] income. The stuff you can touch, the tangible, you either depreciate that over seven years and then you’re 100% written off, or as long as the 2017 Tax Code is in place, you can accelerate that depreciation the first year. So Robert, for example, let’s say you make a half-million dollars this year. You make a $100,000.00 investment into a drilling venture. Your taxable income is now $400,000.00.

Grant Norwood (39:54):

So you basically [inaudible 00:39:57] gave it to charity, and you’re ready to start receiving returns. Now on the income generated, 15% of that is tax-free cash and that’s for depletion allowance. Now you do have these big-time CPAs and they will try to get more than the 15% depletion allowance and they can in some cases, if they can build a case and justify it, they can get 60% of it in that first year but the problem is you forgo that 15% every year following. So for me in case this winds up being a 30, 40, 50-year well, I would just stick with that 15% depletion allowance year after year on the income that the well itself generates. So you’re kind of getting to burn the candle at both ends. So you write off what you spend to get into the project, and then you’re writing off a good portion of what the project generates you.

Grant Norwood (40:53):

Whenever you’re looking at these pro formas, some of them calculate your tax savings, but it’s really hard to do that because I don’t know what your income situation is, so I don’t know what tax bracket, I don’t know what state you’re in, what you’re doing on state versus federal. Like there are a few things I don’t know so I don’t get into it. All I know is that I can tell you where you save and then you can kind of figure in, “Okay, well if I’m paying 30% this year, then that lowers my basis in this investment by 30%. That compounds my return by 30%.” There’s a lot of people that just do it to not have to write as big a check to Uncle Sam. I don’t do it for that, I think that that’s a little bit reckless, but it does help. It is a benefit.

Robert Leonard (41:40):

If I asked 100 different guests this same next question I’d probably get at least 75 different answers if I had to guess, and that’s because there’s a lot of variability in what people believe is right for portfolio allocation and diversification, and it varies from person to person, but in general, what do you see as the right percentage of someone’s portfolio to allocate towards investments in oil?

Grant Norwood (42:05):

Like you said, everyone’s got a different opinion. It really depends on the person and kind of understanding. Do you have like 80% of your portfolio in safe investments and 20% of your portfolio in risky investments? Or are you younger and it’s 50/50? I’m not sure. But of your risk portfolio, I’m going to claim between 20 and 50%. You might be conservative and only want to dip your toe in at the beginning. I like to think that you should get at the right company so you can make it a little bit more worthwhile because once or if this [inaudible 00:42:43] craze and everything else goes away, I mean and you’re just exposed to equities, the turbulence that you can experience if you’re not an experienced trader, you can get beat up real quick in that just like anything else. But unless you just get into a project and completely stub your toe and take a bath on it, you don’t have any other options that are going to return at this rate as fast and as long. So if you’re doing the 80/20 strategy and that 20% is risk, then I guess it works out to somewhere around 10% of your portfolio. But a large portion of what you have in the riskier investments.

Robert Leonard (43:23):

As we get towards the end of the show, I’d like to ask the guest three questions that create an action plan for listeners of this episode for when they’re done with this show. The first question gives listeners something to implement in their life, the second question gives them a resource to go learn from, and the third one gives them a specific action item to take right now. So the first question is, which habit or principle do you follow in your life that has had a big impact on your success that not enough people do but should?

Grant Norwood (43:57):

For me, it’s triangulating opinions. So you get a second opinion, you get a third opinion, and then you find out where they meet. I know I made reference to this in the last show, but I honestly don’t believe I’d be where I am today without it. So yeah, triangulating opinions is going to be the one I stand on.

Robert Leonard (44:16):

What has been the most influential book in your life? It doesn’t necessarily have to be your favorite book, because I think there could be a difference between what’s been influential and what’s your favorite, but more so what has just had the most impact on you?

Grant Norwood (44:30):

Hopefully, you’ll allow me to pick two, but like I said in the last show, Principles by Ray Dalio. There are few things that you can read that will share the wealth of experience and successful experience as that book. He’s learned a lot of lessons for people and if you’ll kind of read it and listen to him, I think you’ll do well. Now a more recent book, I can’t say it’s influenced my whole life because it’s not that old. But A Moral Case for Fossil Fuels really puts a different spin on things. I struggle with, “Hey, I went down this rabbit hole of ‘Are we destroying the planet?’ Is it that bad and why would we do so if it’s so bad?” Then you read that book and it’s a different philosophical light on it’s great for humans to flourish, we shouldn’t feel bad about that, and then also there are so many other things that contribute to the pollution that everyone thinks is exclusively to blame on this industry. So yeah. Principles and A Moral Case for Fossil Fuels.

Robert Leonard (45:34):

For those who … If you’re just listening to the audio version, you can’t tell that I took the Principles book off the shelf behind me, but I held it up so that Grant and I could see. Principles is one of my favorite books as well, I have three books on the bookshelf behind me, Principles is one of them. I hadn’t heard of the second one but it sounds interesting so I’ll have to dive in.

Grant Norwood (45:56):

Yeah, so it’s a great book. It’s written by Alex Epstein. He’s appeared before Congress a lot here recently. Just kind of posing cases for the industry and just recommend him to everybody. Once you listen to him, you get on his YouTube, he’ll debate these different professors that are all about the new green push and all that stuff. They really don’t have anything for him because they can’t back anything up with data, whereas he can and some of it is comical and you feel bad for the other side, but I mean not to get into political things but if you struggle with should I do this based on a moral perspective, then give that book a shot.

Robert Leonard (46:41):

The third part of the action plan is when this episode is over, before the listener quickly jumps to the next podcast queued up in their podcast player, what is one action they should take after listening to this episode that can help them improve their life, career, or business?

Grant Norwood (46:58):

So I guess for life, your loved ones are everything. Keep them close to you, always make time for them. I know if you’re a businessperson and you’re as busy as I am, sometimes that’s hard to do. But you never want to lose that closeness with those people, because in the event this all goes away, those are the ones you’re going to fall back to. In business, always be a good listener. Never stop a man mid-sentence or mid-thought. You might get whatever answer you would have never heard or if you just let him finish. Hopefully, if you’re lucky he goes on a rant and really shows some cards that you can use in the future, who knows. But so many people will really tell you a lot about what’s going on if you just let them finish.

Robert Leonard (47:43):

Before we give a handoff to where people can find you, I’d like to wrap up the show by turning the tables and letting the guest actually ask me a question. So Grant, what question do you have for me?

Grant Norwood (47:54):

Well, I guess Robert, so you’ve heard me on the last episode. You kind of let me go on about the development value yield, how it compares, how it contrasts. I know you’re big into real estate and stuff like that, but do you see this as worthwhile personally?

Robert Leonard (48:11):

So yeah. I do think so. The hardest thing for me, whether it’s oil like we’ve been talking about which I think you’ve done a great job in this episode and the previous episode explaining. But whether it’s oil, whether it’s stocks, whether it’s crypto, whether it’s real estate or even some private equity through crowdfunding that you could invest in, one of the hardest parts about investing for me at least is when I have a dollar, let’s just say I have one dollar. Of these five or six buckets, what is the best bucket to put that dollar in because you can’t just say, “It’s a good investment.” Finding good investments is relatively easy, but finding the best investment of all of your options is very hard. So just because you find a good investment doesn’t mean that it’s great overall because you could have massive opportunity costs, right? Let’s just say you invest in one thing that has a 10% or 15% return. That sounds amazing, but what if you pass up on an opportunity that has 25% returns or higher?

Robert Leonard (49:07):

So it’s hard to decide what to allocate that dollar to and so for me I think you’ve done a great job explaining it. One of the … Not issues, but one of the problems that I have personally with it is Warren Buffett has this idea of only investing in things that you really understand and I don’t think I’m personally in that space where I know enough about it that I personally would be comfortable investing in it. But there are people that I’ve talked to from this show that work in similar industries or they’re engineers or whatever the case is and they know this stuff well and they love it. And so for me, like I’m pretty into let’s just say fitness or motocross. I know a lot about those industries but there are some people who have never even seen a dirt bike in person. It wouldn’t make sense for them to invest in a company that has anything to do with dirt bikes. I think there are people that know a lot about it and it’s within their circle of competence and it’s right for them. For me, I would need to do a little bit more research on actually investing in it before I knew about it.

Robert Leonard (50:09):

It’s the same for stocks. I’ve never owned Exxon, I’ve never owned any sort of oil or gas drillers, I’ve never owned any miners, I’ve never owned any biotech or anything like that because these types of companies, they’re just outside of my circle of competence. So I really think it is a good investment opportunity. I like what you’ve talked about, you’ve done a good job explaining it. I just need to get it within my circle of competence before I actually put any money in it and I’d need to know … For me personally, I can confidently say, “This is the best place for my dollar, and my opportunity costs in other places aren’t as high as they could be if I invested elsewhere.” So that would be my answer to that question.

Grant Norwood (50:46):

Cool. No, I like that. There are so many people that aren’t that prudent where they stick to those principles and they’ll stray, they’ll try just about anything and as much of a blue-chip as you may or may not consider Exxon, for you to not own any of it. I mean that’s principles there.

Robert Leonard (51:04):

The only way I own it is through the S&P 500 or any index that has it. But yeah, other than that, I’m pretty strict with my principles in my investments. Now let me add one caveat and that is I might put a little bit of money into something like this. Like I believe in bitcoin personally. If we were to draw a circle to actually represent my circle of competency, I would say it’s like on the edge. Like wherever that circle ends, it’s very close to the edge. Like I don’t know a lot about it at all. It’s not in the middle of my circle of competency but it’s enough where I say, “Okay, I’ll put a little bit of money into it. That way if I’m wrong or I didn’t understand something right and I lose it, it’s okay.” That’s kind of how I feel about something like this with oil. I would probably be okay with putting a little bit of money into it without knowing as much as I would for some of my other investments. But if I was going to put in significant capital, it would really need to be well into my circle of competency. So yeah, I mean you’re right, I am very principled and I’m very strict and I’m hoping it will lead to success.

Grant Norwood (52:04):

Yeah no, I think that will carry you far. I mean sticking to your guns is something that few people do, and like you said about your bitcoin strategy like I’ll put a little bit, I’ll watch it, I’ll learn as I go. I mean I was following your Instagram and did the same thing you did. So that’s why I had some too because I was like, “Okay, this makes sense. I’ll do it with him.” But yeah, I mean it’s one of those things where how much time do you have to learn this all before making a decision. Some people have a ton, some people don’t have very much at all, and maybe coming up with a digestible amount that you’re in a sense, you’re not taking a flyer in the sense that I’m taking the flyer. You’re taking the flyer on me and taking that flyer with a digestible amount that, “Hey, if it all goes south and you don’t see anything, you’re not going to [inaudible 00:52:53],” even one dollar is never anything you want to lose. But maybe that is right for you and most others. I’m going to start here. If it’s anything like it’s supposed to be, maybe there are two dollars next time, who knows?

Grant Norwood (53:06):

But along the way, and I’m sure you’ve heard this from some of the guys that got in the last show, the amount of communication about what happens out in the field is weekly and I mean somebody that doesn’t know anything about oil will probably feel like they can drill their own well by the time … If they actually read everything I send out as far as updates. So no one tells me it’s too much, they might be thinking that, but I haven’t heard that yet. But I give them the play-by-play each and every week. Sometimes I get things done faster than I expect. More often than not it takes a little bit longer than I’d like it to. But you know each and every step of what I’m doing and if you got that little token of experimentation in there and you’re following it every week, you’ll know what’s going on, what we’re capable of, or you’ll go, “Huh.” You got two deals, I actually think that one’s better. You’re going to see value in it that I don’t see. Otherwise, we drive the same car and live in the same house. Once you kind of know a little bit about it, you’ll see more value in one deal over the other and I think with what I give my people each week, they’ve got that ability to discern between one deal or another.

Robert Leonard (54:25):

You mentioned something very briefly at the beginning of that response that I think is important, and you mentioned that people are betting on you. If you don’t know a ton about oil, you’re more betting on you than you are the business, and I really like that idea, because you hear a lot of venture capitalists and a lot of private equity companies that say they’re betting on the jockey, not the horse. You’ve heard people say, “I don’t care what this guy is building.” Not necessarily you but somebody in general. “I don’t care what he’s building. I’m going to invest in this guy because I believe in him.” So that’s another kind of piece as to how … If I was going to consider an investment in oil, there’s probably zero chance that I would do it with anybody but you because I don’t know them. I don’t have a relationship with them. I don’t know anything about them and I don’t really know the industry that well, I don’t want to go into researching and them and do their backgrounds and all that. But you, you and I already have a bit of a relationship. I know the reputation that you have. I know those types of things. I would feel a little bit more comfortable going into something that I don’t know a ton about with somebody that I know is a good operator, that I could bet on that jockey.

Robert Leonard (55:27):

So that’s like a little bit different than the stock market where you can’t really do that per se. You’re betting on a company. I mean you could bet on the management team, but overall, it’s a little bit different dynamic. So that is something that I would consider if I was going to go into the oil space. But Grant, where can the audience go to connect with you and find you on the internet, your social media, your website, where is the best place to connect with you?

Grant Norwood (55:49):

The website is very easy. Instagram is very easy. I’m trying to … You’re not going to find a lot of Instagrams where they focus on oil and gas, so I’m really trying to develop that and put my millennial twist to it and kind of keep up with other Instagrammers in a sense for my industry in specific. So it’s not just going to be like, “Hey, this is mine, this is what you should do.” I try to put a lot of informational stuff out there so you can learn along the way. Because just like what you were saying about you’re betting on me, I might just be your stepping stone. I’m the guy you trust and I’m the guy that delivered for you that first time. But through doing a deal with me, you learn enough about the business that you found somebody better than me. Because you know what a good deal or a bad deal is. But to not get off subject, yeah. Instagram, Facebook, my website. I have a YouTube page. Those are the best ways to reach me.

Robert Leonard (56:45):

I’ll be sure to put a link to all of Grant’s resources and anything else that we talked about in the show, in the show notes below for anybody that’s interested. Grant, thanks for joining me again.

Grant Norwood (56:55):

I appreciate it, Robert. Thank you.

Robert Leonard (56:57):

All right, guys. That’s all I have for this week’s episode of Real Estate Investing. I’ll see you again next week.

Outro (57:02):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about bitcoin, and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.