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you're listening to tip in today's episode i chat with grant norwood to talk about the oil and gas industry and why investors should consider this potentially lucrative space grant is the president of norwood energy corporation a texas-based oil and gas exploration company oil and gas is another one of those industries that doesn't exactly come as top of mind to most investors especially most of us millennial investors however it is a space that has seen advancements in the last few years and grant has been at the forefront of those changes even as there are risks involved it can be lucrative given the right strategy and i'm happy to have grant today to give us a look into this so without further delay let's get into this week's episode with grant norwood you're listening to millennial investing by the investors podcast network where your host robert leonard interviews successful entrepreneurs business leaders and investors to help educate and inspire the millennial generation [Music] hey everyone welcome to this week's episode of the millennial investing podcast as always i'm your host robert leonard and with me today i have grant norwood welcome to the show grant hey thanks for having me i appreciate it robert i'm excited for the show today since we're going to be talking about a topic that i'm not really an expert in by any means so it should be a great learning experience for me as well as the audience but before we dive into the topics of today's show tell us a bit about yourself and how you got to where you are today so obviously i'm in the oil business i put together drilling projects i help mineral owners sell their mineral interest to bigger companies and get the most money they possibly can for it i had some mentors earlier on in life i had a ranch out in west texas that my family well it was their ranch but i grew up out there and i got to be around oil people because they always wanted to lease it from us to hunt on so i got to know them and i made some contacts early on and then as i grew up and tried to figure out what i was going to do with my life i referred back to those contacts and they brought me in mentored me and i got to learn a lot of things at an early age that i think helped me get to where i am a lot quicker so i've tried to take advantage of that as much as i can and i credit a lot of my success to the people that helped me get here how and why is the oil and gas industry so lucrative yet so inaccessible to everyday investors so that's a great question i guess it's lucrative because 91 of our transportation is still powered by petroleum products five percent biofuels and you wouldn't have biofuels without petroleum products so 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 percent powered by natural gas which is still a petroleum product so it's it's lucrative because it's relevant because we need it and 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's going to pop up but i don't recommend doing business with those companies they're what i would refer to as promoter and 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 i've directly generated most of the time you're going to be paying 200 percent of the cost for 75 of the interest that's just the way it is out there so it's inaccessible to good deals it's not like it's inaccessible altogether but you know you want to get with somebody that's got your best interest at heart and to find that is rare 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 the publicly traded equities that we're familiar with well i guess we would have to cross paths somewhere another and i guess this is how we cross pests but indicate some interest then i would get you some information and if you could make sense of the information then you could jump right in if you couldn't then either myself or a member of my team is going to walk you through it till you feel comfortable enough to make an educated decision and 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 so what exactly is it that we're investing in so 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 and it goes much deeper than that geology is super complicated and i've got it broken down and put into models and things that you know your everyday guy could understand but you actually own interest in the wealth so if you own five percent interest five percent profit goes to you giving ten percent ten percent goes to you so that is actually what you're investing in and now there's wells of all different sorts there's shallow wells there's deep wells there's vertical wells there's horizontal wells that have to be fracked there's old wells that you want to go back into and you feel like hey on the way down they passed a better zone than the one they went down and produced from so we're going to go back up the hole and perforate somewhere along the way down where we feel like there's more oil there's so there's all sorts of wells so that is what exactly you would be investing in and so 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 so we form a new entity for every project a project can be one well a project can be two wells my current project is 10 wells so yeah we created an entity it's direct participation so we act as a general partner you act as the limited partner i guess if i did a really bad job i could all get together and vote me out but 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 so our company has we're at 100 success rate so the last five wells we've drilled have all turned out really well so we are drilling 10 wells and those 10 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 the assets and in the entity and you have rights to the tax benefits you have rights the revenue you actually own that asset but what it allows us to do is act as the general partner meaning that we oversee the day-to-day operations and you as a limited partner just benefit the revenue so what's good about this is you can invest and basically own a piece of a business but it's hands-free so the only work involved for you is writing the check filling out the paperwork sending it off sitting back reading the emails dates 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 but beyond that all you have to do is walk to your mailbox pick up your check and carry it to the bank so that's the benefit to the direct participation structure is we do all the work and you sit back and just collect checks so it's really interesting to hear this parallel because i host two podcasts and one is all about real estate investing and often on 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 lp's and oftentimes we talk about being each one being the gp or being the lp but it sounds like this is very very similar except for investing in a an apartment building that produces cash flow you're investing in a well that produces cash flow and you're essentially still getting that same mailbox money so it's really interesting to draw the parallels between two different assets that are still essentially doing the same thing yeah it's along the same lines i mean our target rates of return are just far above it carries a little bit more risk i'd say than apartment building but the apartment building's still depreciating just like the well's still depleting so i mean you're going to have our leases appreciate the same way you would have the real estate appreciate but what you make from month to month you know you're talking about a return annually that we could probably be monthly when everything's going well so are you actually doing the well drilling yourself are you subbing out that work to another company is that what we're investing in so 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 like can do a better job than us so a lot of times it will be ourself because they do not want to always share in the opportunity at cost and what you get with us that you won't get in other places is more interest for less money now there's set costs for drilling and there's set costs for operating and 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 high basis lower return so yeah 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 the time we do it ourselves so it almost sounds like to me like you're a gc or a general contractor for a construction project but 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 but instead you're creating or building an asset a well and raising money to do that that is correct currently earlier on we pursued smaller opportunities and we funded it completely internally before i was incorporated i funded it myself and many times i've been an investor in the past and it took investing with different companies to kind of really learn what to do and what not to do so i would say in a way it's kind of the same thing we put the money together we go drill the well 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 and you'll always have more opportunity than you do money so it just depends on how big do you want to go so how does investing passively in a deal like this differ from buying just buying easily a publicly traded oil and gas company like exxon mobil or chevron so to compare buying equity in 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 so while we're in the same business you're just taking part in two different things so 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 collect some dividends along the way but those dividends are usually minuscule buy low sell high on a stock you probably do all right but you're also open to any kind of financial trouble that happens to that company and falls out of favor with investors and the price goes down then you lose your money so i guess the thing is you're directly owning an asset that cash flows that's liquid because it cash flows so you have a way out and that cash flow has value 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 so what are you seeing for passive investors returns generally in these types of projects so i said that in reference to real estate investing so you get into a real estate project i've seen where guys have returned as low as one or two percent annually i've seen where they've returned as high as 15 16 or 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 we just turned on a well june 15th the first two weeks that well was online it returned 7.6 of the investment and then you know for the month of july it returned north of 15 just barely north but it was north so what i'm saying is when you consider it a win reach a 10 return on real estate maybe it appreciates three four percent we've done that in months and quite a bit more on certain occasions with returns that can be so strong why aren't more people doing this why isn't this strategy more broadly adopted most of the time companies are charging 100 markup and they're only letting you get 75 percent of the interest after they tax 100 markup and to me that's what you call a bad actor the industry's full of them and it's it's a shame that it is but it's not often that companies are able to do this and 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 the wells that we're hitting and because we're making returns today and i think the price oil today is around 36.30 i mean the kind of returns that we're generating right now companies can't do that at 70 80 a barrel so i guess since other people just can't do it they're struggling just to stay alive right now so i mean typically in west texas oklahoma north dakota those guys need about 40 45 a barrel to break even we just fell below that point and if we stay there for another three four weeks you're going to see them shut wells in because they can't run them at a loss month after month and 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 if they can't create cash flow they can't create a bigger deficit than they already have and so for somebody to invest in this type of deal do they need to be an accredited investor they do now there are certain types of projects where they don't if they buy that asset outright or if they want to buy it where we issue it to them but then they're liable for the liabilities involved and they don't want to be held under the llc then yeah they could purchase interest not being accredited and directly own it but for direct participation yes you do have to be accredited so i would say you know if you don't have a liquid net worth of over a million dollars or you haven't made two hundred thousand dollars a year in the last three years consecutively then maybe one day we'll be able to have this conversation and bring in on something and you'll be satisfied with the results but 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 a blazing you can start out with a minimum position 10 15 20 000 most of my guys are 50 100 000 and up but it's accessible to someone that does not want to just dive in the pool but wants to dip a toe in are the increasing green initiatives and the transition to renewable energy a major risk for the traditional oil and gas industry and their underlying companies and what are these companies doing to prepare for this change you have some companies that are buying in to that idea and then you have companies that aren't like i said earlier 91 percent of transportation is powered by petroleum products all across the board and then five percent that's made up for biofuels that also took petroleum products to create all the way from the planting 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 of solely biofuels alone and then the few percent that electric does make up is still powered by 40 natural gas and that number is even growing so as they retire more coal plants 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 and 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 newsom 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 and i read another article today that they're expecting to have more it's been a hot summer and as the sun going down air conditioners are still running so they couldn't support the grid they retired too many different fossil fuel generated power plants so whether it's natural gas coal or whatever have you 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 and i don't know if that's just because we had a really hot summer over there or you know if that's just a sign of things to come but 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 so if they had it figured out maybe 20 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 nuclear oh it's going to replace everything that's this is it's renewable it doesn't create pollution it's it's the best thing since a slice of bread oil and gas is doomed well then you had chernobyl and a couple other instances where people were like hey we should incorporate that but maybe it's not the um 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 gonna need an all-in energy strategy there's a lot of third world countries trying to catch up with the world third of the world has no power at all another third of the world has power but not enough and then there's our third of the world that has all the power they need so as these other countries and parts of the 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 hands down this is by far the cheapest since june of 2014 when oil was about 115 dollars a bill or so we've seen the price of a barrel of oil drop between 40 and sixty dollars with a low of nineteen dollars as recently as of april 2020. how do these depressed oil prices impact oil companies how does it impact the investments that you're making so i'll start with other oil companies i would say that most of them that set out to put a project in motion when prices were 115 a barrel the last thing they were thinking about was 40 and then yet 19 a barrel when they set out to do it so there's been quite a few bankruptcies this year as a result and you know if you can't make money at forty dollars a barrel and far below that then you're going to be in trouble so 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's economic 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 not only do they give off big bonuses pay fat salaries all across the board but they think it'll never end and then you've got the guys that are what i'd call promoters that fall in love with the idea of oil and gas and they put a company together and they couldn't tell you the first thing about geology they've never been on a rigged 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 they're going oh wow this is a great way to make money so then they jump into stuff and a lot of things get drilled that never should and 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 so i mean us personally if oil's at 12 a barrel we are turning a profit at 18 a barrel we return 100 of the investment and then returns get pretty good north of 30. so we're talking about low prices but people listening to the show may have even heard the term for the quote negative oil prices on other major financial media outlets what does this mean and how can oil have a negative price that was more of a technical mishap with futures contracts expiring you had traders going okay well i'm gonna have to take delivery of this there's nobody to buy this from me i'm gonna 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 and for less than 24 hours you saw the price oil go negative but i don't know if that will happen again i doubt it'll happen again if it does it won't be for very long no matter what we were still using 75 million barrels at the bare bottom per day and that was with all the planes landed 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 so we've talked about how the prices of oil have come down so much and you've even talked about how you'll still be profitable at much lower prices than even today and 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 but i would assume that a very well capitalized financially stable publicly traded company who 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 it's really about location and usually if someone's talking about location in the oil industry they're talking about west texas oklahoma north dakota louisiana but you know 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 so that eats into your margins greatly so if you're producing let's say 300 barrels of oil and 400 barrels of water well you got to truck that water distances that run you about five dollars a barrel and you're making more water than you are oil then you've got to pay two dollars a barrel to dispose of it well there's six dollars a barrel and you're making more water than you are making oil and let's just say average pumper which goes by and checks out on the well every day he's going to run more money in these popular areas service works going to run more money in these popular areas royalties are a big thing that people have to consider so we're drilling we pay landowners a 15 royalty on every barrel that we take out of the ground so we sell a barrel for 50 they get a 15 royalty and west texas these popular areas they're paying at 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 well but you're only taking home 75 and in crazy cases 70 percent 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 so our well cost is about 10 cents on the dollar for not the exact same well but targeting this same kind of formation and what i'm speaking about is horizontal drilling and hydraulic fracturing so they're spending anywhere between 8 and 15 million dollars to drill these wells out in west texas and 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 and we while we have those costs they're just minuscule compared to what they're paying so like i said eleven dollars we're breaking even on returning a profit and twenty dollars that's when we pass the hundred percent rate of return so thirty dollars it gets interesting should we see fifty or sixty dollars again like i said our company records three months and twelve days but a hot spot to us isn't 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 so more oil will get produced on leases than not whenever prices are that high so 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 so i know how it feels to invest in something and it's great at 50 60 70 a barrel and then you wake up the next morning and it's 40 a barrel and 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 when i picked up the phone said hey robert you know we're drilling well out in west texas pioneers drilling next to us eog's drawing next to us man they're making so much oil out here it's gonna be great it'd be so much easier to convince you that when i can show you those big companies out there but i'm not you know 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 a thousand barrel a day well 1200 barrel a day well 1500 barrel a day well but they're not telling you that they're not producing it profitably so i guess that's how we've come to a lot of our conclusions 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 a much lower royalty rate than somebody small like yourself so how is that possible well like i said we're agnostic when it comes to location so 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 so we can put an entire 640 acre drilling unit together for the price are actually less than the price of one acre out of the 640 acres needed in west texas right now the a d market's kind of depressed but you still saw noble get acquired by chevron a couple of weeks ago and i need to check the figures and see what they paid per acre but about 18 months ago that you could just open any oil and gas publication and see the price of land out in west texas to drill on trading hands for anywhere between 25 35 50. back it up about two years and you saw several hundred thousand plus dollar and acre transactions happen and 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 so it's not in as high a demand so they're happy to have us they'd rather us drill on their property than their neighbors so they're 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 so position the royalty owner in is great and if there's not a lot of competition out there and they don't lease to us and give us preferable terms and they stand to not get a well drilled on them at all in west texas people will pay just about any price for those leases and under just about any terms and so many of these companies are hurting because they spend all this money on acreage that they can't even afford to go and drill so they were able to borrow the money for the acreage prices turned the way they turned and now they can't go suck off the teeth a little bit more to get enough money to actually drill a well and if they can't do it within the first three years then their lease expires and they have nothing so it's it's unfortunate what's happened out there just so much money has been given to these companies and chesapeake's a great example so 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 leases expired so where they borrowed all this money because their ceo at the time aubrey mcclendon he never found an area he didn't like he heard there's oil there he thought had even the slightest hunch he was going to lease that property and they didn't have the bandwidth to get out there and drill all the acreage and then a lot of the acres they picked up they really didn't think too hard about they didn't evaluate it well enough natural gas went from ten dollars to mcf down to four dollars mcf and then on down to three and where it sits right now two dollars and forty cents so they you know bought it without the thought in their head that hey these prices today might not last so like i said it was they could have been a little bit more frugal and a little bit more choosy 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 so i found it really interesting and i think a lot of the audience is going to be in a similar position i think they're going to find it really interesting as well and probably haven't thought about it much before so thank you for coming on 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 and where can they connect with you further i would say the oil and gas investor is a great magazine it's called the oil and gas investor but really 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 but 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 and you'll be seeing me there but you can go to my website norwoodenergycorp.com fill out the little thing if you want to get some information directly from me or one of my team members office lines listed you can leave a message if no one picks up but they're probably going to answer ask for me i'll be happy to speak with you there's a lot of different good sources there's 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 buy anything and make any decisions based on what you watch on that show with 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 but it's a lot of fun if you want something a little bit more technical and i i bought these shows both off amazon and other ones boom towners so that's more like day to day field things that 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 boomtowners is a little bit more technical but still far below anything you'll get if you come to me directly so you know if you have interest or you know you want something to diversify your portfolio or just juice 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 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 to learn from so grant thank you so much for that and 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 so take advantage of that if you have a chance and and are extroverted enough to make that phone call grant thanks so much for coming on the show of course robert thanks for having me all right guys that's all i had for this week's episode of millennial investing i'll see you again next week thank you for listening to tip to access our show notes courses or forums go to the investorspodcast.com this show is for entertainment purposes only before making any decisions consult a professional this show is copyrighted by the investors podcast network written permissions must be granted before syndication or rebroadcasting you