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Investing in Oil and Gas in Today’s Market – feat. Grant Norwood

With the steady rise in energy prices, the oil and gas industry has even more profitable opportunities for investors. In this episode, you’ll hear from Bob Fraser and Ben Fraser as they visit with Grant Norwood, President of Norwood Energy Corp, about the current state of the industry, where it’s headed, and demystifying real world investment examples. You’ll understand improvement strategies that are similar to real estate and be more informed when it comes down to investing in the oil and gas industry.

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Investing in Oil and Gas in Today’s Market feat. Grant Norwood

Ben Fraser: Welcome back to the Invest Like a Billionaire Podcast. I am your co-host Ben Fraser joined by fellow co-host.

Bob Fraser: Bob Fraser.

Ben Fraser: And today we’ve got a really great interview. We are talking with Grant Norwood of Norwood Enterprises.

Bob Fraser: Woo. Grant!

Ben Fraser: Grant. Thanks for coming on, man. This has been a long time coming. We’ve been talking with you for a little while and thought it’d be a great time to bring you on.

Grant Norwood: Yeah, thanks for having me.

Ben Fraser: You’re in the oil and gas industry in drilling operations.

Bob Fraser: Oil, as they say, oil.

Grant Norwood: Yeah. yeah. What a great time to be in it too.

Ben Fraser: Yeah. So it’s top of mind for everyone because they’re feeling the pain at the pump. But on the flip side of it as an investor, if you can invest into this market, it’s a great time. We wanted to bring you on and just demystify this industry a little bit.

A lot of our listeners, us included or predominantly, real estate investors, maybe stock market investors. You’ve heard about oil and gas investing. You’ve heard about, seeing people that have been successful with it. You’ve also probably maybe heard some stories of a liar on top of a hole as the saying goes.

Talk a little bit about your background. How did you end up in this space and really excited just to dive in here?

Grant Norwood: Yeah. I mean spending a lot of my childhood in west Texas on a ranch where there were Wells in every direction. It’s also a big hunting area, so we leased to two different oil companies the right to hunt on it. So I grew up around those guys. And I always had an interest in it, but it wasn’t really until I got to college that I met someone that was active in the business that was willing to take me under their wing.

So I spent most of my twenties just aggregating mineral interests for private equity groups. There’s certain thresholds and size of deals that they won’t transact beneath. So whenever. Put those pieces together and build Humpty Dumpty back together again makes it appealing to them. And there’s just a nice arbitrage and doing that legwork on their behalf.

But for the last three years, I’ve been into operations. Met an operator that was active in Louisiana and he was selling out those assets and they were wonderful with a lot of running room, ton of upside. And I’m like, how does anybody leave this behind? That brought us or he informed me about the Illinois basin and.

Some of the discoveries he had made there. And then it made a lot of sense why he would be willing to leave something like that behind to go pursue something a little bit better. So I followed him and I’ve been out there and we’ve been operating and drilling Wells for the last three years. And even through COVID and negative oil prices, obviously you can’t make money at negative oil prices, but it was only down there for 24 hours.

As soon as we broke $20 a barrel. In the black again. And it’s just been climbing ever since. And, I don’t think anybody expected for it to jump all the way up to a hundred dollars a barrel, but if it works at 20, it’s great at a hundred. We’ve had quite a great run and we’ve expanded into some other areas, other states and that’s going really well.

Bob Fraser: So there’s a ton of money to be made. We were looking at an oil field here and. The, available for 3.7 million bucks. And last month, I believe it was $135,000 in profit on a $3.7 million investment. So the money is just nutty and so partly right. It seems come on, is this real?

Is this real? Why isn’t everybody doing this? Is the money real? Are people really making money? And it really works.

Grant Norwood: Yeah, and it’s like anything you buy and sell. If you’ve got access to off market deals, you’re gonna get to buy it a better cash flow. Multiple. Anybody and their brother can jump on energy net and pay a hundred months for the same property we’re buying. And, we’re buying it for somewhere around 28.

So it’s just access to deal flow. That’s it. Spread to the masses and you’re gonna get better numbers, you take a deeper look specifically on the field we’re talking about, and you’re seeing what they’re paying the staff. You’re seeing what they’re paying for hauling and a lot of different services they’re using and you’re going well, I operate right down the street and I’m paying a fraction of that.

What’s the deal? And they’re in Houston. They don’t have boots on the ground out there. When they’re four or five states away and they don’t wanna have their fingers in it, they just want to get a check. They’re leaving a lot on the table.

Bob Fraser: Okay. You started in the land business now for those that aren’t in the old business, you know what that means is you’re basically getting mineral rights and every property owner has mineral rights and they can bifurcate that. So you can bite, you can separate your surface rights from the mineral rights. And then those are sold off. And typically then you have operators who lease those rights and pay royalty interest, and then drill the Wells, pump the oil, deliver the oil, and pay the royalty owner.

So there’s two ways to make money, right in this space or two main ways. One is to own the land and own the mineral rights or own the mineral rights or lease those mineral rights and pump oil. Is that accurate?

Grant Norwood: That’s correct. Yeah. You’re either sitting back and somebody’s developing your minerals or you’re leasing minerals to develop them.

Bob Fraser: And you hope they are. So the mineral ownership is really more of a passive deal. It’s almost like land banking, right? So yeah. So maybe you have a big bunch of acreage on the mineral rights, but you may sit on that. No one may be interested. Someone may be, they may be interested, but then they don’t actually develop it.

And if they don’t develop it, you don’t actually get paid anything. So it’s very passive. It’s more sit back and wait for something good to happen. It can be a good business, certainly.

Grant Norwood: It can.

Bob Fraser: But it’s a different business.

Grant Norwood: I’d just call ’em generational assets, if you will. If you pass ’em down through generations, there’s gonna be certain generations that benefit from ’em more than others. They might come in the fifties and develop a field and then plug it out in the seventies and no one comes back till the present.

There’s two generations there that didn’t see a penny from it, tomorrow’s generation might see it.

Bob Fraser: So for you, what you’ve stepped into, in the last three years, as you said, is oil operations where you develop, you basically buy leases of land and you develop it. So that means either drilling Wells or primarily you’re buying operating interest,

These are actually working Wells that you’re buying off market. And you’re doing value-add play, and all of a sudden, and so you’re actually pumping oil, you’re delivering oil to the refiners and you’re making a buck doing that. And so you’re very much in control of the revenues and expenses, et cetera.

And it’s, so it’s really more of a business and like that.

Grant Norwood: Absolutely. Yeah. You control the maintenance, you control the development time. You control the repairs. It’s really all on your shoulders. You’re not relying on another company to produce those resources for your revenue.

Bob Fraser: Which I love right. Yeah, you’re we’re, you’re taking control of this. Okay. So now here’s what we’ve discovered. Okay. As we’re digging into this space, and Grant is leading us down this path. So you’ve got an oil fund. Let’s just take this $3.7 million oil field. This has been operating for roughly 10 years.

You’ve got an initial group of investors that put someone together, developed, bought this to develop this. And then what happens is this thing over time, they’re all designed to pull money out. And so all the cash goes one way from the oil field to the investors, right? No money goes back into the oil field and after 10 years it gets tired.

This. It needs to be maintained. It needs to be upgraded. It needs to be, there’s always something where it starts slowing down. Then the, and work needs to be done, rework needs to be done on the walls, that kind of thing. But the system is not set up. The financial structure is not set up to do that.

No one wants to write a check. Back, they just want to cash the check. And so what happens is these things end up being underperforming over time. And so what you’re coming in is you’re buying these things off market and at this kind of, if this kind of size, it’s too small for a mom and pop investor and too, or are too big for a mom and pop investor and too small for an institutional investor.

And so you’re able to come in and buy these things off market and then do value add. So talk about it really. Talk about how you do this, how you do the value add play in these, you buy these underperforming under assets and give us some real examples of just a couple of Wells that you’ve been doing.

And some things that you’ve done to fix these things up.

Grant Norwood: Yeah. You brought up a good point, the mom and pops they’re usually under capitalized, so they haven’t been able to spend enough money on the field or like in the river dance situation, the guys are so far away. And so outta touch with operations that they don’t keep a close eye on it.

And they definitely don’t put money back in. So just like our initial field visit. You’re seeing, ’em pull Wells for the first time in 10 years, and then they’re going, oh, I need to lower a pump in this one. I need to raise a pump in that one. And then immediately they’re getting 30, 40 more barrels a day out of the field

Bob Fraser: So it’s just adjusting minor adjustments. And they’re not even doing that.

Grant Norwood: And they’re like, can we reno on that 3.7? I didn’t realize we didn’t know any of this. And it’s just not paying attention to what you have, but Like we talked about, they don’t wanna spend any money on it. They, I don’t know. I guess sometimes people get a little bit lazy or complacent and they don’t actively manage some of the stuff, whether it’s distractions or lack of capital

Bob Fraser: What are some of the things you do to rehab a while? What do you do when? So what happens? It’ll but production just begins dropping right over time. So what happens.

Grant Norwood: So you look at the river dance field, the original engineering report, so that field should make two and a half million barrels. It’s made 700,000. Have they ever done a pump change? No. Have they ever checked fluid levels? Have they ever checked if they’re getting filled up, if they’re scaling the Wells there’s basically the few things you wanna always do with the well is change your pumps out, clean up any kind of build up and scale comes mostly from salt.

Paraffin comes like a wax that’s in higher grades of oil that winds up clogging your perforation. So if you don’t clean those out some well. Needs it every six months, some Wells, it needs it every two years. I can tell you it needs it a lot more frequently than the 10 years, and they started doing that as we started the negotiations process and saw a 30% increase in production.

There’s quite a few more Wells to do that on, but I think we’d be looking at a very different acquisition price if they had done, they would’ve done that before we came on the scene and got a contract signed. It’s just all over the place, and then we look at our Cold Water field.

That one’s not just lack of attention. That’s a lack of capital. They needed a new engine. A new engine. We bought a new one for 10 grand and that went from five barrels a day to 20 barrels a day. That pays for itself in a few weeks.

Bob Fraser: Wow. So it pays for itself, but it still takes 10 grand of capital.

Grant Norwood: And the reason it’s so great at doing it at a hundred dollars oil, obviously, you get a little higher valuation, so you have to pay more, but it’s a lot quicker to pay that $10,000 fix out at a hundred dollars a barrel than it is at $50 a barrel. So then you’ve got improved production. So even when it goes down your production is stronger, so it’s like you can pay out the work you do on the field and prepare yourself for it to go back down and still see great returns.

Bob Fraser: So one of the things you’re seeing too is turned off well, so you’re going into one of these fields we’re looking at, right? There are 21 Wells, I believe. And. In what five or seven of ’em are just turned off. Explain that to me. Why do they turn off Wells? And what do you do? Is it just flipping a switch or what do you do?

It’s probably super complicated. What are some of the scenarios? How do you decide whether a well should be turned on or not? And what do you do?

Grant Norwood: If you see something out of the ordinary with like it’s daily production levels, whether it’s oil, gas, or water, you never know if you have a tubing leak, a casing leak or you parted rods and then say you can’t get a rig at the time. And then you go on without that production for a few months, you get a little bit behind on bills and if you’re not well capitalized, you don’t have the money to go back in there and spend a hundred grand to turn that well, back on that makes 30 or $40,000 a month, it’s people have to sell cars, sell their homes whenever they fall on hard times. It’s no different in this business, and if they’re too spread out and they’re not paying attention to their main profit centers, they let ’em go to the wayside. So a lot of opportunity gets created through these cycles as well.

If something breaks and say oil is $40. Can they afford to fix it and wait eight months to see that capital back instead of four months to see that capital back on the repair? They might not be able to afford to wait. At a certain point they look back and they’ve got 10 of them to fix, and they just, it overwhelms them.

Bob Fraser: So it’s easier. It’s you just to turn it off and, so maybe they know what the problem is, or they don’t know what the problem is, and maybe they know what the problem is, and it’s just more money than they have in their pocket at the moment. So they, Don gotta turn it off or maybe they don’t know what it is and it’s, they don’t have the time or energy to really figure out what’s going on.

Grant Norwood: Correct. Yeah. And that’s what happens in these cycles if it’s a lower commodity price environment and they have a big issue, it’s just easier to shut it in, then spend the money.

Bob Fraser: Just turn it off and wait. So what are you gonna do to turn these walls on? What is your process to go on and figure out, what you really try and diagnose what the issue is, and then figure out if it’s gonna be economical or what’s your strategy.

Grant Norwood: Correct. Yeah. You go figure out what’s wrong. You get quotes on the work to get it done. You get quotes on the parts that need to be replaced, and then you go, okay what do I assume this production comes back at? And how long till I see a return on that capital?

Bob Fraser: It’s just a value add play, right? It’s like any value add, play, it’s your cost and benefit you do the analysis. So you just have a team that comes in, does this, and puts your best geological brains on your best engineering brains. You get, it’s not rocket science, and

Grant Norwood: That’s all it is.

Bob Fraser: Bring this in.

Grant Norwood: Yeah. It’s not, and there’s different situations. People sell valuable things. Like with the cold water field, the man died two years ago and the kids tried to figure out what all this stuff was and how it worked and what they can do to best operate it. And they finally gave up and sold it to us. And then we’ve been doing a good job with it. It’s a field drilled in the nineties.

Ben Fraser: One of the things I love about this is as I’ve started to learn a little bit more about it is my perception of oil and gas investing, big capital intensive projects, offshore drilling rigs or, these big, well capitalized companies doing drilling.

And that’s what I thought oil and gas was in my mind. But learning that you can go and buy producing fields that are actually bumping actually producing. Barrels of oil right now, and then going and finding these little ways to increase the production by very simple fixes is pretty incredible.

Bob Fraser: It’s very low risk. These are producing wells.

So cool. And now you do see with oil typically, you’ll see when you first drill it produces generally more, more productively, and then over time it decreases. So how do you navigate that? How do you mitigate that?

Grant Norwood: It’s it, you look at it and obviously you have flush production when a Well’s brand new, but you look at the cumulative expectations. If I’m gonna drill a million dollar well, and cumulatively, we’re hoping the well produces. Let’s call it. 80,000 barrels. You look at the decline curves of the surrounding Wells and you build out how fast you see your capital back, what kind of maintenance you need to plan on in what years and how to most efficiently produce that 80,000 barrels as quickly as you can, and then you look at your numbers.

So 80,000 barrels in today’s dollars is worth $8 million. The landowner typically receives anywhere around let’s call it a fifth of the revenue. So you’re, let’s say $1.6 million. You’re probably gonna have $4,000-$5,000 a month in operating costs over anywhere between 60 to a 120 month period.

And you just factor in your economics and when you get down to it, if you look at it and go, okay, over, let’s say the first five years, we think we’re gonna recover 60% of that. So if we recover, give or take 50,000 barrels in those initial years, and we receive a three to one on our capital, and then we’ve got another 40% of the production still left to come to us.

Then it’s just an annuity on steroids, but you’ve already made your money. So that’s how you get into evaluating these things. So it’s like certain fields become more economic in a pricing environment like this. Obviously you wouldn’t wanna spend a million dollars to drill a well to make 80,000 barrels.

If we were back at $20 oil. Because you’re barely breaking even, but at a hundred dollars a barrel that same 80,000 barrels is very appealing and you look at the market and you go, okay I think we’re gonna be in this pricing environment for another 18 months. I get capital back in 12. So I’m looking at somewhere around 180% return before I just make not no money or not uneconomic, but a little bit less.

But your money’s been made at that point.

Bob Fraser: For declining, how do you decide whether to rehab it or cap it right or frack it? 

Grant Norwood: You just pull a calculator out once you get your bids in, you go, okay. What was the well making before? What did the original reserve report say that was recoverable out of that? And then over what time period will I recover those funds? And then is it worth the spend.

Bob Fraser: Oh, okay. So the original reserve report says maybe like you said, there’s a hundred thousand barrels that this should be recoverable. And you look over the history of this and you generally have really good data. And you say gosh, this only it was supposed to be a hundred, even only pulled 20 out.

So you assume that there’s another 80 there and it’s worth rehabbing. And so now let’s go figure out, wait a minute, what’s wrong with this? How do we get that oil out of the ground? Versus if there’s a hundred thousand you’ve pulled out 70, it’s probably you’re, it’s not worth it.

There’s, it’s declining because it’s just declining. There’s the oil’s been pumped out.

Grant Norwood: Absolutely. Yeah. If there’s a discrepancy of 80,000 barrels out of the initial expectations and you’ve found the reservoir you’re looking for, you’ve mapped it, it has the extent. Absolutely. Most of the fixes on an established in the worst of cases, aren’t gonna run you more than a hundred, 150,000, and that pays out real quick.

When you think you have 80,000 barrels left to go, and even if you do get to the 30,000 barrels, you just gotta go at what rate am I gonna produce that at? If it’s gonna take you three years back to, or three years to see that rehab money back, you probably will leave it sitting there,

And you still get value for that when you go to. So you might let somebody else wait that three years after you move on to capture that value, cuz it’s worth more just sitting on the books than it is producing cuz of how long it takes you to get the capital back to do the work.

Bob Fraser: Do you frack?

Grant Norwood: Absolutely

Bob Fraser: So fracking is like this really divisive kind of political, scientific thing, so what is fracking and is it bad? And does it work? Talk about fracking.

Grant Norwood: I don’t believe it’s bad and a lot of people disagree, but it’s sand and water. Under hydraulic pressure that goes out into a reservoir to add permeability and speed up recoveries and or recover oil where the rock had previously been too tight to flow. And if it wasn’t for fracking you know before the shale revolution, the world was considered to be running out of oil.

This was, before fracking, that was the last time we were in a pricing environment like this and Technically brought prices down through this new technology. And anytime you shake up the industry like that, there’s gonna be all kinds of critics, but it just comes from a lack of information or the unwillingness to accept something that’s actually good and helps, but it unlocked.

A whole lot of resources. We use it both conventionally and unconventionally, which conventionally means vertical and traditional reservoirs. Unconventionally is actually when you drill horizontal through, what’s considered to be source rock. So think of conventional you’re drilling into mostly a sand reservoir.

So it flows easy. You frack those less frequently than you would into a shale reservoir. Think of that. Thick like concrete and you’re boing a hole right through it. And you’re trying to board as long as you can. So you have as much contact with it as possible. And then you have to go in there and frack it because it doesn’t just flow.

Pour a glass of water onto the street corner. And it’s gonna sit there, you pour it on the beach. It’s gonna soak up.

Bob Fraser: So summers of ours are very much like sand. And so the oil flows easily, but some are not, they’re very tight. So like concrete or clay or something. And so what fracking is then is you put a giant pump on top of this wall that it’s super high pressure, right? Like 2200 pounds a square inch or something like that, is it.

And then you pump water and sand in there. And it basically fractures the rock, like creates fractures. And then the sand gets in there. And the sand keeps it porous. And so create the   designed to create permeability and flow where the oil can get out. Is that roughly accurate?

Grant Norwood: Absolutely right. Yeah. If we’re still taking that concrete metaphor, you’re pumping sand into it so that it actually has the ability to float.

Bob Fraser: Gotcha. And so the critics say basically, it’s messing up the water tables and all that, but you’re generally below the water table, when you’re doing.

Grant Norwood: Far below it. Yes. Far below it. And like when we drill our Wells, you’ll see, you set what they call surface casing, and that goes most of the time, 500 feet below any known water table for that area. And the state comes out, tells you where it needs to be. It’s a very safe process,

Bob Fraser: So it’s all environmentally responsible and clean.

Grant Norwood: Right.

We’re a mile away. If you’re looking into the earth, we’re a mile below any water table for anything that we’re actively pursuing. So there’s so much separation there. There, it. It’s isolated from each other. That hadn’t really been any of the issue. And there’s been like in Oklahoma, they’ve got some issues with water disposal, but it’s because they’re disposing of so much water into certain zones that are prone to earthquakes.

It has nothing to do with fracking. The disposal: that’s more of an issue than the fracking, but people don’t look into the issue enough to know which one is, which it’s just fracking’s and easy targets, cuz it’s so prevalent and so common in today’s oil and gas industry.

Bob Fraser: So has fracking worked in your experience? You ever fracked a well, and give us an example of something where, what it did.

Grant Norwood: Yeah. Whenever you drill a well, you do, what’s called an open hole log. You see what the matrix within the reservoir is. And if it’s a little bit tight, but there’s plenty of oil there, enough porosity and it just needs some help to release that oil. Then that’s when you apply a frack and. I’m not saying it works every single time, but it sure hedges your bets

Bob Fraser: Have you ever seen it double your flow or more?

Grant Norwood: Oh, you’ll see it take a five barrel a day well on up to a hundred barrels a day in some instances?

Bob Fraser: Holy Smokes!

Grant Norwood: And then there’s other people that get a little bit greedy, and they might have a 50 barrel a day. And they’re going, oh, it’ll be 200. If I frack it and they get out there and they frack the dog out of it. And, they frack into a water bearing zone and lose their whole well. There’s an art to it, but it works more times than it doesn’t.

Bob Fraser: And what does it cost to do a frack?

Grant Norwood: Oh, so that’s a wide ranging answer. On a conventional you can do little bucket racks and they might cost you $20,000-30,000 grand bigger fracks on a conventional with the increase of everything lately, sometimes $80,000-$100,000. Now some of these big, horizontal Wells they’re spending several million dollars on it, but they could be fracking, a horizontal leg as long as three miles nowaday.

Bob Fraser: Wow.

Grant Norwood: So it, it ranges tremendously.

Bob Fraser: But even at those prices, if you’re getting a two or three or four or 20 X, it can definitely make a lot of sense.

Grant Norwood: Absolutely. Absolutely. So it’s definitely situational.

Bob Fraser: And certainly at a hundred dollars, a hundred dollar oil, it’s a whole lot easier. It’s a whole lot more margin for making   a mistake.

Grant Norwood: It does. Yeah. There’s so many more properties that are way more economical because of where the prices are. As opposed to before.

Ben Fraser: grant. I wanted to shift the conversation a little bit to new drilling, so drilling new Wells. And I think one of the things that you mentioned earlier that I wanna underscore is. A lot of times in these types of kind developments, it’s not, what’s kinda called wild CA right?

Where it’s, Hey, I just, we’re gonna start drilling all over and hope we, we hit some well

Bob Fraser: We’re gonna get grandma praying and hoping we.

Grant Norwood: exactly. Yeah.

Ben Fraser: It’s proven reports, proven reserve reports, which are created by geologists. And a lot of times public data that is aggregated. So a lot of times you have a really good idea, a really good sense of how much recoverable oil there is in certain areas.

Bob Fraser: And where it is, how deep it is, the whole thing.

Grant Norwood: Yeah. So you have development drilling nowadays and that’s been around. Quite some time, the fear associated with the oil and gas is that term Wildcat and before modern times and turned the clock back a hundred years, there weren’t all these fields and data points to work off of.

So people just got out there and gave it a shot, but nowadays these fields are so well defined and the technology that we have and the mapping softwares that we have Help you understand the structures and the reservoirs so much that, it’s easy to determine just how many Wells you need to dis to develop an entire structure, how much you look at some of the historic Wells and you go, okay, so how much is each well draining out of this structure?

So you’re looking at it and you go, okay, this structure spans three square miles. It’s a big stratigraphic trap. And there’s eight Wells in it and they’re spread out and each one’s recovered an average of let’s call it a hundred thousand barrels, some more, some less. So you start studying which ones recovered more than the others.

If they’re in the same structure, was there anything to the placement of those wells? That allowed them to perform better than their sibling Wells right next to ’em. When you understand that you go, okay the structure can support five more Wells, but I know three of them are gonna perform twice as much as the other two.

So then you go, I just drove those three or the last two with the smaller recovery, still economic. And it’s like a fourth quarter decision and you just decide, Is it gonna be the three or is it gonna be the two, but it’s, I’d say today’s times it’s a lot easier because of all the generations of drilling, we just have all these data points and then, the software side of it, it just makes it where it’s less prone to human error for shoot until.

Call it 20 years ago, geology was done with colored pencils and protractors and stuff like that. And even being off a millimeter might mean a hundred yards out in the field and a dry hole. You can really get it down to the nets rear with today’s methods yourself a lot of heartache when you’re out there drilling.

Ben Fraser: So talk about your experience in drilling. So you’ve been involved in a good amount of drilling and what success rate are you seeing generally.

Grant Norwood: We’ve logged pay in every we’ve drilled, I’d say roughly around between 78 and about 82%, we’ve been able to produce Wells commercially profitably, and for a multiple of our investment 80% of the time now we’ve always we’ve been super lucky. We haven’t drilled down there and go, okay, there’s no pay.

But in one of the recent Wells I’m sitting there going, okay this is a million dollar. We found our pay zone. We were hoping it would be about 12 feet of net oil pay and it wound up being seven feet of net oil pay. But we knew we needed a frack and there was a water bearing zone above it and a water bearing zone below it.

So I could produce that well without the frack and recover about 40% of the investment before the water crept in, but I’m sitting there going, okay the drilling side of that well was about 50% of the total costs we plan to spend and. I don’t know th at it’s worth completing the well to only recover 40%.

We can keep that 50% not throw good money after bad. So we found what we were looking for. Just not under the perfect conditions once we got down there. And that happens to everybody. Those are the only situations where you don’t do it, but a lot of times, if you’re wise enough to not complete a well.

Obviously could not perform up to expectations. You can take that other half the money, which is your completion dollars and not spend them and apply it towards the next one. And most of the time, if you’re drilling good economics, you can take one on the chin and it doesn’t hurt that bad. Especially if you stop yourself, so many operators are like, Nope, we found a pay zone.

Let’s complete it. And it’s yeah, but it’s gonna water out about eight months from now. And it’s not gonna produce at the rate. You’re hoping. So why don’t you just take that, scoot over, drill another one and get out of that water and, you’ll make up for your initial well.

Bob Fraser: And so yeah, you actually learn something from that. That helps you make you more successful in the next one. The other thing that was new to me is the idea of drilling. Is one cost, but completing is another. So it costs like so to drill a well, may cost you for a simple vertical 250,000 to complete that maybe is 800,000 and that may complete, it means.

So you found the oil completing. It means now adding the pumps and the tanks and

Grant Norwood: setting the pipe, all the down hole equipment, all the surface equipment, potentially roads.

Bob Fraser: A good, costs you a whole lot more than a dry well,

Grant Norwood: It does,

Bob Fraser: Or a non-academic. So that’s very interesting. It’s a good way to mitigate risk.

Okay. So it didn’t work to your expectations. Don’t bother spending the other 500,000 to go turn it into a pro production. So it’s easy to mitigate risk there. Your cost is quite a bit different.

The other thing that I love, so for example, we’re talking about the river dance field that we’re actually looking at getting this is so cool because it’s not only producing it’s, already right.

It’s producing real money. Every day pulling oil out and you can go city, right? We went down there and you see the oil flowing. You can smell it. There it is, but it’s also it’s also only 20% developed. So there’s got all this land and that you can actually develop that’s fun thing, right?

So you can actually look at this map and go gosh here’s the trends, here’s the geology. And you can actually figure out where to put other Wells that are pretty low risk, and you’ve already got the property under lease, et cetera. So pretty amazing opportunity to have both this, a value ad, one cashflow play two, a value ad play and three.

Kind of a high growth, hyper growth play, so is that common and is that cool or what do you think.

Grant Norwood: Like I was telling you before I find about two of them a year where they’re a good deal like that. And I look every single day. You find deals in all kinds of sectors, but I’d say anybody that’s really good at finding diamonds in the rough.

They’re not finding ’em all the time. But if they look hard enough, they show up, and like with this field, it probably cost us three times the acquisition price, just to put the acreage back together to drill it. and we get the acreage. It’s held by production. Meaning the acreage is not gonna expire on us before we have a chance to drill and hold that acreage into perpetuity.

And then we get the cash flow for free. So any way you look at it, you’re walking in with equity on the table, cuz you know, the leases are worth a multiple of what we paid for it, the cash flow’s worth probably close to two times what we’re paying for it and you get.

Bob Fraser: So you’ve got this land, all this thousands and thousands of acres. And you got a couple of Wells producing. How do you decide where to put some new ones?

Grant Norwood: So you map out the field like I was explaining in today’s times how we have higher success rates than generations in the past. You map out the structure, you try to look at, where were your highest recoveries in the field, what situation under the ground with what we’ve been able to map caused that well to do better than the others.

And then you kinda look to recreate. So if you’re looking across the field and you’ve got a well, that’s made 150,000 barrels in five years, and the rest of them made 50,000 barrels in five years, what was so much better about that drilling location? Was there just more perm and it was just a better streak of perm or was there something structurally cuz all these things they’re on.

What about that structure made that well, produce so much more and you try to replicate it. And as long as you’re still within the greater structure, If you find 50,000 barrels looking for a hundred, you’re not getting hurt. Most of the time you’re copycatting your best performers and trying to figure out how that happened and compare it to the ones that didn’t do as good

Bob Fraser: Awesome. Talk about the difference between horizontal and vertical. So vertical’s kind of historical, right? That’s what everything used to be vertical and then became everything now is horizontal. So talk about the differences and then I want to end up with due diligence.

How do you do due diligence in this?

Grant Norwood: Yeah. So for close to 200 years now, we’ve been drilling vertical Wells. It’s just, it just sounds just, yeah, just straight.

Bob Fraser: And they’re like how deep would they go? How deep is the well of a vertical wall go?

Grant Norwood: I’ve seen wells as shallow as 300 feet. And I think the deepest, well on record somewhere around 29,000 feet. But most of the time here in the lower 48 vertical shallow Wells are considered to be 2000 feet or less so middle of the road, Wells are about where we’re talking, which is about 4,500 of 5,500 feet deep wells, anything past about 8,000 feet.

You’re starting to, you’re starting to get pretty deep. When you start talking 10,000 feet or greater, you have to have second strings of casing. You have to stop at certain points of the drilling to do things that are almost like completion to make sure you don’t run into too much pressure and lose control of the well so along the Gulf coast, it’s very common to drill 12, 13, 14,000 feet.

But it gets considerably more expensive after about seven, 8,000 feet.

Bob Fraser: So the deeper you go, the more expensive it is.

Grant Norwood: Absolutely. And it compounds itself too, cuz you get different temperatures, different corrosive elements down there, you get higher pressures and it just takes a whole different level of safety measures to make sure that it’s safe for everybody involved.

But yeah, no that’s conventional drilling. It’s just vertical. And Nowadays, we have logging and that’s been around for quite a while. You still frack the Wells the same, but whenever you get into horizontal, nowadays we can steer the bits. It takes about 300 feet to actually make that curve.

And the steel actually bends, and that what they’re trying to do is they’re trying to land the wellboard in a specific

Bob Fraser: Wow.

Grant Norwood: Then go out for miles and keep it within that interval.

Bob Fraser: So they’ll actually start vertical and then it’ll drill sideways and start to turn over 300 feet

Grant Norwood: That’s all it is.

Bob Fraser: And they can literally target. They’ll just say, I wanna stick it right over there and they just steer it over there and the hole goes that way.

Grant Norwood: . Yeah, some of the best in the world can keep it within an eight foot zone. I’d say more often than not, they at least need 30, 40, 50 feet to keep. Within the zone, but really they’re just trying to have as much access to the given interval in a formation. And the more surface that they can cross, the more they have the ability to frack and the more reservoirs they’re accessing.

And they’re really just trying to sweep it rather than drilling a bunch of holes all throughout. They’re really just trying to drill one. And the cheapest drilling you’ll ever do is once you get sideways, that’s the cheapest drilling. So the idea is you’ve already spent the money on the vertical part.

Why not capture what four or five Wells can do by drilling cheaper horizontally and sweeping it all. And then whatever lack of I guess near wellbore connectivity you’d have out of a vertical. You’ve now accessed the whole thing. So I guess what I’m saying is what little bit gets left behind between two vertical Wells.

If you’re drilling horizontally, you’re sweeping it and leaving nothing.

Bob Fraser: You might have 10 vertical wells that could be covered by one horizontal.

Grant Norwood: Right.

Bob Fraser: Same area. And so you get a lot more production potentially out of horizontal. But one of the things I’ve learned is that certain regions do vertical and certain regions do horizontal. I thought everything had become horizontal, but it’s really not true. So talk about that.

Grant Norwood: Yeah. And it’s a well, and some do a little bit of both and, nowadays it’s pretty much been determined what works better, if we were to turn the clock back to say 2017, 2018 you go, okay if I’m. Drilling a vertical and let’s say the Austin chalk, and it’s at 7,000 feet and that’s gonna cost me 1,000,003, and I’m gonna recover 120, 130,000 barrels is that worth or is that superior to drilling a horizontal well and spending $8 million to recover?

400,000 barrels, so a lot of times there’s a lot of trial and error in the earlier days of horizontal drilling, trying to figure out what the right recipe was, both in vertical or horizontal different frack recipes. Like what kind of sand, how much sand. How much water, how big of a fact do we need to go?

How many stages, how many clusters in each stage what is optimal? So then they came up with kind of whether they would refer to it as like generations. So generation one, FRAs were X, which meant X amount of sand, X amount of stages per thousand feet. And try to come up with what. Perfect recipe is, and some companies are on what they’ll consider their fourth and fifth generations of frack designs.

So it’s yes, these regions they’ve determined. Is it more economic to drill a vertical? Or is it more economic to drill a horizontal?

Bob Fraser: And it goes by region primarily. Is it primarily by geology?

Grant Norwood: Right. And then you’ve got regions that have multiple intervals that are of great interest to certain people.

And you get to a place like the Permian Basin and Exxon Mobil might own the Wolf camp formation and let’s call it Pioneer might own the Bone Springs. So they’ve got, you’ve got two different operators on the same lease, pursuing different things, and it’s a different frac recipe, a different lateral length.

Another big debate if we were having this conversation about four years ago is how long or how far into the lateral is actually contributing to the production. Because at first. The standard was 5,000 foot lateral. Roughly a mile. And then you had these companies like rice, specifically that were starting to push the envelope and going, doing 10,000 foot laterals, then 15,000 foot laterals.

And until technology caught up, we didn’t understand that. Yes, actually that long of a lateral is not a diminishing return. They. The early thought was maybe the first 3000 feet is contributing to the production, but it’s so far down, they are losing pressure. And as they got longer it  took them a while to realize it actually does.

Bob Fraser: Horizontal is really the main way things are going right now. But you’re still drilling a lot of verticals. So why is it?

Grant Norwood: Yeah. The horizontal it, they’re so much more capital intensive. They’re very predictable about what you’re gonna make. But to get into the good horizontal areas, the acreage is very expensive, very competitive, severely broken up, cuz brokers like I used to be, would get in there and buy all these minerals and then they might.

They might go to a private equity group with 300 acres and they might be into that acreage for $30,000 an acre. And let’s say Carlisle or whoever they’re selling it to, they don’t wanna have that much exposure to one drilling unit. So they’ll say no, we’ll take 40 acres. That’s all we’re willing to take and have exposure to this one drilling unit and this one operator in this one drilling unit.

So then you’re sitting there going, now I’ve gotta figure out whatever what to do with the other 260. So then you sell one to another group. One to another group, one to another group. So all that stuff’s kind of fractionalized out. And what that does is it makes title more complicated and it allows for other operators to come in there and take leases because there’s multiple mineral owners.

So you might go out there and only wind up picking up 30, 40% of a drilling unit and you control the drilling. But you don’t get a hundred percent of the costs and you don’t get a hundred percent of the revenue. So you’re sitting there doing all the legwork for only 30% of the well, so I don’t like that aspect.

I don’t like the high acreage costs. Only until recently of Well’s been, even coming close to performing with their estimates are so it’s a big boy’s game and it’s that margins just aren’t near as strong as this vertical drilling that we’re looking at.

Bob Fraser: So the last thing I want to cover is really due diligence. How do you know, how do you make a good decision on buying this? Obviously something that’s producing that’s you can see the statements and from the Finers and, you can see the oil, so it’s kind yeah, it’s working.

Right. It’s not a lot of question marks there.

Grant Norwood: Yeah

Bob Fraser: But how do, what else, what are the real pitfalls are there and how do you avoid those?

Grant Norwood: If you go into something and you’re not well capitalized and there’s poor equipment and the equipment goes down within the first couple of years of buying it heck you might not have planned on that expense. You might not have the money

Bob Fraser: So you wanna check the equipment and make sure it’s in good shape.

Grant Norwood: You wanna check the equipment?

You wanna evaluate what CU numbers are for Wells around? How much of your Wells made, how much lifespan do they have left? Are they on their last legs? Are they at a water flood? It’s all situational, so I look for people that haven’t been able to perform as well, and then try to go out and meet with their staff and just size them.

Do they seem like they know what they’re doing and if they don’t know what they’re doing, their Wells aren’t performing like their neighbors, Wells. You’ve got quite a few inefficiencies there. Then you start looking into their P and LS, which in oil and gas, we call ’em an L OS. How much are they spending?

What vendors are they using? What are those vendors doing to the field and try to figure out what they’ve been doing wrong. How much upside you have in fixing and making those changes. Each field’s different. That’s been the main thing with where we are, what are the fluid levels at? 

Okay. So we go shoot fluid levels. All right heck they’re, they’ve got. The pump’s sitting 500 feet above the perforations. The fluid levels, well above where the pump’s at. Okay. They need bigger pumps, quick fix. So you start going. Okay. I move more fluid. I make more oil. Oil cuts are a big thing.

If you’re sitting there. Making 10 barrels a day, but you’re making a thousand barrels of water. Heck that water’s gonna be more expensive to dispose of than that oil’s gonna generate. So you know that for one, if the oil cuts that low, then you’ve produced most of the reserves. But also that’s gonna be a high cost well.

Bob Fraser: So you actually go in well by And do analysis of this well and the economics of each well and or the problems of each well and the rehab costs. It’s again, by an apartment complex, you’re going in, unit by unit and looking at damage and upgrade requirements. So you’re actually going in and looking at rehab costs and putting that all together

Grant Norwood: Absolutely on each individual. Cuz say if property’s making a half, a million dollars a month, they’re spending $300,000 to operate it and then you go look at it and. 80% of the profits coming from five of those 10 Wells and the other five are actually losing money. You’re gonna get in there and plug those immediately and improve your margins quite a bit.

Bob Fraser: Gotcha. So cool. Now another big risk is the title, right? So these leases are actually right. There you gotta make sure it’s in the right names. And you have the rights and leases actually expire if you don’t maintain production. So it could be, you think you bought a lease and then, but it actually expired because there was a production gap in there and no royalties were paid for us timeframe and there actually is no lease.

So you need to get attorneys and there’s companies and attorneys that just specialize in this to make sure that this thing is tight.

Grant Norwood: Absolutely. Absolutely. Yeah, no you always trace your ownership from patent, the first person that has ever issued title to that property all the way to present and you look, make sure there’s no clouds. If there are you need to get with a title attorney, see if they’re fixable. There’s so many good Wells that are never gonna get drilled just because of the title.

Bob Fraser: And what are the other big gotchas? What about just depletion? What about just, an old does it, you actually look at reserves and all that as well, because it could be, there’s just not enough value left in the ground.

Grant Norwood: Yeah, you don’t wanna buy somebody else’s liability. That’s a huge risk, but generally those stick out like a sore thumb and the people that buy those, just wanna say they’re in the business really bad. But like I said, it comes down to a lot of what the cut is. What the well is supposed to make.

If you can get your hands on any original engineering reports going through the logs, seeing if there’s any behind pipe potential and behind pipe. So what does that mean? Let’s say you drill a 10,000 foot well and complete it right at about. 8,000 feet. If you pass through any other productive pay zones and they haven’t been extracted yet you wanna evaluate what those paid up zones potential is.

And just because you’ve played out one zone doesn’t mean that’s all there is to look forward to in that well, and the guy before you didn’t have the money or the expertise or the willingness to go get it. You’d think why would anybody do that? But it happens. And a lot of times, cuz the well might be 30 or 40 years old and that guy’s retiring or moving on just whatever have you, it’s still there. He didn’t go get it.

Bob Fraser: You have literally have 30 or 40 year olds wells that are still producing? That’s the thing,

Grant Norwood: Oh, absolutely all over the place.

Bob Fraser: Wow.

Grant Norwood: Yeah, no there’s a hundred year old wells. There’s a lot fewer than there are and 40 year old wells, but they’re there.

Bob Fraser: Wow.

Ben Fraser: One of the biggest challenges from what you’ve explained before is these wells age, the mix between oil and water that’s being pulled out of the ground, goes more towards water. So that you call the cut, right? So there’s more water being pulled out. It makes it less profitable and you have other ancillary costs to dispose of that water. So that’s one of the bigger challenges right there. Maybe a potential gotcha when you’re doing due diligence.

Grant Norwood: Yeah. That, or, depending on the kind of lift, so there’s different kinds of lift. You see the rocking horse, if you will, the pump Jack, that’s always going up and down. And then some Wells are on ESP and some Wells need to be converted on the ESP and it, like I said, it just comes down to the cut.

How fast it got there. If the company had good records, you can evaluate these things so easy. And the better records the seller has the easier your job’s gonna be.

Bob Fraser: So it’s like you just put a little business plan in place for each well, and you look at the geology, you look at the engineering, you analyze it and come up with a plan for each. That says, grow it or shut it down or how to fix it, change it, improve it. And each one. Has a little plan that you’re putting in place to make it, to optimize it.

Grant Norwood: Absolutely in some of these fields, they’ve changed hands quite a few times. And the first guy that ever temporarily abandoned it, just left it there. And the next guy wrote it off as his chopped liver because the last guy had it sitting there and that could be the one with the most upside so many stones get left unturned.

That the opportunity’s everywhere. Especially when you walk into a field that was owned by a major.

Bob Fraser: Why aren’t more people doing this? This just seems so accessible.

Grant Norwood: Show me the company. I’ll tell you why, so the small guys, because they’re under capitalized, the majors, it’s just not exciting. They got out there and drill a deep well and hit a thousand barrels a day.

So they drilled 10 more in a nine spot all the way around it in every direction. And anything that wasn’t a hundred barrels a day or more, they plug well, 80 barrels a day is less than a hundred. So we got. So you look at these scout tickets and you go, oh, wow. This well came in at 80 barrels a day, and then they plugged it.

There’s nothing wrong with it. It just wasn’t exciting. They’re a multi billion dollar company, couple hundred grand a month. Doesn’t matter to ’em.

Bob Fraser: Not being enough. Yeah. One of the big problems for a billionaire. It’s hard to move the needle.

Grant Norwood: Yeah. Yeah, that’s the problem. Couple hundred grand a month. Doesn’t matter to ’em so it’s not worth their time. They’ve got 10 engineers on a $200,000 a year salaries that are associated to that field.

If it’s not making a hundred barrels a day or more, they just go, okay, no, we need to find something a little bit sexier.

Bob Fraser: Makes sense.

This is so good, man. It’s just, it’s so good to, you’re making it so accessible here, grant. I love this.

Grant Norwood: Yeah. And the proof’s all in the pudding. That’s why, I’m glad we did cold water. And then, you see how that’s going? It’s everywhere and I don’t find ’em all the time, but a couple times a year they just pop up and we can’t resist.

Ben Fraser: Grant, thank you so much for coming on the show and really demystifying this whole world of oil and gas investing and appreciate you sharing all your knowledge.

Grant Norwood: Absolutely had a good time.

Bob Fraser: All right. Thanks so much.

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