Join co-hosts Bob Fraser and Ben Fraser in this informative episode of the Oil & Gas Masterclass as they dive into the world of oil & gas investments. In Part 2 of this captivating series, they are joined by a special guest, Jeff Mohajir, President and Chief Executive Officer of Mohajir Energy Advisors, a renowned expert in the field. They dive further into the intricacies of evaluating oil and gas investments, why it makes sense now to invest in this asset class, the keys to doing due diligence on these investments, and where he is finding the biggest opportunities right now.
Learn more about Mohajir Energy Advisors https://mohajir.com/
Connect with Bob Fraser on LinkedIn https://www.linkedin.com/in/bob-fraser-22469312/
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Transcription
Ben Fraser: Hello Future Billionaires! And welcome back to the Invest Like a Billionaire podcast. Today is part two of our oil and gas masterclass. So as I mentioned last time, we just recently hosted a webinar diving deep into the world of oil and gas and investing. We brought on. Our guest, Jeff Mohajer, who’s got a 40 year track record and experience in this space and diving deep into all the nuances of oil and gas investing.
And so this is a continuation of the webinar that we did. We’re going deep again at the technical things to look at when you’re looking at. Opportunities in oil and gas, the different ways to invest in oil and gas. We talk about the risk factors. What are the key things that you need to be aware of to avoid Ponzi schemes and to not invest in a scam or a bad operator.
And really the key things you gotta understand as an investor and then finally really breaks down, at the end here. Where is the opportunity? And Jeff’s experience for the past 40 years, seeing the ups and downs, everything in between. Where he sees the opportunity in 2023 this year to, to partake and participate in the oil and gas investing space.
So not gonna wanna miss this. This is really good stuff. Hope you enjoy it.
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One of the things I wanted to talk about too is just the different ways to invest in oil and gas, right?
Because not every deal, not every drill type is the same, right? And so there’s lots of different ways and types of ways to invest in oil and gas. So first, can you talk about what is the difference between mineral interest or royalty interests and working interests? Those are probably the two big categories of ways
Jeff Mohajir: to invest.
So a mineral interest, in, basically if you think about it from a real estate perspective, and again, on a surface perspective you have ownership of surface real estate, but then there’s also mineral ownership. And typically, somebody owns the minerals. Sometimes it’s the same person that owns the surface, owns the minerals.
Sometimes they’re bifurcated or a split estate is what they really call it. Like out in Colorado or Wyoming, you might have somebody, a rancher that owns the surface, but the Department of Interior or the BLM really owns the federal government really owns the minerals. In that case, you gotta go out for us that are looking to try to develop oil and gas, we typically go out and try to take a lease from the mineral owners to be able to lease that space, however many net acres that they own, so that we then can drill.
And you typically need, depending on what the reservoir size is and what your economics are, you typically need x, let’s just call it a hundred. Net acres to be able to drill a well. Okay.
Bob Fraser: So just just like I think about somebody who is a land investor here in the city and may, may go out where they think the city might be expanding and you go by a bunch of farmland and you’re hoping some point the city will grow into that and the value of that land will go up and you will make a lot of money doing that.
And that’s very similar. So what people can do the same by buying mineral rights of land and hoping that someone ends up wanting to produce this, but it’s passive, right? It’s very passive and it’s very, it’s a kind of a waiting game, right? Correct. But I know a lot of people that are offering those kinds of investments.
What would you, if you’re gonna buy a royalty interest investment, what would you, what should you be looking for?
Jeff Mohajir: You should be looking at development. Obviously your mineral ownership or your royalty ownership in an oil and gas well is really only valuable if the product gets produced, be produced, yeah. So you really need to get produced. So the couple things that I’d be looking for is number one, who’s some of the active operators? Who are some of the folks that are drilling in the area where you’ve got the mineral ownership? The other thing I would be looking for, particularly if it was natural gas, and even for oil for that matter, is what kind of infrastructure is in place to be able to get your natural gas or your oil to the marketplace. Because that’s one of the things that sometimes it’s a big area and you only can get paid if you can get your product sold. Okay. Now you have not
Bob Fraser: done a lot of mineral rights investing in your 40 years.
Jeff Mohajir: No. Why not?
Because we’ve always taken the leases. We’ve not really, we’ve not, we’ve always looked at it as, We, we’d much prefer looking at owning a working interest in a well, as opposed to a royalty. Now we do, full disclosure here, we have about a royalty interest in about 750 wells in southeast Kansas.
Okay. So you do like royalty interests? Yeah. We’ve had it for a long time. And have they done a good job and we’ve got a good operator down there that produces or, and operates the wells, but we haven’t been active in trying to pick up or trying to buy mineral interest.
It’s generally more
Bob Fraser: of a passive kind of,
Jeff Mohajir: It’s much more passive and a waiting game. And you, it’s very land intensive because you’ve got to go and it’s more in my idea, my way of thinking, it’s a little bit more speculative. Because you’re waiting, right? You’re waiting for the game to come to you.
Versus as opposed to you going out and playing in the game.
Bob Fraser: Bringing, there you go. Yeah. Okay. So typically you are a royalty, someone who would come and then lease this from you, and the idea is they would agree to pay you a royalty for producing your land, your minerals and your land.
You get a royalty for that. And that lease is generally and so this is an operator that’s gonna lease that up, and then those leases are traded as well.
Jeff Mohajir: The leases are traded. Typically what they do is they come in and they’ll give you a three year or a five year lease and they’ll say, Hey, I’m gonna pay you a lease bonus.
I’m gonna pay you like, as an example. A few years ago there was a hot play down in Texas where mineral owners were getting, a hundred dollars an acre, a mineral acre for their acres. A couple of operators came in a mile away, proved up to resource. All of a sudden they’re selling for $10,000 a net acre.
So For a lease. For a lease,
Bob Fraser: yeah. Yeah. So the leases are traded actively. And this is where you buy leases. This is what you like to do primarily, correct? If you’ll buy leases. Correct. And those leases typically have to be held by production.
Jeff Mohajir: Yeah. So you pay, so you’ll pay for a lease bonus, and then you typically have three years to, to five years to drill.
On that lease. And as long as you’re producing and paying the royalty owner who you’ve leased the minerals from and this is a contractual term, but contract quantities or economic quantities of revenue, then that lease typically stays in effect.
Bob Fraser: And if you stop producing, then that lease is in question or it’s lost.
Correct. So one of the things you have to do, and this goes back to the land piece of this, is if you’re looking at what are the rights? Do you have a valid lease? You gotta take one look at, you gotta ownership and you gotta look at production, you gotta historical production And see, has this, have they met the terms of the lease?
Not only,
Jeff Mohajir: Yeah, you have to look at production, make sure that the lease is in good shape, but you also have to just make sure you know the title’s in good shape and Right. And you have to go to the county. A lot of the time we have land people that go to the county courthouses to make sure that.
The people that own them say they own it.
Bob Fraser: Oh. There’s this phrase called land people in real estate. It’s called title companies. Who goes and makes sure the title is square and they also check production and make sure that it’s, that the lease is valid. Correct. It’s a lot of work.
For a certain piece of dirt, there’s a, there’s quite a bit that has to go into this to make sure that you actually have a real asset there, right? That’s true. Okay, so talk about operating, non-operating. We talked about that. So we’ve talked about working interests and mineral interests and, more of the working interests are more active, more play the game.
The mineral or the mineral interests are more passive, passive. You wait for the game to come to you.
Jeff Mohajir: Yeah. I think one of those talks about operating and non-op operating. Yeah, go on the working interest side. I think when things think about it, working interest pays for expenses, mineral interest, or royalty interests don’t.
Gotcha. Whether it be development cost and our monthly operating expenses, working interest pay, expanders expenses, mineral interests don’t. So the difference between a non-operated working interest and an operated working interest is that just as it sounds, you’ve got the operator who is Devin Exxon, Chevron Continental they’re operating their working interest, whatever they typically have.
Not always, but typically have the majority working interest in the well. And that would be called an operated working interest. You also have. People that kind of come in that have taken a lease with some of the mineral owners who then have the opportunity to participate in a well that gets drilled on a working interest basis, but as a non-operated working interest.
And so they own the, they have a, actually an undivided ownership in the well, but they’re just not the operator.
Bob Fraser: Okay. So just to give an example. So you buy a lease from a royalty guy and you agree to pay him a certain royalty percentage, and then you’ll partner with a, let’s just say a Devin who was a big major producer, and they’ll take an 80% operating working interest or they’ll basically buy your lease from you or they’ll operate your lease for you and you get 20% of the revenues and they get 80% of the revenues. Is that right? Correct. And you share the costs 80-20, is that correct? Yeah. And you share the revenues 80-20?
Correct. So you’re riding along their coattails and letting them take the lead. They’re they’re doing it producing, they’re determining the revenues and the expenses, but you’re getting
Jeff Mohajir: a cut of it. You’re getting a cut of it. You’re bringing something to the table a lot of times because if you’re in a large area with them.
They’re doing some capital allocation. They’re doing some risk mitigation, so they don’t want to take a hundred percent of their wealth. Not very many not many owners or operators really want to own a hundred percent of the wealth. Really? Explain that because you’re taking a lot of risk. It just depends.
You’re like, you’d like your, like anything else, you’d like your dollars to go farther. Yeah. And sometimes because we have, because sometimes you’re working interest owners on, we’re an example, might have a highly technical group as they’re thinking about drilling, they would be running ideas by us in terms of interesting interest.
Bob Fraser: So they actually like partnering with you. A lot of cases, we’ve had a lot of good, because you guys are a very good engineering firm, inuring, geology, and they like to bounce it off you and you maybe bring ideas to them, right? And say, Hey. Exactly. Hey, we’re looking at this spot right here. We think this is where the.
Where the pay is. Exactly.
Ben Fraser: One of the cool things with this, with the middle interest, a lot of times you’re having to, buy land in hopes of new production coming down the road, but a lot of times you can go and buy existing production that’s producing current cash flow and then you alluded to it, but you have the right to participate in new drilling, but you don’t have the requirement to do that right? That’s right. So break that down a little bit cuz that kind of gives you a lot of flexibility. That’s incredible. What you wanna be able to do.
Jeff Mohajir: Yeah. So you and we’ve done this, as an example, I think I told you, we, we did a deal in Colorado and Wyoming. We bought 400, producing proper.
We took a non-operated. Working interest in 400 wells, the operator, and we owned about a hundred thousand net acres together. We put together a joint development agreement with the operator. They really liked, we liked the way they operated, they liked the way that we identified new assets or new targets to be able to drill.
And together we drilled about a hundred, 120 wells.
Bob Fraser: And you chose whether you wanted to
Jeff Mohajir: participate in those or not? We chose whether or not there was something we did, we weren’t obligated to. So that’s the optionality piece that we really liked. They say we’re gonna produce
Bob Fraser: Well, and they’re saying, Hey, do you want to take your 20%?
And you say, nah, I’m gonna pass on
Jeff Mohajir: that one. On the flip side, we might really like an area that they say we don’t really want to, but we think, boy, it makes a lot of sense to develop this, particularly because of commodity prices. You can propose a well. So it goes both ways. You can propose a well and then they have to make a decision on whether to come in or, and if they pass, you can go find another operator.
You can find another, you can find another operator or find another partner. That’s for sure. Yeah. Yeah. I love it.
Ben Fraser: So talk about just the types of drilling. Cause I think, the common thought is the wildcatting, you know where you’re going, you’re just exploring new areas out there. I’m gonna go drill it.
Let me just pick this spot and see if there’s oil though, versus, infill is rod out there. That’s right. Yeah. Yeah. And so a lot of these things, you’re going into an existing basin, in a non-op working interest, you’re already buying production. There’s already a good amount of development in the acreage and a lot of times you’re participating in more infill drilling, which you know, is more just filling out those children
Jeff Mohajir: Well, right?
Correct. Right now there aren’t a lot, like I, I mentioned before, 10 years ago, there were three or four different plays where there was a lot of exploration going on where there just hadn’t been very much development and companies were coming in with a geologic idea and drilling what we call Wildcats or exploratory wells.
And there’s a place for that obviously high risk, high reward type stuff. But for us, we like to stay in areas where development has already been proved out. The minerals
Bob Fraser: are well defined. And the basins are well defined and we people know what their characteristics are, they know where they are.
Jeff Mohajir: Correct. And so you come in and you’re taking that. Geologic risk off the table. There might still be some mechanical risk, there might still be some commodity price risk for sure. But you’re taking the geologic risk off the table, and as Ben said, you’re, the s e c or the sp e society procurement engineers come up with some terms that try and give investors a sense of how to understand risk.
And when you’re talking about reserves they put a, the term proved. In front of. So it’s proved, developed, producing wells that are already producing. There’s proof behind pipe reservoirs that have not been completed but are in a well bore that is producing in economic quantities.
There’s proven, developed non-producing wells that have been drilled. Looks like the reservoir’s been established, but it’s not producing yet. And then they proved undeveloped. And that basically means, the way to think about it is geography. You’ve got it’s approved, undeveloped location, meaning,
Bob Fraser: there’s for sure oil down there, exact, you know how much, you know pretty accurately how much oil is
Jeff Mohajir: down there.
And there’s an offset. That has demonstrated it can produce, commercially.
Bob Fraser: So if you’re drilling into approved, undeveloped, you don’t have a. Geology risk, basically
Jeff Mohajir: It’s there. Minimal mother nature will put faults, right? And folds and all kinds of things in place, but yes you,
Ben Fraser: completion percentages are pretty high, right?
Above 80% is
Jeff Mohajir: problem. The f wants an investor when. Proved undeveloped reserves are reported to have a sense that these are less risky than wild ca.
Ben Fraser: Gotcha. Sure. And I think it’s just an important thing to note because as people are probably seeing more deals and opportunities come across their emails to really dissect what are you really investing in?
There’s a lot of folks out there that are selling drill co opportunities. Correct. And these are, you’re going in and it may be in fill, it may not be infill drilling, but it’s, you’re just going and drilling and you can have a hundred percent return. You can also have a 0%
Jeff Mohajir: return.
Bob Fraser: So what, so a lot of people are selling this, I don’t know why this is super popular, but literally one drill, like you’re going to cooperate in one drill hole.
Jeff Mohajir: Yeah. And I’m a little sensitive to this because this is where oil and gas investing can get a bad name, particularly for some people that don’t.
Understand you might have an operator who might only have a 5% working interest in a well. But he’s now trying to sell 95% because of the geologic risk. And so he’s trying to get some other folks to come in with the money to come prove up, risk it to de-risk it, and then he gets to keep a hundred percent of the offsets.
So those are the kind of games that get played, and that’s where our industry can get a bad name. So I just caution people to be careful about
Ben Fraser: that. What are some, maybe just some yellow flags to you if you saw something like that? What, for someone that’s not sophisticated, how do you, if
Jeff Mohajir: an operator, what are the questions to ask?
I guess if an operator didn’t have a majority of the working interest and the okay, that’s one. What’s my ownership? If the well is successful, what’s my ownership? And well, 2, 3, 4. Yep. If that’s,
Ben Fraser: So meaning they, they could sell you one well and you get all the capital for that and they go off and run with this 2, 3, 4 and you don’t get any of it, correct?
They go
Bob Fraser: turn that one off now that’s proven it and go drill a new one. That they get a hundred percent off. Yes.
Ben Fraser: Yeah, very interesting. Let’s shift a little bit. We’ve been talking about a lot of these, but just the risk factors, right? So we talked about the bigger big picture environment, talked about some of the technical terminology and technology.
But now as investors, obviously we’re here because we think there’s opportunity here, but for investors that are new to this space, what are some of the key things that they need to be thinking about? We’ve put a little list here together that we talked about beforehand.
And so you wanna start with the geology? We hit that a little bit, but we talk about
Jeff Mohajir: always starts with rock. You’re gonna have rock that has the ability to produce hydrocarbons. So that’s number one. So you gotta have the geology and it all starts with geology.
Ben Fraser: And from an investor, a passive investor standpoint who’s not a trained geologist, like you hasn’t been in space for 40 years and they see a ge how what questions do they ask to ascertain?
This is good geology versus bad geology, right? Like it’s
Jeff Mohajir: Part of it is, what’s produced around it. Yeah. So what’s been produced around it? Is it how much reserves have been, how what have been the qualities? Yeah, the qualities and the quantities of oil or natural assets produced out of the reservoir.
And track record of
Ben Fraser: the operator of, correct success of the past walls that they’ve drilled
Jeff Mohajir: Yeah. Yeah. And, all the financial stuff. Did they bring, they have a budget for drilling. Did they meet their budget or you, were they over, were they under the, all those sort of things.
The geology, it always starts with the geology starts with rock. I think the other, the biggie, obviously that’s, yeah. Hard to control mother nature. You can understand it. You can understand where she has the oil and gas. The other thing it’s hard to control is commodity prices.
Obviously you can do some control of that, some mitigating with hedging. And we always try to do some hedging when we get into our projects because it just creates a baseline of cash flow. So commodity prices are always a big risk. Just they’re all over the map and we really never, particularly now with all the volatility going on, with Right.
You’ve got all kinds of things going on globally that are coming at us. You mentioned it earlier, the other big one I would talk about is regulatory. Which slash ESG just what’s happening, in some areas of the country, big swaths of mineral acres are being taken off the table.
Can you imagine in Oklahoma it might take us a month to get a drilling permit. When we were in. Colorado, it might take us three years to get a drilling permit. Wow. Regulatory issues are a big factor. ESG issues are a big factor. And so we’ve, we tend to gravitate towards areas that you can work with very easily with the state and local authorities.
Ben Fraser: And you alluded to this earlier, but what’s the infrastructure like? What’s the transportation? Cuz you can pull it out of the ground. Correct. But how do you sell it to the pipelines or the end user and what’s the capacity, right? Correct. Especially for natural gas and in jails.
Correct. Yeah.
Jeff Mohajir: So there’s a, there’s areas right now that are. As you know, probably the best play in North America is the Permian Basin. It’s got some of the best economics, but they have a, they just don’t have much natural gas infrastructure and with the oil production comes natural gas production.
And in a lot of cases they’re flaring. Describe what that is. Yeah, so they’re just they’re venting net a match light, lighten a match, and put in the,
Bob Fraser: And you see these big towering flames just correct. In the middle of the fields. Correct, yes.
Jeff Mohajir: So they’re
Ben Fraser: taking money and lightning on fire.
Cause they can’t, they literally can’t take it out of,
Jeff Mohajir: and because they just don’t have enough infrastructure. Yeah. And
Bob Fraser: Let’s talk about petroleum versus natural grass a little bit. So, petroleum is very high density and so it’s easily transported by trucks and other things, and it’s economical to do.
The problem with natural gas is it’s loose, right?
Jeff Mohajir: It’s a filter of gas. And it’s difficult to transport and it’s hard to store. Hard to store. You have to have natural gas storage fields, which are basically depleted natural gas fields to store it in.
Bob Fraser: And so most of the natural gas that’s produced there is actually a pipe going from the wellhead to the midstream producers who are basically taking this gas and packaging it up and selling it.
And so if there’s not a pipe, then you can’t do anything with natural gas except vent it and light a match or flare it. That’s right. And who wants to do that? So natural gas ends up being highly localized. America produces a ton of natural gas, but a lot of it, unless there are literary pipes, can’t be used.
And this is why you’re seeing natural gas prices in Europe. What are they, what are natural gas prices in Europe right now?
Jeff Mohajir: There’s, if natural gas rights were trading when I left the office at about $2 and 33 cents in the United States. In the United States, in Europe, I think it was about $7 or $8 per m mcf.
And so three times the price, three times the price. And I think you’re starting to see a little bit. We don’t, I tell you, we started a business in 2005. I gotta tell you this story. We started a business in 2005, and basically, Alan Greenspan came out and said testimony to Congress that the United States has 10 years of natural gas supply left.
And so you saw all of these liquified natural gas platforms that were being built to bring liquified natural gas into our United States from Saudi Arabia or from Russia, or from, some of these. And again, with some of the things we’ve been talking about with the shale, Revolution technology, the access to technology, the access to capital.
We have this horizontal drilling, we’ve got this completion technology that within two years, we have a hundred year supply of natural gas. Yeah. And so now we’re talking about, now we’re exporting, now we’re talking about all these LNG to export. That’s right.
Bob Fraser: And talking about LNG. So what LNG is, so of these guys, you’ll take in natural grass from all these little pipes coming in from all these producers and they compress it and they cool it and compress it and cool it, and compress it and cool it until it turns to a liquid.
It comes liquid. So it’s like taking air and turning our air into a liquid. So it’s very cold. Correct. Okay. And then they put it on special ships. That keeps it cold and then they move it somewhere else, and then they gasify it at the location. So very expensive, very difficult to do, which is why natural gas, again, it is inherently a local commodity.
Jeff Mohajir: At the end of the day, it’s a local commodity, but I think you’ll start seeing more and more markets, particularly what’s happening over in Europe, open up to North American liquified natural gas. Yeah. But
Bob Fraser: how much liquified natural gas is actually as a percentage of the natural gas market? How much is liquified?
Not very much. Yeah. It’s a teeny tiny, it’s
Ben Fraser: just a, and the number of refineries, we don’t, we have a limited number to refine it and to build one and to, create a whole more capacity
Bob Fraser: To, you mean l n g production facilities. Yeah. Yes. Yeah. That’s not refining.
Jeff Mohajir: That’s a 10 year, yeah, that’s a 10 year to build
Bob Fraser: an L plan.
Yeah. Yeah. And even the gasification plants are not easy. So all this stuff, the infrastructure just isn’t quite there. All right. So we wanted to hit that a little bit.
Ben Fraser: Yeah, I think we hit most of those. I think while Ron, we have a, we had a great question here from one of the viewers here just talking about pricing.
Price has been very volatile over the past, several years ranging from $35 to $120. We’re in the midpoint right now, and, not that we wanna put on our prediction hats here, but, talk about what you are seeing from the price environment? We talked a little bit at the very beginning of some of the supply demand things going on, but do you see the possibility, there’s more upside here in price and then also just maybe discipline and as your underwriting deals and evaluating opportunities, it has to make sense in the current environment and in a worst case scenario, right?
So talk a little bit about just pricing and how that impacts what types of deals make sense?
Jeff Mohajir: Yeah, there’s a tremendous amount of, and we’re talking about oil specifically. So yeah, oil being a global commodity, which we’ve talked about. Right now we are, and when we underwrite a deal we think about current prices and everything’s gotta make certain sense at a current price strip.
Do I think there’s upside? Yes. I think the big upside is going to be driven by demand in China. Yep. I think you’ve seen, it’s always the supply demand thing. I think there are some countries big OPEC countries Saudi Arabia who try to control prices with cutting. You saw that they were gonna cut their production by a thousand barrels a day, a million barrels a day, and they it was a yawn because the markets already got baked in that there’s gonna be companies or countries like Venezuela and Iran that can make up, make that up very easily.
So right now our world oil production is around 99.7 million barrels a day, and our consumption is around, I think it’s 96.6 million barrels a day. And so that little gap. Is what’s keeping this volatility in check. If we see anything move on the consumption side with China, with India, with South America, I think you’ll see prices go up.
Bob Fraser: Okay. I think let’s talk about due diligence. Everyone has no, knows someone who lost money in oil and gas investment. So give
Jeff Mohajir: us a
Bob Fraser: couple of the, what are the mistakes investors have made and some of the egregious mistakes or some of the things that operators have done poorly or wrong or dishonestly that are some of the biggest ways that people are getting creamed that you’ve seen?
Jeff Mohajir:
It’s hard to, from a nefarious, there’s just some nefarious people out there that, I’d be, I would be Leery of somebody that says that they’ve never drilled a dry hole, because that typically doesn’t happen. But the main thing that I would say is that folks that don’t show a real, bent towards the technical, that don’t give you a technical or an economic reason, a technical and an economic reason to make an investment if it’s just because, prices are gonna go keep going up up, up to, $120 a barrel, that’s probably, you can’t, that’s probably not a good w good reason to make an investment.
So those are the technical pieces. The economic piece to me is where some people, sometimes they, lack due diligence in really looking at the geology, looking at the engineering, looking at the infrastructure, looking at what happens at different price sensitivities. Yeah. And that’s where people can get burned.
Yeah.
Bob Fraser: And depleted, wasn’t this something people can buy and start hawking there? There’s a lot of dishonest people in this space too.
Jeff Mohajir: There was when we first started our first business back in 1992 we went and we talked to some folks in Topeka about starting a business and what are some of the pitfalls?
And they told us a story about a guy named Johnny Rocket who was in Kansas and who was selling oil and gas leases to investors. And he would bring all his investors out to the land and he would turn his well on and then all of a sudden you could hear the natural gas coming on and he would light it.
Light it and it would be flaring this big flare of flame. And so everybody’s great. This is great. So they get money and then all of a sudden they find out that Johnny Rocket had tapped into a local pipeline where a gas was coming out. There was just even one there. And that’s one of the things that, anyway, so those are the, yeah, so there’s plenty of
Bob Fraser: shysters and Correct.
Ben Fraser: We just saw a big Ponzi scheme that was shut down by the carbon
Bob Fraser: capture, and they’d raised how many, $250 million, 250 million from investors to do carbon capture. Having this technology, supposedly they’d go onto these things and do carbon capture, and it’s all the big fraud. There was nothing substantial about it.
So there’s plenty of, there’s plenty of fraud out there, which means the best way to is just get honest people, get good operators. If it
Ben Fraser: sounds too good to be true it probably is. And I mean there’s, one, one opportunity I heard about is they’re gonna go, they create a whole new technology.
It’s, gonna go and go into these Marcellus Shale plays that you can’t go into right now and extract, a hundred x returns basically. And, it’s all proprietary. They can’t tell you the whole method because they’re got patents pending. It’s those are the kind of things, that’s
Bob Fraser: Everybody’s got a lot of secrets. Stay away from Yeah. We met a guy who claimed to be able to find a gram of gold in every play hand out there. Oh yeah. He was convinced. Yeah, FBI
Ben Fraser: was after him. He was always over shoulder. He got
Jeff Mohajir: Those are frustrating deals.
Yeah.
Ben Fraser: Let’s shift to some of the fun stuff. The last section here you wanna talk about is tax benefits, which. Shouldn’t drive the decision to invest in a deal. But there are some pretty attractive ones. And as investors, you can participate in some of these tax benefits, which are mostly depletion and intangible drilling costs.
And can you talk a little bit about just what that is and I guess mostly the
Jeff Mohajir: IDCs? Yeah. When you drill, obviously you’re drilling a well and there are tangible and intangible costs. Typically, the tangible cost is equipment or pipe that goes into the ground. Some of the intangible costs are the actual completion work, the fracking, the bringing the well on the services that it takes, the geologists on site.
And some of those are all intangible. Right now you can, as part of the. IRS tax code, you can deduct those costs if you’re participating. There’s also a Ben depletion, and there is a, and I think it’s by play and it might be by state. A for every molecule, oil or natural gas unit that you produce, you can deplete, you can take, you can have a depletion by unit based on how much production Sure.
Is next to your ownership. Those are a couple strategies that I know give people comfort for taking and for taking the risk. Sure. Of participating in drilling and or producing oil and natural gas. Awesome.
Bob Fraser: I think why don’t you explain that a little more? How it works from an
Ben Fraser: investor’s point?
Yeah, from an investor’s standpoint, there’s different ways to invest in these deals, whether it’s as an LP or as a gp. And you can potentially take these losses against, most of the time it’s against passive income, but sometimes you can take it against active income.
And,
Bob Fraser: So meaning you’re a doctor and you have high W2 income, you’re making several hundred thousand dollars a year. So losses produced by an oil field are intangible losses. It may be producing cash, right? But you actually can deduct the losses against your active income. Yeah.
So to
Ben Fraser: the extent that an oil field produces losses, right? If it’s not producing cash flow and you’re active in the g as a gp, you can take those against active income and write those down. So it can be very attractive for high income earners.
Now you are taking some additional liability. You have to sign on as a general partner. But that can expose you to some liability, but generally it’s somewhat minimal. And there are points in time where you can convert to becoming a limited partner to, to remove that.
And then I think the last big thing, I wanna wrap it up here and maybe consolidate some thoughts on just what are you seeing right now? What are the best opportunities that you’re seeing in the market? And, No, 2023.
Jeff Mohajir: Yeah. 2023. We’ve had a little bit of a.
We had this big run up in commodity prices in 2022, and we’ve had a little bit of a dip. And where I think personally, this is me talking now, I think that there are some really good opportunities. I think you’re starting to see players that are rationalizing their portfolios and larger oil and gas operators or companies and will be looking to divest.
And I think you know where prices are because you don’t have to pay for the upside. And because there is a fair amount of volatile risk in the pricing you can buy. Cash flow streams for a very attractive, discounted value. Yeah, so that’s one of the things that we see that we’re looking
Ben Fraser: at. It’s a range of returns.
Obviously this is just a big picture, a lot of factors go into this, but what kind of the range of returns you’re buying production at, and then what are you seeing on a. Pr production stand, our
Jeff Mohajir: new drill right now, just on metrics of what’s happening in the a and d markets.
Most oil and gas production is right now being sold at taking the cash flow, discounting it at a 15% discount. Wow. And then buying it with the purchase price and getting it, did you hear that guys?
Bob Fraser: What that means is you can buy an oil filled and the cash flows will be around 15% returns without debt, without leverage at all.
Yeah. No leverage and add a little bit. Yeah. If you added 80% leverage on the q in real estate, the returns would be insane. So obviously nobody’s doing that. You don’t need to do that. And
Ben Fraser: because you’re purchasing at this kind of, good value, the upside is not really baked into that.
So you’re upside down. It’s just the gravy. And a lot of times you expect a higher rate of return when you’re doing new drilling because of the additional risk. So ranges of IRRs, there can be 30% plus,
Jeff Mohajir: 30% to 50% depending on what the reservoir is. Yeah. And you’re typically
Bob Fraser: seeing an IRR on a new drill of around 50%, isn’t that right?
Of around
Jeff Mohajir: 50%? Yeah. So what I to say,
Bob Fraser: So meaning you drill a new hole, you’ll typically see a return in about 50% of that three years. Yeah. You’ll see a return in two years, which is insane. And then it continues to produce for many years after.
Jeff Mohajir: Correct. That’s to me, the opportunity right now is to buy a cash flow.
It’s on sale at a pretty good discount, and then you get the upside, all of the undeveloped locations or undeveloped acreage that come along with it. So you’re not paying value for that.
Bob Fraser: You’re not paying for the undeveloped locations, you’re paying for the producing at a
Jeff Mohajir: killer return. And why is that the case largely?
Because we don’t have the competition. Right now. Yeah. Because capital, private equity capital flood the market and some of the pensions and endowments who have been, traditionally, the companies that have come in to make these acquisitions aren’t there. So There’s a lack of capital.
Yeah.
Bob Fraser: It’s, and to the point, What’s Buffett been doing?
Ben Fraser: Yeah he’s been buying up a lot of oil stock. He’s been very active in, in bedding, betting big. There’s a, he’s a value investor.
Bob Fraser: He’s a value investor. Honestly, it’s a value play right now. It is.
Ben Fraser: Yeah. Yeah.
Yeah, thank you all so much for tuning in here and for those that are still here an hour and 20 minutes later, we commend you for listening to the whole thing. Hopefully it brought a lot of value and obviously it’s a little bit longer than some of our webinars, but there’s a lot to cover and a lot to unpack for folks.
And if you are interested in learning more about oil and gas investing we do have some projects coming down the pike. And so I’d encourage you to join the investor club on our website or on our podcast website. How do you do that? So you’ll see it at the top there.
It’ll say Investor club on the top.
Bob Fraser: AspenFunds.us/InvestorClub
Ben Fraser: Yep. And if you’re on the podcast website, TheBillionairePodcast.com click investor club at the top. And be sure to jump in there and get first notification of future deals. And with that, Jeff, thank you so much for coming here in studio and sharing your an hour and 20 minutes.
Jeff Mohajir: I know. Very good, man. Time flies. Okay. When you’re having fun. You guys are fun guys to be around.
Ben Fraser: Awesome. Thanks so much and thanks everyone for tuning in. Appreciate it.
Bob Fraser: All right, take care guys.
