Investing in Oil and Gas in the USA
by Mark S. McGrew
Let’s start with a few words that should scare you anytime you hear them from an investment salesman: “Guaranteed. Exciting. Opportunity.” When either of these words are used by the salesman or in his informational brochure, it is time to end the conversation. Why?
Because they are using emotion to sell a product. They are trying to use your emotion, to prohibit you, from performing an un-biased analysis of their offer. Just stop the conversation or you will lose. They are very good at separating nice people from their money.
I was an Investment Broker for 22 years, a Property Broker of producing oil wells for six years and have been an Oil and Gas Operator, with my own projects for five years. You may want to consider that it is possible that I may have learned some things in the past 33 years.
INVESTMENT AND STOCK BROKERS
There are large Investment Brokers and small Brokers. I never recommend investors to deal with the big Brokers. Probably most sales Brokers are decent people, but the big Brokers have many floors of lawyers who can do very well to convince a judge or jury that blue is red and the sky really is yellow with purple stripes. What I mean by that is, if you have a legitimate complaint against a big Broker, out and out fleecing you, you will probably lose your case. Proceed with caution.
The smaller Brokers are more aware of their vulnerability if they make a mistake or their salespeople lie to you. And it is easier to sue them and win. They know this, so they are more likely to operate in fairness. They are also very aware of their competition and make great efforts to present to you a more attractive and more profitable investment. You, as a buyer, will most likely have better access to your Broker, especially when there are problems.
Buying from a Stock Broker or Investment Broker may earn you an annual return of under 10%. Sometimes more, sometimes less. You may also lose all your money.
Oil and GAS PROPERTY BROKERS
Much like a Real Estate broker, these property brokers are usually smaller, local companies, with close communications or relations with the owners of the properties they are selling. Where Stock Brokers, large and small, usually base their sales techniques on developing a “personal relationship”, making you feel warm and fuzzy to make the sale, Property Brokers are strictly “data driven”. They don’t blow smoke and sell you on hype and whatever is the “hottest thing on the market”. They provide the cold hard facts of the deal and leave you to make your own decision. They don’t have to hard sell anybody. The numbers of the deal do the talking. Here are three Property Brokers that I have dealt with for many years and they are always straight:
Buying from a Property Broker can give you a 20-30% annual return. Sometimes more and sometimes less. You may also lose all your money.
OIL and GAS OPERATORS
Operators are people who manage and/or own oil wells. Most of them depend on private investors to fund their projects. If you have the time, you can call or write to any Operator and ask him if he has a project that you can join. If you are looking for a smooth talker or a politically correct kind of a guy, you need to look to the Stock and Investment brokers. Most Operators are pretty tough cookies. They have brains and a lot of experience but they also work in the field with some of the toughest guys you’ll ever meet.
By far, the vast majority of Operators are honest. Most Operators are people who were brought up in the business, going out on jobs with their dad, since they were very young. Some of them are 3rd and 4th generation professional oilmen.
If the employees, the people working in the oil business are not honest, they, or people around them, will die a very nasty death. It’s that simple. Remember this: Most people in the finance end of the oil business are low down lying snakes. Most of the people who actually work for a living, trying to produce a valuable product, are honest. If not, they get their butts handed to them on a platter and get kicked off the job or they get themselves killed and maybe take somebody else with them. The liars don’t last long in the “hands on” part of this business. There is no niceness or political correctness when a liar gets fired. It’s not a pretty sight, unless you enjoy seeing intense hostility. These are some very tough guys. (FYI…….we are also not too happy with investors who lie to us.)
If you want to “Deal Direct” with the principal, rather than dealing with the middlemen with their floors of attorneys, then contact an Operator. You can find Oil and Gas Operators by contacting the State authority that regulates the oil business in that particular State. Just don’t expect an Operator to tell you what you want to hear. He will more than likely tell you the truth, whether that is good or bad.
Pooling your money with an Operator’s project can get you a minimum 20% annual return and most likely into the 40-50% annual return range and even more. You may also lose all your money.
OIL PROPERTY AUCTIONS
Auctions are for buyers who have some degree of experience in oil and gas deals. Nobody is going to explain the project to you. They just lay the Data on a table and you can pick the ones you want to bid on. Some of their deals already have an Operator and some you need to operate yourself or hire an Operator.
In auctions, you will see deals sell at prices that give the buyer anything from a 10% annual return up to a 30% annual return and possibly double your money in a year or less. Some deals pay more and some deals pay less. You find properties costing from a few hundred dollars up to the millions of dollars. You may also lose all your money. These are two of the busiest oil property auction sites:
As you explore various options, if you’re paying attention, if you follow the rules below, your odds of success will greatly increase:
Rule number 1: Proceed cautiously, do your homework. Only fools rush in. Believe half of what you see and nothing of what you hear.
Rule number 2: Invest only an amount of money that you can easily afford to lose. Like driving on icy roads, go only as fast as the accident you can afford to have. Professional gamblers will tell you to bet only 1/32 of the money that you have to throw away. That way you have a far better chance of staying in the game. Oil wells are a Crap shoot. A roll of the dice.
Rule number 3: Have patience. Don’t rush to buy in. There is always another deal to be had.
Rule number 4: When you hear or see the words: “Opportunity”, “Exciting”, “Guaranteed”, stay away from that deal. The only “opportunity” is for the salesmen to take your money. Salesmen have no faith in the success of a well. They only pretend. They know as well as I do these same rules. And they also know just as well as I do that somewhere around 80% of oil deals are a net loss. The salesmen only want your money so they can collect a commission.
Rule number 5: If you are told it is guaranteed, the guy is either stupid or lying. There are no guarantees in this business or any other business. If you want a guarantee, buy a puppy. I guarantee he’ll pee on your carpet.
Rule number 6: Never trust a geologist. They don’t know what 1,000 feet below the surface holds any more than you do. So what can they know about two miles below the surface? Or 5 miles below? The greatest discoveries have been found where the experts said there was nothing there. Saudi Arabia and the North Slope of Alaska, both originally classified as losers, are only two examples of epic failed predictions by top notch world class geologists and geophysicists. The greatest failures have been where the “experts” highly recommended to drill. The $1 Billion dry hole, the Mukluk in Alaska, had the best of the best geologists, geophysicists and engineers all screaming, “Drill Baby Dril!”
Rule number 7: Trust the “Data”. Data is a physical record of the history of a well.
If you follow these rules, if you do lose, you won’t break down and cry like a baby.
FUTURE OF OIL
The future of oil is no great mystery. The modern world would not survive without oil. Stop all oil production today and within five years, 80% of the world’s population will be dead.
Since oil was first produced, we have gone through boom and bust cycles, but never a complete shutdown. The News is constantly hyping one great fear after another and life goes on, because oil goes on. The three necessities of civilization today are food, water and oil. Most wars of the 20th and 21st centuries were and are, because of oil or gas. You only need to look at Libya, Iraq and Syria. Do your own research on Vietnam.
America’s current energy plan is “Energy Dominance”. That means we will produce far more oil than we need and sell the rest. The State of Alaska alone, holds enough proven and recoverable oil, to fuel the USA for 200 years. America’s new trillion dollar infrastructure plans will require enormous amounts of oil. The various companies returning to America and foreign companies coming here, bringing billions of dollars with them, maybe trillions, are going to require enormous amounts of oil. Our oil and gas exports will create more of a demand for the USA to produce more oil. And, rebuilding the war torn areas of the World, will require what? Oil and the willpower to do it.
These Population Growth vs. Oil Production charts tell the tale. We have been producing oil since the mid-1800s. From the year 1900 to the year 2000 the life expectancy has almost doubled. Infant mortality is far lower. And because of oil, we have in fact and in deed, gone on Space odysseys, where no man has gone before. People today survive injuries, infections and diseases that killed normally healthy people all through history, until we unlocked the hundreds of thousands of beneficial chemicals in oil and gas. More food is produced due to pesticides, herbicides and other petro-chemicals. Livestock lives longer and healthier. Many lifesaving medicines come from oil. We live with on-demand heat and air conditioning, hot and cold running water and one of the greatest new-birth reducers: Oil burning, kerosene burning, gas burning and electricity producing LIGHT. People engage in less sex when the lights are on. Third World countries know this.
The list goes on and on, to hundreds of thousands of chemicals and products that World civilization would not have, if not for Petroleum.
Civilization is Oil and Oil is civilization. So, what is the future for Oil?
You tell me.