One of the main questions that we get at Cannon Operating all the time is “How do I pick an oil and gas company.” Once you get past all of the fluff, and miss direction out there. It’s incredibly easy to figure out if a company is worth your time and or your hard earned money. In this article, I will lay out three simple things you can look for in any oil and gas company you are considering giving a shot. These steps will let you know for sure:
- What type of company you will be investing in.
- How likely is your venture with them is liable to be successful?
- And most importantly can investing with them give you the return on investment that will fit your needs.
So without further ado, I present three tips for picking an oil and gas company to invest in.
What kind of company are you considering doing business with?
of company are you considering doing business with?
Many people that decide to invest in many oil and gas go thinking that every company, for the most part, is the same as far as how they operate, and what your money is going towards when you invest it. This is absolutely NOT true. For the most part, there are two types of oil and gas “companies” you can invest with. There are Operators, which is what Cannon Operating is; and then there are promoter companies, which is what the majority of companies out there are. An Operator is a company that is responsible for every aspect of the well being drilled for the most part. The very first thing an Operator does before it even considers putting a project out to the public to invest in oil wells is to perform their due diligence on the potential prospects it is considering. It does this by hiring a professional geologist to go out and do different tests and evaluations on the land that it is considering drilling on. These tests could include shooting seismic to “see” what is under the ground. Land surveying, Radio Telluric testing, and taking and analyzing core samples. These tests costs the company thousands of dollars before it even reaches you as the investor. Once the Operator is satisfied that they have a good prospect, they will move forward with leasing the land that the well or wells will be drilled on. Depending on the state, this can be a very involved process and will cost the Operator upfront funds to complete. Once everything is in place the operator will proceed forward with drilling the well. Operators generate money for their companies when the wells that they drill produce. From time to time they will allow outside investors to participate in the drilling of the well and as a reward for the investor participating they receive a stake in the well in the form of Working Interest and Net Revenue Interest. However keep in mind that you will also be responsible for that percentage of the monthly expenses due for that well also (more about that later). If you are not familiar with WI and NRI get in touch with Cannon Operating, and we will go more into detail, but for now just understand that this is what determines your share of the project’s earnings. Once the funds are in place to drill the well the Operator will either hire a driller to go out and drill the wells, or they will use their drilling equipment if it is available. The first phase of the project is drilling to total depth and testing the well as to ensure that it will be a productive well. Assuming that everything looks good, the operator will complete the well and start preparing it to be put into production so the oil well can begin generating revenue. Once the well is completed and in production, it usually only takes 60 to 90 days before you receive your first revenue check. You should then receive earning from your investment every single month that well turns a profit. So to put it briefly when you partner with an Operator, you are dealing with one company that is completely in control of what happens with the project that you are invested in.
Now as for a Promoter company. When you are dealing with a Promoter, it is an entirely different ball game. The primary difference between an Operator and a Promoter company is a Promoter company does not partake in any aspect of drilling a well other than raising the money. In fact, the majority of the time the project that they are selling you a piece of is not even their project. Usually, they will contact a company like Cannon Operating and offer to sell a piece of a project that the Operator has already done most of the “heavy lifting” on. The Promoter then sells the interest that they have purchased at a significant markup compared to what it would cost to do the same project directly with the Operator. The Promoter company is not going to make any money if and when the well produces, so they must make all of their money on the front end when they sell you interest in the project. So what this means is the majority of the time the Promoter company doesn’t care one way or the other if the well produces. They will have made all of their money by then. Of course, this does not mean that there are not any Promoter companies out there that care about their clients making money. There are a lot of them that are very reputable and care greatly about their investors. However, based on how they are structured the majority of the time you WILL make LESS money than working directly with the Operator, only because it costs more to get involved in the first place because of the markup that a Promoter company MUST add to make a profit for their business. Whereas an Operator will make money when the well produces, so that means they do not have to gouge as much out of you as possible ahead of time. This also gives the Operator an incentive to make sure that the well produces. That same incentive is just not there for a Promoter Company.
2. What kind of track record does the company have?
This is possibly one of the most important things to verify, regardless of if you are working with an Operator or a Promoter company.
Every single company that you speak with is going to have an incredible story for you about how the project they are offering is going to make you boatloads of money. All of this is fine and good, but the very first question you should have for the representative you are speaking with is “Have you ever done what you are saying will do before.” Now do not get this confused with what wells in that area have ever done what you are saying before. Being aware of this being done by someone else and doing it yourself are two entirely different things. Think of it this way. Let’s say you want to climb Mt. Everest. You have two different Sherpa you can hire to assist you in getting to the top. You have one that is experienced and has been to the top several other groups and was able to safely get 95% of them back to the bottom in one piece. Then you have a second Sherpa that has never actually taken anyone to the top and back down. But he has the same map as the other Sherpa and is confident he can do the same thing if he does his best. Who would you trust with your life to get you back up and back down? Yes, the first Sherpa has lost a few people but he without a doubt knows his way around the mountain. The other Sherpa has never lost anyone, but he has never even actually tried. Which one would you trust your life with? Although that is an extreme example, it’s not too far of a stretch to say this is a similar situation. When you choose a company, you will be hard pressed to find a company that has never had a dry hole. Some will have more some will have less but all businesses that actively drill or participate in wells that have been operating for any extent of time will have poor producers and dry holes on their record. This should not turn you away from that company. All that means is you need to make sure that they have done as much reasonable due diligence on the prospect to give every possible chance for success. The company that you have to be weary of is the new startup that has no track record at all. This generally means that either the company is really new and may or may not have any idea what they are doing. It could also mean that the company rebranded itself once it failed too many times for anyone to trust them again. Now this is not to say that the company has no chance of success, just understand you are taking a much larger risk working with a company that has no record as opposed to working with a company that may have a few failures under its belt but gets it right the majority of the time.
3. Ask for the proof
A lot of companies out there will make all sorts of ridiculous claims to the successes that their business has had and the money that they have returned to their investors. One of the common denominators we see in a lot of cases where investors lost their money due
to the well not producing or from outright being ripped off is many investors both experienced and novice. Never once ask to see a run statement. What is a run statement? A run statement is simply a receipt clear and straightforward. Anytime a company sells a load of oil they are given a run statement. For example, Cannon Operating sells all of its oil to a very large and well know company name Sunoco. Sunoco, by the way, is one of the biggest purchasers of crude in the United States. The great thing about dealing with a company that can present you with receipts of sale is you can confirm their claims through a 3rd party that has nothing whats so ever to gain by helping that company “fudge” the numbers so to speak. If a company claims to have returned 3 million dollars in revenue to their investors from the wells they are in. Then they will have run statements to support those claims. Think about it, if you go to a bank and you want a loan, what is one of the first things that they ask you for? To see your “run statements”. For an individual, this could be their pay stubs, or their past tax returns, or maybe their bank account statements. In the end, they are all the same thing. The only difference is when you invest in an oil and gas company it is not a loan. You will receive no collateral or any guarantees of any kind. In fact, if you encounter a company that is promising or guaranteeing you success in a venture. RUN AWAY and fast because there is no such thing in this industry. Not to mention it is extremely illegal to make guarantees about how a well will perform. Now do not get me wrong, just because a company has sold oil in the past does not mean that the project you are on will be a success. All the presence of run statements does is confirms that a company is selling oil. Which is an excellent sign. However, you should still look very carefully at any deal put in front of you to make sure the number make sense. You will also want to pay close attention to what kind of fees the company will be charging you and what you will be expected to pay for as far as your part of the bill. Some companies (especially Promoters) will slide additional fees in that can total thousands of dollars. This can dramatically eat into your profits. Even worse, if the well is not a large producer. You can end up owing the company money at the end of each month just to cover their fees. This is not an ideal situation when you invested to make money first place.
In conclusion, investing in oil may seem tough and complicated at first glance. It could even be a little scary and intimidating if you listen to those who have repeatedly failed and never figured out why. However, If you can have just a little bit of patience and remember these three tips that we have provided you. You will have much better chance of being satisfied with your oil and gas investments. Will it work out perfectly every single time? No, it won’t, it’s statistically impossible to win at anything every single time you do it. What this will do for you is give you a strong base to start from when you’re checking out a company, and if nothing else it should at least help you ensure you primarily work with businesses that have your best interest in mind.