S2E42 – Grant Norwood – Demystifying the oil industry

Key Timecodes

• (00:48) – Grant Norwood’s background history
• (01:56) – Oil and gas industry  business model
• (05:43) – New oil pumps and the big companies’ strategy
• (06:03) –  Oil cost and types
• (09:07) – Salaries of the engineers and crew running that business?
• (10:46) – The oil types and classifications
• (14:53) – Comparing the USA and Saudi Arabia’s oil technical characteristics
• (16:35) – What it  means when the oil price goes negative
• (24:29) – What is horizontal drilling?
• (26:43) – How deep can you drill?
• (32:11) – How investors can get involved.
• (36:06) – Some numbers and revenue expectations
• (36:42) – What is the minimum investment amount to get in that business model?
• (37:40) – What are the average annual returns?
• (42:39) – What is the biggest risk for the investors?
• (45:40) – Where does he see the oil price going in the next years
• (49:18) – The best business or investment advice he ever received
• (51:52) – Guest contacts

Transcription

[00:00:03.430] – Intro

Payback Time is a podcast about building businesses wealth and financial freedom. We try to uncover the challenges our guests faced, the mistakes they made, and the steps they took to achieve their goals. The overall objective is to provide you with a roadmap that leads to your own success. Sean Tepper is your host. Are you ready? It’s payback time.

[00:00:32.910] – Sean

Is oil a wise, long term investment? In this episode, we talk about the ins and outs of the oil industry, including the costs around the globe, how it competes with green energy, and where it will be five to ten years down the road. Please welcome Grant Norwood. Grant, welcome to the show.

[00:00:49.620] – Grant Noorwood

Yeah, Sean, thanks for having me on.

[00:00:51.440] – Sean

Good to have you on. We’re going to be talking about oil today, but first, why don’t you kick us off and tell us about your background.

[00:00:58.470] – Grant Noorwood

Yeah. Growing up in West Texas, kind of oil and gas runs in your blood. It’s everywhere. I mean, probably one in three people you talk to work in the industry, so naturally it’s just all around you. So unless you have ambitions to do other things, a lot of people like myself find their stuff in this industry.

[00:01:18.130] – Sean

Got you.

[00:01:18.790] – Grant Noorwood

But anyways, just growing up around it led me into early career in land and title. So land and title is pretty essential to oil and gas because you have to lease the property to be able to drill a well. So there’s no title insurance. So it’s a very diligent process that is tedious. So going from that, I actually started acquiring interest in various wells across the country and slowly made my way into becoming an operator.

[00:01:47.250] – Sean

Got it. You own oil refineries today?

[00:01:51.570] – Grant Noorwood

I own oil and gas wells.

[00:01:53.460] – Sean

Got it. Okay, well, what we want to do on this episode, since we have a lot of our listeners and customers that Tykr, they are investing in the stock market. But there’s been this interest recently because gas prices have gone up as hey, making a faster dollar, quicker buck with oil and gas. And we’re more about longer terms for investments and businesses. But we really want to get to the bottom of it in this episode with you. We’ve got a lot of questions teed up here. We want to walk through and really break down this industry a little bit, maybe provide a little more the pros and cons and maybe risks and advantages of investing in this industry. So the first question I have is, why don’t you demystify this industry a little bit?

[00:02:39.000] – Grant Noorwood

Okay, well, we all need energy, and oil and gas is the most consistent. You can transport it, and it goes into so many different products beyond energy that it’s essential to our daily life. So it’s as essential as food. Obviously, without energy, none of the food gets to where it needs to go. And in our modern times and all the things that we’re used to enjoying in our everyday life wouldn’t exist without oil and gas. I mean, everything from the paint on the walls around me to the clothes I’m wearing to the clothes you’re wearing, it all takes oil and gas. So energy is probably its main use. But another 60% of the products out there actually come out of oil and gas. So just the industry as a whole is an essential need. But if you’d like me to kind of break down what it is in order to get oil and gas, it’s essentially a hole in the ground and then the commodity comes out. Now, there’s a lot of steps to making that happen. There’s a lot of science and research and risk to discovering it’s in an area, but it’s just as basic as that.

[00:03:48.600] – Grant Noorwood

They’re still drilling wells the way they did 100 years ago. They talk a lot about new technology, but it’s really just data mining. There’s not a whole lot different that happens on a rig now than there was in the early 20th century. It’s just now we can find the data. So we’re right more often than we’re wrong when it comes to searching for it. So it’s such a capital intensive and costly proposal to drill a well that you want to be successful as often as possible.

[00:04:21.180] – Sean

Right. Back up a second. You were talking about it really touches a lot of what we’re involved with right away. I think of transportation, like transporting food and supplies. And then there’s manufacturing plants, running electricity. If you don’t have oil and gas, you’re not going to be able to run operations.

[00:04:41.260] – Grant Noorwood

Correct? Yeah. It’s like the mother of all commodities, if you will.

[00:04:44.630] – Sean

Sure.

[00:04:44.940] – Grant Noorwood

So even the commodities that aren’t necessarily energy need energy to get where they’re going or be created or manufactured.

[00:04:54.330] – Sean

Next question here is why the big companies are reluctant to turn on new oil.

[00:05:03.190] – Grant Noorwood

If you’ll read about various public companies, basically they were in such a growth mode for such a long time that investors really didn’t receive cash flow. So it was just grow. At any rate, let’s build up the value of the company. And now it’s after a few downturns and companies having to write down assets and write down assets and stuff like that, they’ve just gone into a cash flow mode. So they’re really just trying to return to shareholders and they’ve done a great job with it. So they’ve kept their production relatively flat. They haven’t put any new money back into the ground and it’s because they’ve been hurt by doing it in the past. So it’s like the cure for high prices is high prices. The cure for low prices is low prices. Because typically you slow down when prices are low, you speed up when prices are high. Now they’re doing the opposite. They’re just coasting when prices are high and they’re just benefiting from the huge windfall.

[00:06:03.080] – Sean

Got you. This is not a question here that we kind of prepared offline. But I’ve done some homework about the costs of oil around the globe, and I understand that sometimes mining oil here in the States can actually be more expensive than getting it overseas for three reasons, and I’d love to hear your input on this. And those three reasons would be lift, weight, and sweetness.

[00:06:35.170] – Grant Noorwood

Correct.

[00:06:35.960] – Sean

Okay, so lift summarize. These we can dive into.

[00:06:41.750] – Grant Noorwood

So you could talk to various people in my position, and depending on who you ask, you’ll get a different answer. But I would say in years past, we had better reservoirs that hadn’t been trained. So actually we had lower hanging fruit here in the States if you were to rewind the clock 80 years ago. So really, a lot of these places overseas, they haven’t been producing as long as we have. So we’ve tapped some of our more charged reservoirs. I’m just going to kind of keep it on a higher level just so it’s not confusing. But basically, we had areas you could drill shallow depths, the wells would produce on their own with little lift, as we call it. And we didn’t manage it well, so we were so new to it, we didn’t know how to handle it, so we would just produce it out into open pits. They use buckets. Pipelines were actually made out of wood, if you can believe it, and there’s still some that are. So we just mismanaged our resources early on because we didn’t really know how to handle it. We didn’t know that it was limited. We didn’t know we’d stop finding big pools.

[00:07:53.970] – Grant Noorwood

So now today, what we have to do is drill into TightRock, which 30 years ago, people knew it was there, they’ve known it’s there for a long time, but they didn’t know how to extract it. So we’ve pretty much tapped in the United States, our lower hanging fruit. So now we have to drill into these tight reservoirs horizontally, place sand in them so we can actually extract the oil in those reservoirs. So we’re essentially a form of strip mining. So where let’s just say a 10,000 foot wellboard cost you a million and a half dollars. Add the horizontal leg, another 800,000, the frack, another two, three, four, $5 million, where overseas they just have that vertical whaleboard. And I would say they’ll be in our position if you fast forward the clock another 2030 years. It’s just we had it before, we don’t have it now.

[00:08:46.630] – Sean

Sure.

[00:08:47.050] – Grant Noorwood

And since it’s such a safer gamble to actually do the more expensive method of drilling and producing, we’ve actually gone backwards in our capital deployment on the easier reservoir. So I’m not saying they’re all gone. I’m just saying we’re not looking for them anymore because the risk associated to them is a little bit greater.

[00:09:08.000] – Sean

Sure. And with Lyft, essentially, that’s the cost, especially with labor, to get the oil out of the ground. Correct. With the homework I did, there is incorrect me if I’m wrong here, but our engineers or the people are running these refineries, they have higher salaries here than those in, like, Saudi Arabia and Russia especially, right?

[00:09:33.070] – Grant Noorwood

They do. I mean, the lowest man on the totem pole in West Texas has a brand new truck that company paid for. And as you go up the chain, it goes from nice trucks to nice houses to nice planes. So I think it’s just overall, we have a higher standard of living here in the United States. And just wages, they’re higher compared to what you need over there. So a good living over there isn’t comparable in price to a good living over here. But the barrel is still the same price.

[00:10:05.550] – Sean

Right.

[00:10:06.150] – Grant Noorwood

That’s one of the differences, I would.

[00:10:08.380] – Sean

Say, because I was looking at salaries. Like here in the US. Salaries can be around, give or take, ninety k a year. In Saudi Arabia, it’s closer to 50 kwh. And then Russia can be between, like 25 and 30K. So significantly less.

[00:10:26.450] – Grant Noorwood

Correct. And then that’s not including benefits, pensions, all these different retirement plans, company set up. Now, another thing is per diem and man camps. I don’t know if they provide that over there, but if they do, it kind of cancels out. But if they don’t, that’s a considerable cost operators like me have to consider.

[00:10:45.900] – Sean

Sure. I like to keep going on this because I find this very fascinating. Before we jump into some of your other questions, which is another variable that relates to the cost of oil is weight. And correct me if I’m wrong here, but weight is the debris and the other things kind of mixed in with oil. Like there’s heavier weight if there’s more stuff in it.

[00:11:10.680] – Grant Noorwood

Yeah. So you have these lower gravity crudes, and their viscosity isn’t as high, so they take more pumping. Sometimes you can’t produce them if there’s not what you call a water drive. And so you go for the areas that are actually 60% water saturation or higher. But when you have 60% water saturation or higher, that well might come in with an 80% oil cut. But in five years, it might be down to a 20% oil cut. In 15 years, it might be down to two or 3%. So water is something to pay attention to because it’s very expensive to dispose of.

[00:11:50.170] – Sean

Right.

[00:11:51.120] – Grant Noorwood

You can’t do anything with it except for pump it back into the ground. You have to transport it to a disposal well because everybody thinks oil is so toxic it’s polluted. What do you think? Send our fertilizers? If I go and punch a hole in one of my tanks and I have 50 barrels spill out, you come back next year, that’s going to be the tallest crash you ever saw. Now, if I go do that to my water tank, everything will be dead next year. It’s just nasty, salty, briny water that really can only go back to where it came from, and that’s the ground.

[00:12:23.280] – Sean

Got it.

[00:12:24.770] – Grant Noorwood

Very costly.

[00:12:26.150] – Sean

And you want lower weight oil, is that correct?

[00:12:30.030] – Grant Noorwood

Right, better lower weight oil. It’s going to produce easier. It’s just a better condition. And it also can go into more products. So you’re heavier crudes, that’s going to be your tars and kind of like your laptops and stuff. So when you do have a surplus of heavier crudes on the market, you blend them with the lighter crudes to actually have a usable commodity. But most of the heavier crudes are coming from Venezuela and Canada. So we actually have good lighter crudes here for the most part. But yes, the heavier crudes are also more expensive on the lift costs.

[00:13:08.430] – Sean

Got it. And then let’s talk about sweetness. So this is one classification a lot of people are not familiar with. So higher sweetness means lower sulfur, is that correct?

[00:13:22.450] – Grant Noorwood

Sulfur, yes. Sulfur is not good for the refineries. It actually can put off toxic gases as well. Now we have detectors that are everywhere if an area is known for it. Back in the day, they actually used to put a bird in a cage and they’d always keep the bird riled up. So if they got silent, everybody knew to ride from the rig. But today we actually wear badges. And then above all door frames, they actually have H, two S detectors.

[00:13:51.200] – Sean

Got it. Sweeter is bad. You want low sweetness. Correct.

[00:13:56.480] – Grant Noorwood

High sweetness.

[00:13:57.410] – Sean

You want high sweetness is better. Got it. Okay. And here in the States, we have lower sweetness. Is that right or am I wrong on that?

[00:14:06.520] – Grant Noorwood

It’s a broad spectrum. I don’t know. It’s weird. So you have west Texas right in the center. It’s pretty sweet. You get too far south, it gets sour. You get close to Lubbock, it gets sour. So north and south and then it’s different state by state. It just depends where you are. But most of the states are actually a lot better than Texas. We actually have more HDRs than a lot of the other areas. And I’m actually in Kansas today, we have six fields up here. And my fields in southern Kansas, they require sweetening because a lot of the gas and oil is quite sour. I wish it was one way or the other, but it’s all over the board. It just depends what part of what.

[00:14:53.110] – Sean

State you’re in now compared to what’s in Saudi Arabia. That would be lower weight, higher sweetness. Is that correct?

[00:15:01.730] – Grant Noorwood

It would be average sweetness, lighter weight. And that’s why it’s so easy for them to produce at such a low lift cost. That’s one of those examples that eventually they’ll tap out their main fields, but they’ve really just been able to coast off of one specifically. And it’s not very deep. So inexpensive to develop, to live. Yes. So they’ve got it good.

[00:15:28.770] – Sean

Yeah. Thanks for breaking that down. I tried to do some homework on this industry a little bit. And that’s why people here in the States will say, well, we’ve got all this oil right here and it’s like, well, technically it’s more expensive in many cases, and here are the reasons why that’s true.

[00:15:45.650] – Grant Noorwood

It is more expensive. But actually, our refineries, we were more geared towards the heavier crews because we got such inexpensive crude from Venezuela for such a long time that we have to kind of shift the way we refine because we’re actually using more of our own because we used to export most of it and then we turn around and then import most of it. So it’s quite backwards and we’re kind of getting on track to be a lot more self sufficient. But we produce I think the highest we’ve ever had is 13.1 million barrels in a single day, and we consume over 20 million barrels. So we make a lot. We don’t make enough.

[00:16:30.510] – Sean

Got you.

[00:16:31.270] – Grant Noorwood

Even if it’s just still not enough.

[00:16:33.840] – Sean

Right. Let’s talk about the price of oil going negative. What does that mean exactly?

[00:16:41.370] – Grant Noorwood

So the price is kind of dictated by the futures market. So it’s all traders and traders on paper. Then you’ve got the traders that will come and try to talk me into instead of selling to the refinery, selling it to them so they can haggle with the refinery. These traders kind of get themselves caught between contracts and they didn’t have the demand for that day. It was kind of a weird thing. So it was like a twelve hour blip, so it dropped negative, next day it was back up to positive, and then it took quite a while to keep going up. But it was just a weird timing with those contracts needing to get delivered and not having a place for them to go.

[00:17:23.560] – Sean

Got it.

[00:17:24.070] – Grant Noorwood

So it was just a main event. I’m not going to say it won’t ever happen again, but I highly doubt it just a little bump in the road.

[00:17:32.230] – Sean

So it’s really the buying and selling, essentially the trading. You can run into circumstances where it goes negative like other commodities. Yes, correct. Yeah.

[00:17:41.620] – Grant Noorwood

And that was the first time, I hope it’s the last. Would take a great deal for us to ever have that happen again. But myself and many other producers, we didn’t sell that day. And a lot of times you’re on like a rolling monthly average with your purchaser, which is like so you got upstream me, the producer, you have the purchaser, which is the midstream, like energy transfer kinder Morgan, and you have the downstream, like Marathon Sinclair refineries. So your purchaser, some of them pay you based on what it’s at that day, but by and large, most of them pay you on like a rolling monthly average. So it really didn’t do much that one time. It did happen.

[00:18:24.820] – Sean

Sure. Well, here’s a good question related to our investors and how they look at this industry because of the risks of, like, electric, the green initiatives out there. So you think of the EV companies and solar panels. How do these oil and gas companies, how do they maintain strong revenue and strong profits when you have a threat from green initiatives?

[00:18:50.930] – Grant Noorwood

Well, I guess the price of our commodity is what it is, despite its competitors. But one thing that I’m able to comfort myself and knowing is they’ve been building windmills and solar panels going on like 35, 36 years now and throwing everything they can at it. And I know that’s still an infancy of an industry, but everything they can throw at it, and quite a bit in modern times, they’ve only been able to achieve 3% of the energy mix. So 3% of the energy mix, of which about 60% of our commodity goes to. So it’s somewhere around a 2% dent in what we could have as demand, because oil and gas doesn’t just go into energy, but our competitor. Like I said, they’ve tried very hard. They’re continuing to try hard and despite their best efforts, have only come up with 3%. But the rate at which they’re growing each year does not offset the increase in demand across the globe. So they remove the need for, let’s call 300,000 barrels. Each year, demand grows 1.1.2, or in a good year, 1.4 million barrels. So if we all tried, we might double kind of what it generates now and still it’s not going to make the slightest difference.

[00:20:19.110] – Sean

So, in summary here, as fast as the world’s population is growing, we will always need, it sounds like oil and gas. And although electricity, solar, turbines, everything, it’s not going to write, it’s not going to replace oil and gas. You’re saying?

[00:20:37.910] – Grant Noorwood

No. If you look at, let’s say 60% goes to energy. Of that 60%, 20 goes to transportation. Everybody switches to a Tesla. When you normalize it across the entire scale, it’s still like maybe 6%. And let’s say it takes 15 years to do that. So you replace 6 million barrels in today’s demand to replace it with 15. So it’s actually kind of startling when you look out 20 or 30 years, because what will we do? That oil and gas is limited. I’m not saying that you’ll ever produce the last barrel, but even as you get close, it gets more expensive. So if we don’t have an alternative energy source, we stand and not have enough energy in general. So I don’t know. I say this whenever I talk to anybody on the subject, but we really need to try to figure out how to make nuclear safer, because I don’t see any other viable alternative that would keep us from going to the Dark Ages. Should we deplete our reserves? It’s not if it’s just win, but that wind is probably anywhere between 40 to 70 years out. But that’s still we’ve got kids to think about.

[00:21:53.430] – Grant Noorwood

Some of us will have grandkids to think about as we get to that point. So we need something. It’s just that’s not a threat. But the only threat is we run out of economic production. But if you think about it, the same time we’re at call it $90 a barrel today. I can drill things today that makes sense economically that I couldn’t have drilled two years ago because the cost of drilling, the amount of production, it didn’t make money. Let’s call it $50 or it made money, but it wasn’t an appealing investment. At $50 a barrel, it is now at 90. Well, the more scarce it gets, the higher the price gets. So there’s plenty of other places to drill if it goes to, say, 100 and 8250. And I really think that’s where the price is headed because we’ve kept prices down. We kept the prices down because we’ve invented horizontal drilling and hydraulic fracturing. And we’ve tapped into our Shell reservoirs because we’ve depleted our low hanging fruit. Before that, we were at $150 a barrel and going up. And like George Bush said, americans are addicted to oil. We need to do something different.

[00:23:08.630] – Grant Noorwood

Obama campaigned on your tire pressure. We didn’t know what we were going to do. And then a gentleman from the Woodlands, Texas, George Mitchell, started drilling these walls horizontally. And we had this big revolution of shale drilling, and that was the new big Boy wildcatters thing. Is that’s what they did. And, hey, we went from 150 of Arrow all the way down to 27. Natural gas went from $13 in MCF down to two. Now, fast forward the clock 13 years later where we sit today. We’ve been drilling our best inventory for 13 years. Okay. We have about five to six years of inventory left. Then we’re going to be back in that same situation. Of the 11 million barrels we’re producing today, about six and a half million of that come from shale. Shale wells are great producers, but their production day one is very high. And by month twelve, it’s about 20% of what it started us. And then the following year, it declines another 40 and then 30, and then it flattens out. So, like I said, I hope that we figure something out with nuclear sooner than later, or $200 a barrel is going to be very cheap if we fast forward five or six years from now.

[00:24:28.650] – Sean

Okay. Kind of a wake up call. Even more so. I like to just go back a little bit. You mentioned horizontal drilling. I’m interested to learn more about this. We’re so used to vertical drilling going straight down. What is horizontal drilling? Are you like, drilling a hole and then going into reservoir sideways? Maybe I’m oversimplifying this.

[00:24:49.310] – Grant Noorwood

So kind of the low hanging fruit, the low lift costs, the more inexpensive and more efficient way to produce oil, of which we have pretty much depleted the best of let’s just think of we’re drilling into sand. So think of sand on the beach or a bottle of water on it. It’s gone instantly. Okay, now, horizontal drilling, we have what’s called shale. So when you’re driving through the mountains, you see that beautiful cut out to where they needed a place to put that road. You see all that stuff on the side of the road? We’re boring through that.

[00:25:22.310] – Sean

Okay.

[00:25:22.880] – Grant Noorwood

And then we’re filling it with sand because it’s like a sponge. It’s a dense sponge saturated in oil. And that sand gives it a way to flow itself to the wellboard so we can pump it out. So what we’ve done is, since all of the low hanging fruit is now diminished, we’re going into the source rock. This is what sourced the stuff and steeped up into the sand. So we’re going to the source, we’re boreholeling through it, and we’re creating these fracture networks so it’ll produce sure, it’s limited and we can calculate its limits, is why I’m saying we have about five to six years of inventory left. But that’s what horizontal drilling is. So it takes about 300ft to bend that steel. That’s about how long it takes to actually go completely horizontal, straight 90 degrees. And then we go out anywhere between a mile to 3 miles, accessing as much of that reservoir as we can. And then we go in stages and we fracturing these clusters going all the way down the wellboard in order to recover that oil. So we’re kind of in a last ditch effort here in the United States to make as much as we possibly can for as long as we possibly can.

[00:26:36.770] – Grant Noorwood

But it’s definitely because you don’t have anything better.

[00:26:41.620] – Sean

Yeah, right. Is there a limitation to how far we can drill down? Because I’m naive in this aspect and I love the education here. My thoughts are, oh, why can’t we just dig deeper to find other oil wells? But maybe there’s a limitation there.

[00:26:59.970] – Grant Noorwood

Anywhere you’re going to find oil is going to be in a basin. A basin is like a bowl under the surface that’s built in sedimentary rock that used to be a river, a lake, an ocean, whatever have you. And then it’s got a basement underneath it. There’s no oil beneath the basement, so it just wouldn’t do us any good. So these basins are various depths, like the Illinois Basin. If you go down to 9000ft, you hit the basement, you hit granite. There’s nothing else to look forward to below that here in Texas, if you’re talking North Texas, it’s about 12,000. West Texas on the midland basins, I think. Eleven. The Delaware Basin is about 23. Oklahoma, you have parts of it where it’s only 3000ft. You have parts of it that it’s 27,000ft. So it just in some cases, there’s just nothing else to drill deeper to that would yield anything that you’re looking for.

[00:28:00.800] – Sean

Got you. So it sounds like oil basins really only reside at a certain depth. It’s not like they’re going to be you mentioned 12,000 is the biggest number. It’s not like it’s going to be sitting at 20,000.

[00:28:15.270] – Grant Noorwood

Well, I would say it wouldn’t sit any deeper than $28,000, but there’s only been like three wells drilled to that and it’s very expensive and it’s very risky and it’s very mechanically complicated.

[00:28:29.450] – Sean

Right.

[00:28:30.400] – Grant Noorwood

Yeah. I’d say most of the whales, if you’re taking every well in the country and average the death, you’re probably somewhere around 7500ft.

[00:28:37.830] – Sean

Have we looked for other more? I wouldn’t call them shallow because they’re still really deep here. But any more wells across the ocean, in different locations in the ocean, yes.

[00:28:49.660] – Grant Noorwood

And we have such an ESG movement going on and such a green initiative that we aren’t allowed to explore here. Kind of our own coast in all parts. So we’ve developed the Gulf pretty well. There’s quite a bit of oil still left to develop in the Gulf. Exxon has made some very significant discoveries off the coast of Suriname. So they’re looking and those are good places. And that’s going to be the only reason we wouldn’t go to 2000 to barrel. I’ll just say that whenever code was going on, demand dropped down to, I think, 92,000. So we had an 8 million barrel discrepancy. Price went negative this past summer. When we were at $120 a barrel, it’s because we had a million barrels or we were a million barrels below what we were consuming. So when you change that by five or 10 million barrels, it’s like it’s going to be a rocket ship. So if you kind of look at how fine that equilibrium is for the price, it’s kind of crazy when it’s off by even one or two or 3%, how much that affects the price.

[00:30:03.460] – Sean

Sure. You mentioned that in five years, I know this is just speculation, but it could go to $200. And then did you mention here just a moment ago, $2,000?

[00:30:17.670] – Grant Noorwood

It’s kind of to be facetious, but it’s in reference to offshore drilling. There’s a great deal of resources there.

[00:30:28.740] – Sean

Sure.

[00:30:30.550] – Grant Noorwood

They take a long time to get those up and running. So right now it’d be great if we had another million barrels on the market and relieve everybody’s pressure at the pump. Food would go down, a lot of other commodities would go down, but you can’t go, oh, we need more supply, let’s just throw five wells offshore. That sounds great. That’s about a three or four year idea to bring around. And then once you do, you kind of get it from the water to the land and that’s an even bigger undertaking. And so if you don’t already have the infrastructure offshore there, then add another three or four years to the project. So a lot of the things they’re doing now are going to benefit us down the road and a lot of the things they did yesterday are benefiting us. Now as far as offshore, but that’s where a lot of the bigger production comes from.

[00:31:24.510] – Sean

Got you. Okay, let’s take a quick commercial break. Hey, this is Sean. I just want to say thanks a lot for checking out this podcast. I know there’s a lot of other podcasts you could be listening to, so thanks for checking out this one. Could you do me a quick favor? If you haven’t done so already, could you leave us a five star rating on either Spotify, Apple Podcasts, Google, or any other platform you use to listen to podcasts? What this will do is help us rank higher in the podcast search engines, you could say. So that would be much appreciated. Also, if there are any questions you want me to ask the guests for a specific topic you want me to address, please go to our Tykr Facebook group. You can leave a comment there, and I’d love to hear what you have to say. All right, back to the show. Well, let’s transition here to our investors, our listeners at least. How can they get involved?

[00:32:18.430] – Grant Noorwood

There’s plenty of avenues. People create private placements of all various types that people can participate in. For us, what we like to do is to evaluate existing fields. A lot of the opportunity we’ve seen lately is older generations have passed away. They’ve handed it down to their kids. And what the kids have discovered is nothing about this is easy. And some of them followed in the family’s footsteps, others went into other things. So whether they came back home to try to save the farm, if you will, or they just said, I want to be done with it, that’s where we’ve been getting our better deals. But typically, a producing field is going to trade at three to four years, net cash flow based on its last six months of revenue. And when you’re buying from these kids, a lot of times one and a half, two. So what that allows us to do is come in with a budget and still be right at market, so we can take what we’re paying for an asset, have a budget to improve the asset, and still be in line with what the rest of the market is paying and what the market would bear if we sold.

[00:33:27.820] – Grant Noorwood

So we take that budget and we improve the asset, and then we’re in a good position to sit in cash flow, or we’re in a good position to sell, and we’ve done a little bit of both.

[00:33:37.130] – Sean

Got it.

[00:33:37.550] – Grant Noorwood

But that’s our main focus. I would say I probably evaluate, on average, eight deals a month, probably close on two to three a year. They don’t come often, so we’ve got to have stuff to do in between. So we do a lot of drilling. We’re always examining new place. We try to stay off the beaten path. The popular areas have higher entry costs, so they’re lower returns. So what we do is we go into old areas that have done well and try to mine the data better than they did to place our new drilling locations in the best spot we possibly can. So that cuts down on our risk and that improves our returns. Because when you go in and you drill a new well, you look at an area and say you draw yourself a 20 miles radius, well, you start picking these areas apart and they wind up becoming statistical. So, like, the poor wells might make 20,000 barrels, the great wells might make 200,000 barrels. But by and large, if you were to cut the top 10% of the wells out and the bottom 10% of the wells out, I would say that you’re going to be right there at 80,000 barrels.

[00:34:45.650] – Grant Noorwood

Okay, well, 80,000 barrels, you go get bids on what it would take to drill a new well. We come up with the cost and we go, okay, well, how long is it going to take to produce that 80,000 barrels? And then what does that look like for a return? So that’s just kind of just the very high level basics of how we go into evaluating something that we’re going to actually pull the trigger on. Sure, but that kind of covers both strategies. So the safest bet that you can do is an existing field. You’ve got years of proven production. We engineer it so we know we have proven reserves, and then we have an idea of how long those reserves are going to continue to bear cash flow. And then on the other hand, we evaluate and drill new wells. It carries a little bit more risk, but it’s also more rewarding. So a good new drill is going to return its principal and anywhere between six to eight months, I’d say our average is anywhere between twelve to 14. Thatwell is going to take two years. I’m not saying it can’t go beyond that, but that’s your average break, even, if you will.

[00:35:52.280] – Grant Noorwood

And then most of the wells we go for have at least a ten year lifespan. So we look to return funds in about eleven to twelve months with about a three to eight potential over time.

[00:36:06.430] – Sean

Three to eight times. Okay, so you’re saying over ten years, let’s just use a nice round number here. You put in $100,000 over ten years. You could turn that into potentially $800,000. You mentioned between three and three, between $300,000 to $800,000.

[00:36:28.270] – Grant Noorwood

And there’s appealing propositions out there. But in order to achieve returns higher than that, you’ve got to take on a level of risk that I just don’t have the stomach for.

[00:36:38.650] – Sean

Still, that’s really solid. Those returns are great. Now let’s talk about from the investing standpoint. Of course, all of our listeners, they can simply go to a public company like you’ve got Shell and you’ve got BP come top of mind, oil and gas. But then with your business model. If they want to invest in a private opportunity, they could reach out to you. Do you have a minimum dollar investment?

[00:37:05.730] – Grant Noorwood

Yes, $25,000. Okay. And I just taken lower investments, but what I wanted someone to have a meaningful enough piece to where they have a decent four figure check. So it’s worth paying attention to and learning more about so that they might develop into $100,000 partner, just so we can continue to grow and pursue some of these better assets.

[00:37:30.260] – Sean

Got you. And with that, do they need to be accredited?

[00:37:34.770] – Grant Noorwood

Yes, they do.

[00:37:36.110] – Sean

Okay. All right. So there are limitations for some of the investors that want to get involved. Now, average annual returns, what kind of expectations do you set with your investors?

[00:37:47.270] – Grant Noorwood

Well, if we’re going into an existing field, I would say that our minimum threshold that we’re trying to achieve is about a 25% annual return, and that’s usually where those opportunities start at. And then we have the budget to improve. So if the budget is well spent and our jobs well done, our most recent ones returning about 41% right now, and that’s after about 90 days of improvements, and we’ve still got about a quarter of the budget left. So might be able to get close to that 50%. I’m really hoping so we’ve got a few more things to do out there, and that might end up hitting that threshold. But yeah, that’s our minimum. And it’s achievable because you look at these fields and you’re going to go back at least five years through the PNLs on these fields, you know what kind of expenses come up every month, you know what kind of cash flow there are. You have a reasonable range. You plan for oil to stay between, and then you kind of go and look at it and you go, okay, well, we’re expecting 30%, but price could drop $10. We still are above 25.

[00:39:06.610] – Sean

25. I’m very impressed because we get a lot of real estate investors on the podcast that they are aiming for about 10%, 10% annual return, which is average, which is still decent, but 25% is pretty darn good. Now, are they paid quarterly or annually?

[00:39:26.870] – Grant Noorwood

Monthly.

[00:39:27.680] – Sean

Monthly on that. That’s a great way to create some residual cash flow, especially if somebody is in a position where they’re nearing retirement or their, let’s say, financial independence, they could get involved with you and your investments and create some nice monthly paychecks. True. Do they have the option to reinvest or do you pay out? Always.

[00:39:51.110] – Grant Noorwood

We always pay out. So I guess, yes, you have the option to reinvest, but it’s not going to sit there and snowball itself. You’re going to take your distributions and maybe put those back in, but I’m not going to withhold your distributions to grow your equity in an asset because there’s only 100% of an asset. So I’m not going to dilute a fund to grow the holdings of a specific fund. I’ve thought about it. I haven’t gotten there yet. So for now, I’ll just kind of say I won’t. But that’s on the production deals. Now, on the drilling deals, all wells decline. So what we like to do is see about eight to 10% a month for the first year. And then we hope to see about anywhere between four to 6% a month for the second, and then above 3% a month for the third. And then after that, you kind of get on goodwills that you could still be receiving a month five, six years from now. But I’d say as long as we’re above two and a half percent a month, five plus years down the road, we’re still pleased with what we’ve done on new drills.

[00:41:04.350] – Grant Noorwood

But another thing to keep in mind, we hadn’t touched on it yet, but whenever you invest in a new well, let’s say you put 100 grand in it. Let’s say you make a million dollars this year. Well, you get to write that investment off and in anything. You can lose your money and write it off, but you’re writing it off whether that thing makes you a million dollars or makes you $0. So it’s a good way to lower your taxable income so it counts against ordinary income. Now, on the production deals, let’s say it’s a $5 million deal, that 2 million of it is going to be our working budget. Well, that 40% of the investment. That dollar amount can be also written off. I mean, it’s been that way since 1986. It’s because the government knows we need to keep drilling, keep exploring, keep producing. So it’s exclusive to oil and gas, and most people know that have done it before, but not everybody or especially somebody new, they don’t know that they have that benefit, and it’s a way to compound those returns. So all the figures I quoted earlier are without considering you’ve essentially, if you’re a top burner, technically, when it’s all said and done, paying roughly 70%.

[00:42:22.880] – Grant Noorwood

So, like, you get in for 100. Technically your basis is 70 because you have to save $30,000 on taxes. Got you. But that’s when it kind of gets really exciting when we hit our marks because it’s a much greater return when you shave that basis down by that much.

[00:42:39.160] – Sean

Right. What’s the biggest risk here?

[00:42:42.200] – Grant Noorwood

For investors, the biggest risk is going to be the commodity price or drilling a dry hole.

[00:42:47.330] – Sean

Okay.

[00:42:48.040] – Grant Noorwood

Smaller risks are going to be like mechanical failure or error. But any operator worth their salt is able to overcome those challenges and in a timely manner at that. So those are kind of bumps in the road that might have a well down for a week or two.

[00:43:03.970] – Sean

It’s nothing major to de risk an investment. Let’s say somebody came to you, gave you 100 grand. We’ll use this nice round number again. Do you diversify the capital over multiple wells, or is it going all to one well, so there’s higher risk.

[00:43:21.530] – Grant Noorwood

It’s always multiple wells. I have not yet done a one well venture in my entire career. I’m not saying we wouldn’t, but if I did a one well venture, it would be because it’s a prospect that we’re drilling a big structure that we saw in seismic and that structure only needs one well to drill the whole thing. So I would send out an email and say, guys, you can put it all on black at the table or you can put it in this. At least we have science on this. That’s all chance. This is semi chance, semi science. But I haven’t done one yet. I don’t want to say never, because if there’s something that’s that great of a reward, maybe we just that minimum would probably be five grand. Let everybody come in.

[00:44:07.070] – Sean

Sure.

[00:44:07.710] – Grant Noorwood

You don’t have to put a whole lot in it and there’s plenty of those opportunities out there. It’s just not in my nature to pursue them.

[00:44:14.340] – Sean

Right, well, that’s good to hear. I had to ask that question because I know our audience, for those interested, they would want to know like they want to derisk this investment because 25% return annually is really solid and if you can hit some level of certainty, you’re going to get that.

[00:44:32.150] – Grant Noorwood

Right. Well, the 25% is actually the safe one, the drilling one, that would be like 100% 1st year, 50% to 80% 2nd for that total three to 800% over time. Got it. Let’s just break that down a little bit. So let’s say across all of our operations were successful about 80% of the time, if you’re spread across five wells and four out of five should work. So if the plan is to break even in ten, 1112 months, you apply that 80% factor. Hey, well, then, you know, okay, more like 1415.

[00:45:11.860] – Sean

Sure.

[00:45:12.400] – Grant Noorwood

So that’s kind of the best way. And the outcome could play out any host of ways, but yeah, for the safer ones, the production deals. But if somebody said, I only have $100,000 to spend or invest in this sector, I would probably say, well, 60% of it go with the production deal, 40% of it let’s go with a diversified drilling program.

[00:45:40.370] – Sean

Well, this has been great, Grant. I really love the insight and context on the industry. Where it’s going. One more question here before we transition to the rapid fire round, which is where do you see the price of oil going here? You said it could go to $200 in the next five years per barrel. What about the next year or two? Any predictions there?

[00:46:03.100] – Grant Noorwood

I think it’s going to be back and forth between 81 hundred, so I could zero that in and say 85 and 95, but I really think it’s between 81 hundred. We just had another good draw in inventories this last week where everyone thought it was going to be a huge build so that’s why I’m saying the high Side 100 next week, it could actually build pushes down to 80, but there’s no major foreseeable factors that lead me to believe it’s going to go in one direction or another. But just keep this little $20 range down, which is relatively high compared to most years. I’d say when we get back into the driving season, let’s call it April. There’s a good chance we’re back at 110.

[00:46:53.150] – Sean

Well, got you. Great context. Let’s dive into the rapid fire round. This is the part of the episode where we get to find out who Grant really is. If you can, try to answer each question in 15 seconds or less. Are you ready? All right. What is your favorite podcast?

[00:47:11.510] – Grant Noorwood

So I really like yours. I really like the Millennial investor. I really like this new one by a gentleman named Jay Scott called Passive Investing. He had a really good one before, but this one is brand new and he’s got a great lady that he does it with. But those are my top three as far as this kind of podcast. Other than that, I like the Joe Rogan podcast.

[00:47:33.270] – Sean

Okay.

[00:47:33.670] – Grant Noorwood

A lot of people might agree, but popular.

[00:47:36.920] – Sean

Yeah. Cool. Next question here. What is a recent book you read and would recommend?

[00:47:43.250] – Grant Noorwood

A painted house by John Christian. It’s a really cool story. This family is basically sharecroppers, and it’s just all of the trials of the basically at the end of the book, they achieved their goal, and that was to have a painted house. Who would have thought just living in a wood frame house that had paint on it meant you had a life of luxury. But great story. Completely unrelated to anything we talked about. That’s the most recent book, and I really enjoyed it.

[00:48:11.340] – Sean

Sure, it sounds like a fiction.

[00:48:14.030] – Grant Noorwood

I think it’s modeled after a true story, but so many twists and turns for a small farm in Arkansas.

[00:48:21.670] – Sean

Cool.

[00:48:22.290] – Grant Noorwood

Middle of nowhere where we think it’s super dull, but it kept me interested the whole time.

[00:48:26.950] – Sean

Wow. Sounds very inspirational. All right, what is your favorite movie?

[00:48:32.810] – Grant Noorwood

It’s Pearl Harbor, to be honest. Yeah.

[00:48:35.860] – Sean

Really? All right.

[00:48:37.350] – Grant Noorwood

Yeah. Classic Michael Bay. Well, they’ve got the romance in it. Just kind of a history buff and stuff. My dad was a pilot, so I always thought I’d grow up and be a pilot.

[00:48:50.610] – Sean

Okay.

[00:48:51.200] – Grant Noorwood

Then I wound up following this path. But just all in all, great movie.

[00:48:55.460] – Sean

Sure. Knowing the history of Aviators, I’m surprised you didn’t mention Top Gun Maverick.

[00:49:05.150] – Grant Noorwood

That’s like, probably fifth or six. Absolutely. And I actually saw it in theaters three times.

[00:49:12.260] – Sean

Nice. Yes. Great film. All right, so we got a few business questions here. First one, what is the best business or investment advice you ever received?

[00:49:23.210] – Grant Noorwood

The best business advice I’ve ever received is, when you have a complex issue, find the two best experts within your network. Ask them both the same questions, see how their answers are different and then how they’re the same, and try to figure out how to meet in the middle or if one’s clearly are superior than the other. So I think that applies to my industry so well because you do run into complex things and two people of equal talent, equal background, equal experience, are going to go about it two completely different ways. And you need to figure out if one is far better than the other. It’s obvious to you. Or if you need to try to do a little bit of both. So, triangulation of experts, really.

[00:50:08.230] – Sean

I love that strategy. Great idea. And last question, here is the time machine question. If you could go back in time to give your younger self advice, what age would you visit? What would you say?

[00:50:20.450] – Grant Noorwood

I would say I’d probably go back to 24. 25 when I was just doing land title. It’s really hard to scratch out a living that way. But some of the lessons I learned, I don’t know if I’d be here without them, because other operators, they come into operations through different ways. Maybe they were an engineer, maybe they’re the son of a big oil bearing that walks into it, that actually followed the path or whatever have you. But without that land and title background, there’s so many issues that you run into while developing fields or maintaining fields that are land and title related that you can handle yourself without long drawn out things, because land companies tend to be pretty slow. So I would just go back and tell myself, hey, what you’re doing now is actually setting you up for what’s to come. And I probably really needed to hear it. Years 24 and 25.

[00:51:23.090] – Sean

That’s great advice. I was in a similar spot. My 20s were brutal through the recession and really didn’t make any money. But just hold your ground because the education you’re getting right now is incredible. For my 30s, absolutely.

[00:51:40.630] – Grant Noorwood

Just think of you to switch to something else and look at all the ones that did right. It might be them instead of you if the roles were reversed. Yeah, just keep going.

[00:51:52.060] – Sean

Right on.

[00:51:53.070] – Grant Noorwood

Well, awesome.

[00:51:54.070] – Sean

If you could, why don’t you tell the audience where they can reach you?

[00:51:57.350] – Grant Noorwood

So email, telephone, you can call the office. I have a scheduled call with you. We’ve got Instagram, YouTube, Facebook, LinkedIn, all the typical channels. We try to do a good job with those. We like to share a lot of informational, content, a lot of authentic content from our own operations. So any of those channels is a great place to get in touch.

[00:52:24.740] – Sean

Do you have a website?

[00:52:26.330] – Grant Noorwood

Yes. So Norwoodenergycorp.com and there’s a contact portion, there’s a lot of information, pretty much anything you could want to find.

[00:52:36.150] – Sean

Awesome. And we’re talking offline, this is more to the audience. Go to the website or go to his YouTube channel, which is growing. I think it’s a great idea you’re going to be pumping out more content because there’s not a lot of guys in your industry who have the background intel from the front line and putting that content on YouTube. So you will be a very rare specimen.

[00:53:00.590] – Grant Noorwood

Well, thank you. We’ll actually have some ones that are a little bit comical. My fiance actually made it up here to the field today before I did, and she was sitting in the frack truck because we were fracking a well and got to talking to the guys in there, and they are calling one of them ticktocks famous. So there’s actually a guy that’s getting chased around by a donkey, and the donkey keeps on kicking and kicking and kicking them. So she’s got a video of him holding up the video with his 8 million views saying, hey, look who’s bracket. Or well, it’s that guy from Ticktock.

[00:53:32.300] – Sean

Sure.

[00:53:32.800] – Grant Noorwood

But it works. Yes, sometimes it’s real serious informational stuff, but that kind of will bring a little light hearted to it.

[00:53:40.110] – Sean

Sure. Yeah, that’s what you got to do. You got a pepper and that humor.

[00:53:43.040] – Grant Noorwood

Exactly.

[00:53:43.690] – Sean

Cool. Well, hey, Grant, this was really educational. Appreciate your time and we’ll talk to you soon.

[00:53:50.110] – Grant Noorwood

Awesome. Thanks for having me.

[00:53:57.150] – Sean

Hey, I just want to say thanks for checking out this podcast. I know your time is valuable and there’s a lot of other podcasts out there you could be listening to. So thanks for taking the time to listen to my guest story. If you did enjoy this podcast episode, could you head over to itunes and leave a five star review? That would be much appreciated. Thank you. And last but not least on this podcast, some episodes we do talk about stocks. And please keep in mind, this podcast is for entertainment purposes only. So if you did hear any buy or sell recommendations, please don’t make those decisions based solely on what you hear. All right, thanks a lot. See ya. You.