Thoughts from 2013: Some time ago, I was contacted by a group of accredited investors residing and working in the northern states of our country regarding their concerns over oil and gas investments made in Texas. I must admit that I was taken aback when it was revealed that this group was comprised almost wholly of attorneys and investment advisors, professionals who were more than capable of handling the matter in contention. Their relationship with the producer of several wells in which they had invested had predictably soured when they began to question the investor regarding the lack of progress in the well development. The producer, of course, supplied them with answers that would satisfy the layman with little sophistication in oil and gas exploration and production, promised repayment, adding that any party continuing to harass the producer would receive nothing. Intelligent investors reevaluate their investment portfolios with regularity and in so doing, they discovered they had doubts.
Investment in oil and gas exploration is exciting and a certain mystique cannot be denied of the attempt to grind a 31/2” to 73/8” drill bit into an anticipated reservoir of oil and gas lying thousands of feet below the surface. The momentousness of the enterprise is powerful and it takes dedicated teams of hard-working people to make the endeavor function. When I was younger, I worked on some of these drilling rigs and can attest to the often quoted fact that the industry gets into your blood. These investors who had never spent a day standing on the floor of a drilling rig felt it nonetheless. They invested to become not just part of the venture but in reality, part of the adventure.
In our society, we have many different types of investors. It may be fair to surmise that the investor who looks forward to retirement is the one for whom money means the most. That investor will hold relatively safe mutual funds which hold the shares of two or three winning companies and twenty to thirty absolute mutts, or he will own annuities. These people look forward to retirement and spending their later years without having to work or to be particularly concerned about their financial well-being. I have not the remotest understanding of such parties but they certainly have the right to do as they choose. The investors who contacted me are not of that ilk. They will likely go screaming into that good night of permanent slumber, perhaps pursuing challenges to their last dying breath. I have a great admiration and respect of such persons.
Unfortunately, much akin to the poor widow who is sold a Bible by the Depression Era flim-flam man who claims her husband ordered it not long before he passed from this world, the native and innate behavior that guides the adventure investors to stir the world around them also makes them targets for dishonest persons. While any investor may fall prey to such a person, the relatively large sums required of oil and gas ventures makes persons of means particularly well-suited for the “dodgy” producer. Time and again, I hear the following two plays commonly utilized as setup to the sale of oil and gas ventures:
· I need just the startup funding. In this play, once the willingness of the investor is established, the producer changes the need from that of a working interest relationship to one of financing in which the producer asks the investor to finance ongoing activities and to take his payment through tranches from future funding certain to happen.
· My funds are tied up oversees and I am waiting for it to clear regulatory authorities. In this matter, the funds are claimed almost always to be in a Middle Eastern or Asian country in which an investor would have no ready knowledge regarding where to begin any due diligence of the claim.
Certainly, this behavior should give anyone a feeling of nausea but it is quite effective for the investor with a first-mover mindset. It brings to mind something my father told me when I was a child. He said that the difference between a wealthy man and a poor man had little to do with skill or hard work because both the wealthy man and the poor man can work undoubtedly hard. The difference, however, is that while the poor man sees not taking a chance as lost opportunity, the wealthy man anticipates there will be always be another around the corner. While even he at times did not follow his own advice, I have found this observation to be undeniably true.
The moral of the story here is that in order to adopt the wealthy person’s attitude, the investor must take into account several realizations prior to his investment in oil and gas ventures. First, you are going to need help from knowledgeable persons familiar with the industry. For instance, oil and gas attorneys can be quite knowledgeable in the determination of investing parties’ interests or in explaining various legal matters regarding the oil and gas lease. That oil and gas attorney should be prepared to review any agreements with the producer to protect your interest. Remember, his job is to protect your interests by tying any contractual matters as tightly as possible in your favor. Second, if that attorney cannot give you some degree of comfort in explaining the exploration and production process, you need to find an additional source. This source should be capable of answering those questions, giving you periodic sanity checks on information you receive from the producer. Third, you also need a very good Certified Public Accountant that is well-versed in oil and gas accounting and related taxation matters. Oil and gas accounting can be arcane and is not generally familiar to most accountants. That CPA should also tell you that you are entitled to financial reporting commensurate with your investment interest.
Lastly, do your due diligence. It is not entirely unusual for a producer to be involved with several different entities at any one time. Ask the following:
· Has the producer ever filed for personal bankruptcy?
· Have any of his companies filed for proceedings under the bankruptcy code?
· Is there pending or past litigation against the producer or any of the entities with which he has been associated?
· Does the producer have a criminal record?
Your homework never ends nor does your education. Whether you recognize the information you assimilate every day is entirely up to you. We live in a world that depends on professionals to assist us in managing our money, but do we know enough about them before taking the plunge?