Opportunity Zone Pitch Day - March 23rd
Tax-Advantaged Oil Investment Strategies, With RJ Burr
According to Panex, 85-90% of all domestic oil production comes from companies with fewer than 12 employees. With the global energy market in crisis, these oil production companies are more important than ever.
RJ Burr, Sr. VP Corporate Operations at Panex, joins the show to discuss the incredible opportunities for domestic oil production, and some ways that High Net Worth investors can participate while availing themselves of some unique tax advantages.
Watch On YouTube
- Facts and myths about oil production in the United States.
- Details about the different type of domestic oil production companies (and why some types of companies have much more longevity than others).
- Some unique ways that High Net Worth investors can invest in domestic oil production.
- Several specific tax advantages that investors can enjoy in certain types of domestic oil investments.
- The three keys to a successful private investment in a domestic oil production company.
Featured On This Episode
- Oil Investing 101 (Panex.us)
Today’s Guest: RJ Burr, Panex Oil Exploration And Production
About The Alternative Investment Podcast
The Alternative Investment Podcast covers new trends in the alternate investment landscape. Hosts Jimmy Atkinson and Andy Hagans discuss tax-advantaged investment strategies to help you grow your wealth.
Jimmy: Welcome to The Alternative Investment Podcast. I’m Jimmy Atkinson.
Andy: And I’m Andy Hagans.
Jimmy: Andy, today we’re going to be diving into Tax-Advantaged Oil and Gas Investment Strategies. And joining us to discuss that today is RJ Burr, Senior VP of Corporate Operations at Panex. RJ is joining us from Bowling Green, Kentucky. RJ, how are you doing? Welcome to the show.
RJ: I’m doing wonderful. How you all doing?
Jimmy: Doing great, RJ. Happy to have you here today. So start us off at a high level here today. RJ, give us your overall investment thesis. Why should high-net-worth investors consider investments in private equity oil production companies?
RJ: Well, when you look at oil and gas, and let’s just set the drilling of the wells aside and you look at the importance of oil across the globe, every economy is built on energy. If it costs you more than the next guy to produce your energy, you have a handicap.
And so when you look at the importance of energy, you look at the tax benefits. How many times have you known Uncle Sam to give you something for free? There’s a reason Uncle Sam allows these tax benefits because we need oil. And so when you look at the oil industry, my main key to it is, not only the tax benefits and the revenue, but you got to have a good feel about who you’re dealing with.
If you’re talking to me, and you don’t get that warm fuzzy feeling about who I am and what I’m doing, or my family, well, I’ll be the first one to tell you, “Don’t get involved, don’t do it,” you know. There’s too many things you can’t control in life, this is something you can. If you get a good feel for somebody, then take it to the next step and what can they do for you financially.
But that’s the first bridge that has to be crossed. If you can’t look somebody in the eye and know that you would break bread with them and their family, then don’t do it. Just stop right there and look for the next product.
Jimmy: So investing in this segment then means investing with an entrepreneur, investing with someone you trust, or a group of people that you trust. And for our listeners and viewers, you know, when we’re talking about the domestic oil production market, we’re talking about thousands of small businesses.
And specifically, like RJ mentioned, smaller oil production companies in the United States, they receive several advantages from Uncle Sam because they’re, you know, strategically important for national security, which is a very key industry, you know, as we’ve been reminded in the past year.
But RJ, could you walk us through just the market landscape a little bit like the different types of companies? So, you know, specifically, I’m wondering the difference between exploration, drilling, and production. Are these companies typically integrated in the United States or are they fragmented with those different areas? Where does Panex fit in?
Can you just kind of walk us through the different types of companies?
RJ: Oh, absolutely. Now, in the energy sector, you really have three different routes, you have the upstream, midstream, and downstream. Your upstream is your development, that’s your production, that’s you’re drilling the wells, that’s producing the oil. Midstream is getting the oil from point A to point B, is transporting and getting it to where it needs to go. Downstream the products created.
And so we’re mainly talking about the upstream, which is the actual development of oil and gas. Now, there’s nothing academically that you’ll be able to find to validate what I’m saying. This is just kind of…oh, heck, I was on my first rig at seven years old. Graduated high school, funded my first deal three months later, and have been doing it ever since.
And so this is my family, my dad got involved in the business in 1973 before I was born, and this is all we’ve ever done, you know. Some kids got to grow up watching their dads practice medicine or law. I got to grow up watching my dad cut oil and gas deals. And so when you look at the oil and gas industry, pretty much every company that starts, starts doing what we call chasing oil.
And here’s what I mean. You have a geologist, you have a prospect. You have a group of guys that want to drill this prospect, they want to be oil men. And so they put their money together, they go out, and they drill the well. Well, for 99% of the companies, that’s it right there, game is over. They miss the well, they can’t raise any more money, they end up putting the Close sign on their front door. Well, every now and then a company gets fortunate and they hit that well.
Well, they just found what we call job security. Their job is secure, however long it takes them to develop around that well. If they have enough room for five offsets, well, they got job security for five wells. Ten offsets, 15, you get the picture. So as long as they have these wells to drill, they have job security. Well, during that time, they’ll be drilling elsewhere looking for another lily pad.
When they finish developing this field, they’ll leapfrog to the next pad and start developing that. Well, a successful oil man will look back, he’s 60, 70, 80 years old, he’s discovered 5, 10, maybe 15 different fields, however, he spent his entire career chasing oil.
And what I mean by that, in order… and it doesn’t mean he’s not good at what he’s doing, I’m not diminishing. It just means that he had to produce everything he found to keep that engine going. And so it doesn’t mean that he’s not successful, it just means he never found enough oil to put him over the hump.
Now, that’s where the vast majority of your oil and gas companies stay their entire career. Their entire long life, that’s where they sit. Now, every now and then a company gets fortunate and jumps out of that chasing oil stage and gets to what we call the producing oil stage. Really, the main difference between chasing oil and producing oil is not the fact that you’re going to hit every well you drill.
If anybody ever tells you that in oil and gas, they’re lying. You’re going to miss wells, it just happens. However, when you’re producing oil, you know the oil is there when you’re drilling. Then on top of that, you have found enough oil in reserves where you can utilize those reserves to acquire more reserves. And so prime example, a field we have right now, the Bayou Choctaw is down in South Louisiana.
Well, this field has production ranging from 3,000 feet, all the way down to about 15,000 feet. Well, personally, we’re really not interested in 9, 10, 12, 15,000 feet deep. While we can drill those wells and we have no problem drilling them, that’s not our cup of tea.
We like the wells from 3,000 to 9,000 feet. Well, just because 9,000 to 15,000 isn’t our cup of tea doesn’t mean the oil is not there. So what will we do? We’ll take another industry player, somebody who does like wells from 9,000 to 15,000 feet deep, and we’ll show them our inventory.
Say, “Hey, look, y’all want it, go fund it, drill it, we’ll keep a piece of it.” And at the same time, they’ll open their inventory up to us and they’ll say, “Hey, we know you all like salt domes. We control a handful of salt domes, if you all want to come drill them, come drill them.” And so we essentially utilize our reserves to acquire more reserves. And that’s really the stages of your independent producers, that’s the upstream independent producers.
You’re either chasing oil or producing oil. Because the next step above that is either getting purchased out by a larger company, going public, or you just keep on going the way you’re going and keep making the money as your unsuccessful wells. And so once you get to that point, then the decisions become a lot easier because now you’re not speculating on whether you have the oil or not.
And so that’s really the key to it is building those reserves.
Jimmy: Yeah. and then that becomes a lot more comfortable for you as a company and for your investors I’m sure once you do have those oil reserves. I wanted to talk about the mechanics or logistics of oil production. Maybe you can educate me, educate our listeners and viewers here. When and how do you ramp up or tamp down oil production as market demand changes?
Is it as simple as like dialing a knob, or what do you do exactly?
RJ: It was explained to me a long time ago. Now, I don’t know if this is the correct way to explain it when it comes to modern times, but it was an old field Harry told me years ago, he said, “Look Jay,” he said, “Every well is like a woman.”
He said, “Some women like to have their hand held, some women like to be kissed behind the ear.” He said, “Each well is going to be a little different, and you just need to know the area.” And that’s really the key is the area. If you take a geologist from East Texas, he might be the best geologist that has ever lived in East Texas.
However, you take that guy in East Texas and bring him to Louisiana, he’s not familiar with that rock. While he’s still a good geologist and will have a pretty good idea of what he’s looking at, he doesn’t know how each one of these rocks react to treatment, you know. Prime example, my dad drilled a well, I want to say it was 1977, ’78 in that point in time. They drill this well, they cement the well, the cement job was bad, they didn’t get good bonding.
It was just bad news, he was in a bad position. He’s sweating going back to the office in Dallas, telling his brother and his partner, “Hey, we messed, the well didn’t get a good cement job.” And so he’s kind of stressing over that a little bit. Well, the geologist on hand says, “Bob, you see those logs?” Dad said, “Yeah.”
He said, “You see that 3-foot of pettit lime right there?” He said, “When we put a little acid to that pettit lime, it’ll pay off in a year and it’ll be producing for decades.” Well, that was in roughly 1977. My dad sold his portion of that well almost 30 years later about 150,000. We wouldn’t have had that well if that geologist wouldn’t have been there.
Nobody else would have noticed that 3-foot section of sand, except somebody who knew that rock. And so when you look at the increasing production, decreasing production, the well pretty much tells you what it wants to do. It’s hard to make a good well bad, and it’s even more difficult to make a bad well good. They’re going to tell you what they do.
Now, you can choke them back and you… Prime example, when prices crashed in April of 2020. You had a lot of companies that tried to choke their wells back. Well, the problem is, if you choke it back, you might lose your pressure, you might lose circulation. You’re messing with the natural flow of that well and so you really don’t want to. And so it’s one that…it’s kind of a catch-22, yeah, you want to maximize market price, but what’s worse?
Messing your well up or maximizing the market price? And so you let the wells produce what they’re going to produce because other than that, you might mess them up. And I was told a long time ago, “Son, you don’t buy a Ferrari, park in your driveway, put it in neutral, and red line it. You’re going to blow the engine.”
And so essentially you let the car be, let the oil well do what it’s going to do.
– Yeah, that makes sense. Yeah, and walking us through that story about that well that your dad owned. that makes me wonder, how much of success in this industry is based on identifying the right real estate or the right areas to explore versus just having that right, you know, the dream team assembled of the right people with that deep expertise?
Is it really all about the people or, you know, are there other assets that it takes to put together a successful venture?
RJ: Oh, man that’s a great question. It’s really hand-in-hand. I mean, you’d have to know where the oil is. If you can’t find the oil and you’re in the oil business, you’re wasting your time. Well, knowing where the oil is, is really only half the battle. Now, you have to have the crew that is proficient enough to get that oil out of the ground. Well, where we’re drilling down on these salt domes in the Bayou Choctaw right now, it’s not easy drilling.
It’s drilling that unless you know what you’re doing, it’s going to be next to impossible to completely get that well down unless you have people that know how to drill salt domes. And so it goes hand-in-hand. And, in a lot of cases, the people you have are probably more important than what the well is telling you it’ll do.
Because the people that are experts in that area know how to maximize that production. And so you can take every prospect we have and leave us our people, and we’ll conquer the world.
Andy: I love that. I love that. And, you know, that’s actually a really good segue to my next question. Because I noticed on your website, some of your marketing literature, your company discusses some of the facts and myths about domestic oil production. And I mean, you know, when people hear oil production, they typically think big oil, right? They think Chevron, they think Exxon, you know, they think these global mega-corporations.
Whereas I know that the domestic oil production industry is totally different probably than what people have in mind. So can you talk about some of those facts and myths just about the oil production in the United States and what folks are actually investing in?
RJ: Oh, absolutely. I mean, probably just because I’m in oil and gas. But I think that’s one of the biggest misconceptions in the world. Is if you went out and just grabbed the average American, and said, “Name me an American oil and gas company.” They would immediately go to the majors. They’d go to your Exxon’s, they’d go to your large companies.
When in truth, 83% of your oil and 90% of your natural gas is produced by roughly 9,000 independent oil and gas companies that average 12 employees or less. And so when you look at the domestic oil and gas industry, that’s who you’re talking about. You’re really not talking about Exxon, or Chevron, or BP, or any of your majors, you’re talking about the independent producers.
And that’s really where, on April 20th,…I mean, I can’t tell you exactly where I was when the… I didn’t even know oil going negative was possible. I mean, I’ve been in the business since I was 18. And I remember, on that particular day, I’m sitting at my desk, and I’m watching “Fox Business,” and I’m watching the price go from 20 to 50, and just keep creeping down. And I’m dumbfounded.
I mean, it was down. I remember funding programs in the 90s at $8 a barrel. I didn’t think that world would ever exist again, and all of a sudden, when it got to $8 a barrel, I’d had enough. I got up, I said, “Okay, I’m taking a break,” and I went to Arby’s. Arby’s is about a block and a half down the road from my office. So I leave, I go get me a roast beef sandwich, I come back in.
I’m gone maybe 15 minutes, maybe. I’m literally… And I walk back in my office and I look at the television, and I see 40. And I’m like, “Oh, shoot, okay, shoot, it corrected.” Well, by the time I sat down at my desk, it dawned on me, “Hang on, there was a little line in front of that 40.” And so, at that particular moment…
and here’s the biggest issue that was created from it. Most people when they saw the damage that was done to the oil industry in that day, they looked at the same thing we were just talking a second ago. The said, “It’s Exxon, they can handle it.” “It’s Chevron, they can handle it. They’re big conglomerates, they’re international, they can handle it.”
Well, those weren’t the guys that were taking that hit, it was your independent producers. And so, as a company, what we saw coming… and this is just paying attention to the industry. Coming into that, we thought there was going to be a crash in prices. However, nobody could have predicted corona.
If anybody ever tells you they did, I’d really have to check their honest meter because nobody saw that coming. What we saw coming was we saw Russia and Saudi Arabia. We saw whether you like President Trump or not is irrelevant to what happened there. Because when you look at the oil industry up until 1960, the Seven Sisters is basically your seven major oil companies, they controlled the price.
They manipulated for good or bad, for the government ,for themselves. Do the research, don’t take my word for it. Go dig into it, there’s books after books after books written about the Seven Sisters. And so you can see what they did. Well, the reason OPEC was formed was to counter the Seven Sisters. They wanted to take that power. And so you had your petroleum-producing countries, they formed their little cartel.
Well, for the next 60 years, that was pretty much the power structure in the oil industry. And then all of a sudden, our shale industry takes off. And when our shale industry became such a heavy producer of oil, it took the power from OPEC. All of a sudden, they couldn’t set the prices like they used to.
And so that’s what we saw happen. Now, the little secret is the shale industry, and here is where, kind of, not patting us on the back, but our outlook is a little different. Like I said a second ago, I remember drilling programs and selling programs when oil was $8 a barrel. And so, in my mind, when I run numbers on a deal, I use $20 as my bottom.
If I can live, I’m not saying that’s what we want, but if I can live with oil at 20 and those results, well, I’d be tickled when we actually get what oil is worth. And so that’s how we base our economics. Well, for the last 20 years, oil has averaged $60 a barrel. Most of the companies that are in that independent world now were formed in that last 20 years.
And so, therefore, they built their life around that $60 barrel. Chances are they need 50 to pay their bills and everything over 50 is what they make a profit on. And so bringing this whole thing back together and tying a bow around it, what we saw happening is we saw Russia and Saudi Arabia increasing production to push the price down. Because if you need $50 to pay your bills, and all of a sudden oil is at 45 maybe $40 a barrel, now you’re in trouble.
And so that’s what we saw happening. And we thought it would probably take them 18 to 24 months to accomplish that. And so we were gearing up getting ready because we knew when that event happened, there would be tremendous buying opportunities. There’d be companies that really just couldn’t survive that we could come in and buy their reserves for pennies on the dollar.
And so that’s what we were gearing up for and then all of a sudden, corona hit. And when corona hit, it took what we thought would take 18 to 24 months, and it crunched it down into 30 days. And so the end result was the same in the sense that prices crashed, and it really killed a bunch of oil and gas companies. The trigger was different.
And so, at that moment in time, I mean, I can remember like it was yesterday, me and my dad and my brother and Chris, we sat down and we said…that’s our crew. And we sat down, we said, “Okay, guys, everybody else on the planet is pulling their sails in battening down the hatches, and are getting ready to ride out this storm.” If you look at history and every moment like this, every time there was a financial crisis, there was always a group of people that when the crisis was over and all the dust settled, they came out of the other side looking like geniuses.
And so when you look at each one of their stories and tie them together, and find the common traits that these groups shared, there’s really only two common characteristics that they share. One, when the crisis happened, they had cash on hand. They were in a cash position where they could take advantage of. Secondly, when the opportunity presents itself, they had what my dad likes to call the intestinal fortitude to push all their chips in the middle of the table.
And so that’s where we were sitting in April of 2020. We had a pocket full of money, we had a lot of funds raised. And when the opportunities presented itself, we had the intestinal fortitude to push our chips in the middle of the table. Now, two years later, we’re sitting on what could be 100 to 150 million barrels of oil, all we got to do is develop it.
And so that move was made possible, not because of what we did yesterday, it was because of what we did several years ago and getting ready for it. And so when you look at the oil and gas industry and where you position yourself, really, I’m a firm believer, and don’t get me wrong, I believe all of us have a little environmentalist in us.
You know, I want a beautiful, pristine, clean environment. I want everything to be nice and beautiful. But the fact of the matter is, there’s nothing to replace oil with right now. Whether it’s solar energy, whether it’s wind energy, whether it’s water, there’s nothing out there to replace. Heck, look at the news reports earlier this week.
I never thought I’d see this. “Middle of America, expect roaming blackouts this summer.” Well, why is that? Because we stopped investing in oil. I mean, just look at the worldwide numbers. In 2014, we put right at a trillion dollars in upstream development finding oil to replace the oil that we produced, okay?
That number this year is expected to be right at 300 billion. I mean, a 65% drop in eight years in what we invest to replace what we produce. So we’re not investing adequately to find oil. Well, now let’s look at the production and consumption. Right now, we’re running about 13 million barrels a day short from what we consume to what we produce worldwide.
And that number is getting bigger every day. They’re projecting, by 2030, that number to be roughly 70 million barrels a day that we’re short. So we’re not investing adequately to find enough oil. We’re consuming more than we’re producing, and it’s getting worse every day. And there’s nothing to replace oil with.
RJ: I don’t think it really matters what happens in Russia and Ukraine. Those three fundamentals don’t change, that’s why prices are where they’re at. And so you can be the magician and shake your right hand so nobody sees what your left hand is doing but the fundamentals hadn’t changed. We consume more than we produce, we’re not looking for it anywhere else, and there’s nothing to replace it with.
Here’s your sign, you know. Oil prices are up and I don’t see any reason why they would go down. Let me ask you, you know human nature. If any human, because I really do think it’s going to take a printing press type invention, if any human had invented that, do you think they’d stay quiet about it?
Andy: Yeah, no, you’re right. And I mean, there’s been so much investment in alternative energy, which I’m a fan of. I’m a fan of investment in alternative energy, but people need to understand it’s relatively inefficient, relatively expensive compared to oil, compared to natural gas.
And for most use cases, you know, not all, and just that huge gap in energy efficiency, and then that global context of other countries like China consuming more and more oil. So we look at the global demand is increasing, our domestic production is shrinking. And then, you know, our current policies are discouraging future oil production, you know, at political level.
Doesn’t make a lot of sense to me politically, but, you know, maybe that’s going to be a different podcast that I launch is my political thoughts. But I think the thing that we all need to recognize is, it doesn’t really matter what your politics are, or how you feel about it. From an investment standpoint, right, when you can see what’s coming, when you can kind of understand, look, this industry is strategically important to any country, including to the United States, that it’s a good place to be in.
And when we look at a portfolio for a typical very-high-net-worth investor, or even institutional investors, increasingly, they’re getting into alts because of that illiquidity premium combined with, you know, the diversification, right? You want a type of investment that’s not necessarily tied so directly to the stock market, as well as for private investors, as opposed to, you know, some of these institutional investors.
But for high-net-worth individuals, they can get some significant tax benefits by investing into these private placement offerings, these, you know, partnerships in the energy world with domestic oil production. RJ, could you talk us through some of those tax benefits?
And, you know, we’ll give the disclaimer that none of us are accountants, CPAs, tax, or legal advisors, so we’re more talking, you know, in the abstract, for example, type of mode. But could you walk us through, let’s say, you have a private placement offering, and I’m an accredited investor, and I invest, you know, 500,000 into your program, or a similar type of program.
What are the tax benefits that I would receive as an individual investor?
RJ: Okay. Now, like you said a minute ago, I’m not a CPA, and just kind of give you a general rule of thumb. So basically, if you’re in a direct participation program, Uncle Sam lets you write off the intangible drilling costs, the actual cost associated with drilling that well in year one. And typically, you’re going to run right at 90%, so let’s use that half-million mark. You invest half a million.
First-year, roughly 400,000 of that is deductible. Now, what that means, let’s say Uncle Sam looks at your income statement and says, “You made a million dollars last year. Well, if you put that half a million in a drilling program, 400,000 of it is deductible. Well, now, you didn’t make a million. Uncle Sam looks at it like you made 600,000. And so cash on cash for every dollar you invest, it’s roughly 30 to 35 cents that Uncle Sam, you no longer have to pay.
And so that’s one of the reasons why my partners love our programs. Their basic complain was 65 cent dollars. If I get them back 65% of their money, they’ve broken even. And so that’s where you’re kind of looking at when it comes to your oil and gas. And then what? Roughly 15% of your income will be tax-free for your depletion allowance.
And so it’s the best tax benefit I’ve ever seen when it comes to investing. Now, when it comes to the other side of… One of the things I’d suggest your listeners to do, go to our website, panex.us. We have a section in there, it’s basically our oil and gas primers.
And it’s educational pieces that we put together. “Oil and Gas 101” is basically the structure of the oil industry. Gives you an idea of where we were, where we are, and how you drill wells. “Oil and Gas 102” explains the tax benefits. Explains from top to bottom everything you’d need to know about the tax benefits associated with oil. “Oil and Gas 103” basically talks about what we have been talking about here.
It brings in what we’re producing, what we’re investing in, what type of production we’re looking at, what green energy and how it plays into it, and it just kind of gives you a full overall scope of where the energy world is. Because maybe I’m overly simple. Occam’s razor is one of my favorite things.
The simplest explanation is most likely the accurate one. And I don’t want to project motives on anybody. But we were talking a second ago about the drop in investment. They went from roughly a trillion dollars to 300 billion. Well, if that’s worldwide, where did that 600 billion go? Well, most of it went into investment in green energy. And so I look at it and I say, “Okay, I don’t want to assign motives, but when I use Occam’s razor, really, there’s only two reasons a major oil and gas company would do that.”
One, okay, maybe they are altruistic. Maybe they feel deep down internally that their product is ruining the environment and so, therefore, they have no problem some rating their company, losing their stockholders’ money, and investing in green energy to save the world.
I’m not saying they’re not doing that, that could be exactly what they’re doing. Or the other side of that is they know exactly what I know. If I can find this stuff on the internet, anybody can. And so if they know what I know, now you look at it from a different prism. You say, “Okay, well, they put that money in green energy, what are the benefits they’re going to get?”
Well, they’re going to get some tremendous tax benefits so they’re going to save some tremendous money on taxes. Well, secondly, they’re going to get praised across the world as global warming warriors. They’re going to get praised as being savior, so they’re going to get all kinds of social loving. But then on the other side, they know what I know.
They know that there’s nothing out there right now to replace oil with. And so once they put this money that they traditionally would have put in finding more oil, once they put that money in something that’s not going to generate what oil generates, what happens to the value of what they already have? Goes up, doesn’t it?
You think Exxon’s holdings are worth more today than they were a year ago? So when I look at those two scenarios, and which one and why they’re doing it, they might be altruistic, but I don’t think so. And so, you know, you look at it, then you kind of take it. If you pull that string a little bit more and you start unwinding the sweater, then you look at it, you say, “Okay, well, are they truly green energy?”
Look at the amount of materials you need to create solar panels. Look at the amount of material you need to create a lithium battery. Look at the amount of material you need to create these windmills. So if they were truly into saving the environment, why don’t they go to natural gas or nuclear? That’s the cleanest burning energies we have.
And so now you start questioning motives. And I don’t want to go down that rabbit hole, but I’m just kind of…you sit down and look at it. You say, “Hang on, there’s something going on here that doesn’t make sense.”
Andy: RJ, if you don’t want to question motives, that’s fine, but I do want to go there. And, you know, not in any kind of a mean-spirited way, but this is one of the reasons that private equity exists and needs to exist. Because with these publicly-traded companies, you know, they have very highly-compensated management, as well as, you know, on the Board of Directors of these global corporations.
And in theory, and with the legal structure, in theory, everyone’s interests are supposed to be aligned, right? The executives of the companies, they’re supposed to be compensated for maximizing shareholder value, at least in theory. In practice, though, there’s all sorts of risks or I would call them misaligned incentives.
One of those is a lot of times, the executives are compensated with short-term price targets on the share price. So that’s a different…versus a shareholder might want to hold that stock for the longer term and want to see decisions made with that longer-term time horizon.
But also, there’s that exact issue that you stated whether you want to call it social currency, social points. I mean, I call it, you know, the risk that the management wants to get invited to the right cocktail parties, or is the popular thing, whatever is the in thing, whatever’s the trendy thing, is not necessarily the decision that’s going to maximize shareholder value.
And here’s the thing, I got nothing against altruism, and I got nothing against capitalism. I like to be very clear what the goal is with an organization, right. And, of course, there’s always the ground rules of honesty and ethical behavior, and legal behavior. But I think some of these publicly-traded corporations got to be clear, “Look, are you an energy company, or are you an alternative energy company, and what’s your goal?
Is it to maximize shareholder value, or is it to be trendy and speak at global conferences and have your upper management be invited to cocktail parties with central bankers, and so forth? And so I think that’s one of the reasons that private equity and taking some of these larger companies private even exists because, you know, sometimes the corporate boards or the management, they just get out of control.
RJ: Without a doubt. No, you’re absolutely right. And that’s really why investing domestically in the energy sector, you’re dealing, for the most part, you’re dealing with them on power companies. And that’s why…my dad came up with a saying years ago, and I’ve told him for years to write a book about it, and now, it’s just kind of ingrained, and it might be a really short book.
But when you look at it, there are three factors. We always, and we kind of laugh around here because we call them three factors. And we’ve been saying it for…I can’t remember. I can’t even tell you the first time I heard it, it was that long ago. But there are three factors involved before we’ll do business with anybody. The first factor is strictly our partner’s responsibility.
The remaining two factors are strictly my responsibility. The factor that is my partners, it’s simple, it’s the money. I don’t know how much you have, I don’t know how much you can invest. I don’t know what kind of position you’re sitting in financially. Like we were talking a minute ago, if something happened to my company and the money you invested went to zero, if it would change the clothes you wear, the car you drive, or the food you eat, it’s not for you, don’t do it.
And so that’s the first thing that has to be positive. We have to have a positive on you and your family’s money, you have to be in a good position. So now once we know you’re in a good position, now it relies squarely on me. The first factor that is my responsibility, who are we? RJ Burr, Panex, Bob Burr, Justin Burr, JP. Why are we the kind of people that you want to do business with?
Would you be proud knowing I’m working for you? Now, if we don’t get a positive on that, there’s no use even going into the third. If you can’t get that warm, fuzzy feeling about who I am and what we’re doing, look, we’ll stop right there. We’ll part as friends. Now, once you see that we’re the kind of people you want working for you, at that point, it moves to the third factor.
There are literally millions of places in this world where you can put your hard-earned investment dollars. Why is this one of them? Of all the things you could do, why should you put your money in this program? And so when it’s all said and done, if you’re sitting in a good position financially, you see that we’re the kind of people you want to do business with, and my program makes economic sense, if those three factors are positive, we’ll do business.
If those three factors, if anyone of them are negative, and it can take any shape, form, or fashion you know, I want to talk to my lawyer, I want to talk to my wife, I want to talk to my CPA, it’s too risky, it’s not liquid enough, whatever shape, form, or fashion you want it to take when you boil it back down, one of those three factors will have been negative. And so as long as when the average investor, it doesn’t matter who you are, the first thing you got to cross off that list is, who am I dealing with?
How long have these guys been there? I learned a long time ago, one of the easiest ways to check somebody’s credibility, how long they had their phone number. Well, I tell you, the phone…well, I’m actually looking into my phone. But this phone right here, I got my first cell phone…my oldest son will turn 22 in August. And so it was 21 years ago that I got my first cell phone.
I was one of those guys, I worked on a phone all day long and so I was not getting a cell phone. If you want to talk to me, call me at the office or call me at the house. I’m not giving you access to me 24/7 . Now, that was wrong mindset, but that’s where I was 21 years ago. Well, then all of a sudden, my wife says, “Well, what happens if something happens to our baby, and I need to reach you?”
So she hit my dad string, it was the first time anybody ever hit my dad string, and so I bought the cell phone. Same number. Twenty one years later, I don’t change it. Because I don’t run from anybody. If it’s black, it’s black. If it’s white, it’s white, there is no gray. Good, bad, or indifferent as long as my partners and our group knows that it is what it is.
Now, if it’s good, I’m going to tell you it’s good. If it’s bad, I’m going to tell you it’s bad. If there’s something we can do to fix it, we’re going to try to fix it. If there’s nothing we can do to fix it, I’m going to tell you that, too. That way, as long as you know where we’re at every step of the way, then I’m not going to back up from anybody. And so that’s just one of the foundations.
Now, I don’t know how everybody else runs their business, I know how we run our business. Well, just like kids, I tell my kids, “Control what you can control. There’s a lot of stuff in this world that you can’t control, you deal with that when it comes up. If you take care of how hard you work, when you show up, if you take care of the things that you can take care of, everything else will take care of itself, but control what you can control.”
Being honest with your partners, that’s something you can control. And a lot of people, I don’t know if they forget it or if it’s just a lot easier, but I’ve really never had any issues. Now, don’t get me wrong, I’ve missed wells before. I’ve lost my partner’s money. Anybody in oil and gas, if they ever tell you different, they’re lying to you. However, I haven’t had one guy upset with the way we conduct our business.
Because like I said, it is what it is and we deal with it. We’re either happy or we’re sad. But then it’s the next step. And so that’s my philosophy in a nutshell, I’ll get off my soapbox.
Jimmy: No, that’s great, RJ. I think that’s really important for investors to know who they’re partnering with, who their operator is going to be for the next several years and holding their money. You want to make sure you got a good feeling about that. To wrap things up here, RJ, beyond knowing who you’re dealing with and who you’re partnering with, can you restate your bull case for oil production investments?
And then going a step further beyond that, maybe you can tell us a little bit about the different investment programs that you’re currently operating at Panex.
RJ: Well, it depends on what you’re looking for. You know, I have some partners that they like taking…prime example, a wildcat well. Now, a wildcat well, historically, you hear guys say, “Well, you got a 1 in 10 shot at hitting it. But if you hit it, you’re going to make 100 to 1 on your money.” Well, it’s not that wildcat well that makes you that 100 to 1.
The wildcat well just finds the oil to make you that 100 to 1. When you develop the field, that’s where you truly make your money. Now, industry averages, you’re going to hit 1 in 10 maybe 1 in 20 wildcat wells. And so if you’re planning on building your company around drilling nothing but wildcat wells, get ready to miss a lot of wells before you get that one.
That’s just the nature of the beast. Now, once you hit that wildcat well, now you develop the field. You go north, south, east, and west, and you start stepping out and you define the boundaries of your field. You’re going to hit industry-wide probably 70%, 80% of your developmental wells. Now, once you define where your field is, now you’re drilling infield developmental wells.
You’re going in between the producers and drilling wells. And you should hit 8 or 9 out of 10 of those wells that you drill. And so that’s the scale from wildcat to developmental and field development. Now, what we do that’s a little different is the sense that when all of this craziness happened here a couple of years ago, we started flying properties.
We’ve made roughly 19 purchases that encompass two complete salt domes. Well, if you take the , I mentioned the Bayou Choctaw dome. That dome right there was originally discovered a little over 100 years ago. They’ve been drilling wells in this dome for a long time. Now. they hadn’t really drilled in it significantly since the mid-80s. And so when you sit back and you look at the traditional way you develop a field, there’s a standard way you do it.
You start at the top and you work your way out. Well, you look at this Choctaw salt dome and you really, “What was I thinking?” You know, whether it was two landowners that were in a contest and drill along their property lines, or whether it was another company army, there’s no rhyme or reason to them developing this field.
And so when we sat there and looked at it, we just kind of came to the conclusion, “Heck, all of these wells that were drilled out here, they’re essentially the wildcat wells. They all did it for us. They showed us where the oil is, all we got to do is go and develop it.” And since that time, we’ve drilled the first two wells out there. We will be placing these wells in production, the completion rig moves on next week.
But one well has over 230 feet of pay in it, another well has about 260 feet of pay in it. These wells by themselves could be worth 100 to 250 million each, and they’re the first two wells we drilled in this field. We got another 100 to 200 wells we’re going to drill to develop this entire field. And so what we tend to do is, I don’t want to reinvent the wheel.
We stand on the shoulders of giants and just get what they left behind. You take your old oil and gas companies, it was the Wild West. Think back in the 20s and 30s, they’d go out, they’d drill a well. They’d hit a well, they’d get all excited, they’d produce the well, the 40s, 50s. So they’d start producing, but then all of a sudden, they’d hit another well somewhere else.
Well, this first field all of a sudden it lost its allure, so they moved to that other field. Well, essentially, they’re a bunch of spoiled kids. They would get a brand new toy and that toy was their absolute favorite toy till they got another toy. And then they take that toy and they put it in the toy box and never take it out again.
Well, we go through that toy box and we find that mint condition Han Solo toy that’s still in its box and we develop it. And that’s essentially what we do. We’re not rocket scientists, we stand on the shoulders of geniuses and just follow their path. And we just happen to have the guys on our team that know where to look.
Jimmy: I think that’s a great strategy, RJ. For any listeners and viewers out there who want to learn more about Panex and maybe also access that “Oil Investing 101” report that you referenced earlier, how can they go do that?
RJ: I would say go to panex.us, P-A-N-E-X dot U.S., or email us at [email protected] .us. Just def. Heck, we’re an open book. In fact, I’ll probably be the one to call you back if you send an email in or something want some information. We’re an open book.
Up, down, left, right, just let us know what direction you go, and that’s where we’ll want to go.
Jimmy: Fantastic. And a reminder again for our listeners and viewers out there. If you want links to all of the resources we discussed on today’s episode, you can access the show notes at altsdb.com/podcast. And don’t forget to subscribe to the show on YouTube and on your favorite podcasting platform so you’ll be sure to receive new episodes as we release them.
RJ, thanks again for being here today with us.
RJ: Oh, no worries. Thank you very much for your time. If y’all ever need anything, J, just let me know. I have done well travel.