The business model of many oil and gas developers can be boiled down to three points: Finding, Funding, and Flipping. The order, preparation, and strategy put into place around these points are often the major determining factors in whether a business will be successful.

1. Have a Plan. While occasionally an opportunity will arise that is simply too good to pass up, the better strategy before jumping in to oil and gas investment is to develop a business plan, vet it with experienced professionals that you trust, gain a deep understanding of your target basin(s) and network extensively to develop both your acquisition opportunities and your target investor group.  Any new venture will involve risk, but you can mitigate many of those risks by investing the time upfront to develop a sound plan and being disciplined in adhering to it.  Pick your team and ensure that you have the necessary pieces in place.  You will need experience with land and title, a geoscience team, engineering capabilities, and accounting expertise.  Determine how you want to staff or outsource those disciplines, and make sure that the personalities of those teams will work well together.  Decide early on if you want to create a new company and sell equity in that company to your investors or if you would prefer your investors to be working interest partners with titled interests in the assets themselves.  Discuss these options with your attorneys, tax preparers, and financial advisors, and work toward the outcome that best suits your needs.

2. Play to Your Strengths.  This applies to all three phases of the process.  Suppose you (and your team) have a lot of operational, land, or relationship experience in a particular basin that offers good upside. In that case, it likely doesn’t make sense to be looking for assets in a different basin unless there is a compelling geologic, geophysical, engineering (or relationship) correlation to those basins that you know.  Wildcatting is risky; risk turns off investors, and stranded assets or small pools of other players in the field will shrink your potential offramps. 

Similarly, on the funding side, go with what you know. If you have very strong relationships with commercial banks, explore the lines of credit or other facilities that may be open to you.  If you don’t have experience with public-facing capital raises, consider partnering with an experienced private equity group that does, or shift your focus to other funding sources.  If your professional network includes high net worth individuals who are open to direct investment, then explore their appetite for investing in you and your project.

When it comes time to exit the investment, whether or not you are entering into a marketed process, you should have been networking with nearby operators, doing homework on where investment dollars in that basin are coming from, and knowing your price.  Many developers originally plan to develop their assets for the long term, generating cash flow over time for solid and predictable returns. However, if a potential buyer makes a compelling offer, you need to be prepared to respond.

3. Put In the Work and Network. Hustling to put together a cohesive asset position is rarely easy, and it often requires participating in dozens of data rooms, conferences, networking events, and both scheduled and unscheduled social interactions. It is rare that one of your close friends just happens to have some assets that they may be willing to sell to you, and more likely it will be a friend of a friend or a more remote connection that ultimately brings you to an asset opportunity.  Boots on the ground matter.  Whether your land team is going door-to-door to put together a native leasing position or you are attending industry events, a personal touch often makes all the difference.  For example, if you are looking to enter the Midland or Permian basin, putting in face time in and around Midland is essential.

Making these connections will help you in all phases of the business.  Suppose you and your core team don’t personally have the operational experience or capacity to develop your assets, perform necessary workovers, or drill new wells. In that case, you will need to find partners and vendors that you can rely upon. Suppose you need to grow or raise additional funds. In that case, these connections can point you toward additional investors, introduce you to private equity players, or help establish a personal relationship with a commercial bank.

Networking should never stop, as it often leads to exit opportunities (or your next business opportunity) that you may not have been planning on pursuing.  Whether that be through a total buyout, a joint venture, a merger, or otherwise; you won’t find those opportunities if you aren’t willing to put yourself out there.

Lastly, ensure that you have a legal team you can trust.  Here at RR&A, we work with start-ups and serial developers to find and secure their assets, structure their funding, and capitalize on exit.  Please give us a call to guarantee that you start off on the right foot.