Summary

Dive into the rich history of Texas oil exploration, from the Spindletop gusher to modern fracking in the Eagle Ford and Permian Basin. Learn how advanced technology and tax benefits make oil investments a lucrative opportunity for high-income earners.

Chapters

00:00 The Impact of Oil on Texas’ Economy
05:19 Understanding Fracking and Its Benefits
11:14 Tax Benefits and Investment Opportunities
22:32 The Project Lifecycle in Oil and Gas Investments
30:11 Understanding Well Lifetimes and Production Economics
36:13 Investment Strategies and Tax Benefits in Oil Projects

Transcript

Bryan Hancock (00:01.918)
Welcome to the executive connect podcast. here again with my friend Ted Smith. We’re here to talk about oil and gas exploration in Texas and the history of how everything got started in Texas. Welcome Ted.

Ted Smith (00:13.825)
Hey, thanks for having me, Brian. Appreciate being back. Always good to see

Bryan Hancock (00:17.644)
Yeah, yeah, yeah. So, you know, I thought we talked last time we talked a lot about, know, sort of like the geopolitics and worldwide. I think we wanted to kind of focus on Texas this time because that’s really where most of your exploration is focused. Can you tell us a little bit about, you know, how what all means to Texas and how, you know, things got started here?

Ted Smith (00:26.912)
Mm-hmm.

Ted Smith (00:40.289)
Yeah, oil means almost everything to Texas. That’s one way to put it. mean, you know, was discovered back in the early 1900s. There was a famous well called Spindletop came in down south of Houston. And those early wells down in the Houston Galveston area were just phenomenal. And it changed the state. It changed the state from being a backwater to being an economic power.

It happened within about five decades. Texas oil is the oil that got us through World War II. And subsequently, different areas, different geographic areas in this state were found. It’s all over. mean, now my company is prolific in the Eagle Ford Shale in South Texas, running from the Mexican border south of San Antonio, north of Houston, it’s 400 miles long.

Of course we have the mighty Permian Basin, 6.3 million barrels a day. It’s the largest energy battery in North America. Everybody that you know, all the publicly traded companies are out there and have a piece of it. Up north, under Dallas, Fort Worth, you’ve got the Barnett Shale. That was discovered in the early 2000s. We’ve got the Haynesville Shale in the Northeast. We’re sort of right on the Louisiana-Texas border.

And then you have the Northeastern wells. A lot of famous wells came in up there in the 1920s and 30s. So it was originally discovered Southeast, but it’s moved West. There’s so much of it in so many places. Brian, this state has boomed or busted with oil prices. It’s just in the backbone of the holocaust.

Bryan Hancock (02:22.841)
Right.

Bryan Hancock (02:26.486)
And can you talk a little bit about, mean, I don’t know a whole lot about this, but it sounds like the technology’s changed a lot over the decades too. And how has that contributed to them finding various formations here in Texas and how accessible it is and things of that nature.

Ted Smith (02:37.387)
Absolutely.

Ted Smith (02:43.553)
So oil started off in Texas like literally being put in wine barrels because those were the barrels that people had, wooden barrels. most people, for instance, would think of a barrel of oil, they’re going to think of 55 gallon drum. That’s not the case. It’s a 42 gallon wine barrel. That necessitated the Railroad Commission. That’s how, if you’re not in Texas, we have a thing here in Texas. It’s called the Railroad Commission.

Bryan Hancock (03:12.676)
Right.

Ted Smith (03:13.249)
But it has to do, it’s the governing body for all leases, oil and gas leases in Texas. The reason it’s called the Railroad Commission is because when oil was first found in the early 1900s, there were no refineries. So you had to put it in a barrel, you had to put it on train and ship it up to the Northeast. So the Railroad Commission got in charge of counting the barrels and make sure it didn’t get stolen. And to this day, we vote, when we vote for a governor or we vote for a lieutenant governor, we vote for a railroad commissioner. And most folks will tell you,

behind the governor, the attorney general and lieutenant governor, that’s about the fourth most important position, right? So, know, it’s, Texas energy production is the energy of, it’s the freedom engine for the United States. And it has developed over the years. There’s not any other industry that I know of that is going to advance. If you can build a better mousetrap to get more oil cheaper, this industry will be a path to your door. You will become a millionaire.

If you can find a way to extract oil, the advent of fracking. That’s been around for 25, 30 years. It was first used with vertical drilling. Now it’s used with horizontal drilling. It’s been phenomenal. The idea of peak oil that people wrote about a long time ago. Even in that book, the author wrote that

That doesn’t count any other types of recovery that were found. And fracking or modern day drilling has opened up the door to so many more areas. We crack the rock and the oil’s just waiting for it.

Bryan Hancock (04:50.478)
Yeah, so let’s talk about that a little bit. I think a lot of people have heard of fracking. comes up politically, you know, you hear about that. It’s a big political issue. Like I think it was in Pennsylvania this last election cycle. But maybe you can just explain to people briefly what fracking is, how that differs from horizontal and vertical drilling, and what happens when you kind of combine the two, and what opportunities that unlocks that previously were not available when we were digging soda straws in the ground vertically.

Ted Smith (04:57.601)
you

Ted Smith (05:17.633)
You’re right. It has unlocked so many areas, so many opportunities, and fracking is short for hydraulic fracturing. You’re going go down into the ground and you’re going to put holes in your pipe, not too big to destroy the pipe, but just enough that you can pump water and then quickly followed by sand into the layer of rock that you feel has got your oil, okay, that’s got your product in it, your oil and gas.

So you fracture and crack the rock under immense water pressure, usually north of 10,000 PSI. Depends how deep you are. The deeper you go, the more pressure you’re going to have. And then after you crack it with water, you fill those cracks with sand. Because traditional vertical drilling, what the first wells were here in Texas, everybody’s got the idea of the wooden derricks and the gusher coming out. And it’s like,

Bryan Hancock (06:13.294)
Right.

Ted Smith (06:13.873)
movie, there will be blood or it’s like the Beverly Hillbillies where he shoots a bullet in the ground and oil just spurts out. That oil is gone. You know, that’s easy oil, that’s surface oil, and now we’re getting into deeper, lower formations. They need to be cracked. The oil and gas is trapped in the rock like a sponge, like the pore spaces of a sponge. And so by cracking it and then filling it with sand, when in traditional drilling you tried to hit a sand,

Bryan Hancock (06:20.324)
Ha ha ha.

Right.

Ted Smith (06:41.929)
You allow the oil and gas under higher pressure to flow into your little rivers of sand that you made, and then it flows into your wellbore and it comes out the vertical part of your project. And so it’s opened up, you in Texas there’s three areas. You mentioned Pennsylvania, the largest probably shale bed known to man currently is the Marcellus Shale. Runs from New York the whole way down to like the top of Kentucky. And it’s very political.

Because in some of those states, people aren’t allowed to access it. In Pennsylvania, you are. In New York, you’re not. Here in Texas, obviously you are. We’ve got the Barnett Shale, the Haynesville Shale, and we’ve got the Eagle Forge Shale. If you own the mental rights, that pretty much can make you a millionaire overnight. I it’s a game-changing deal that, you know, along… Texas perfected and has elevated to unbelievable levels that people can’t fathom, private mental rights ownership. That is a wealth-generating…

thing that most countries, other countries don’t have. And unfortunately in New York, like they won’t let mineral rights owners get at their own minerals. And minerals should be thought of as crops.

Bryan Hancock (07:49.988)
Yeah, so let’s talk a little bit about that. What’s the working interest in a well? Who owns the lease? How does that all go together in like a sponsorship? I’m familiar with real estate deals and sponsorship, but all the guest deals are a little different in terms of how they go together. So can you talk us through how a normal deal gets formed up and who owns what? There’s usually a structure to most projects that’s pretty similar across the industry. Can we maybe talk through that just a little bit?

Ted Smith (08:01.44)
Yeah.

Ted Smith (08:19.105)
Sure, yeah. There’s many, many moving parts, but basically it starts with a piece of land that’s got minerals down below that you think are desirable. And here in Texas, when we drill a well, you have to take a log. You have to log the rock that you drilled through, both vertical and horizontal, or just vertical if that’s what you’re doing. So the type of rock, whether you saw oil and gas, you have to record that and you turn it into the state. So we’re able to go to a log library.

and take a look and see what’s been produced around us. So we’re not hunting anymore, we’re not wildcatting anymore, there’s really none of that. It’s harvesting, we’re going in next to folks who have already got stuff. And you find a piece that’s available, that’s not been leased, and you go around and you talk to the mineral rights owner. An oil and gas company, an ENP, what you call it, an Exploration and Production Company will go around and talk to the mineral rights owner.

One common misconception people have is that the surface right, the landowner is the same as the mineral rights owner. Most often that’s not the case, or if it is, it’s been split off. Somebody could have been a farmer, might have gone through three years of drought, they needed to raise some money. What do I do? How do I do that and keep my farm? Well, I’m going to sell off 50 % of my mineral rights. Well, who do I sell it I’ll sell it some cat in the big city. And so, mineral rights ownership, owning the mineral on the surface are two different things.

In the state of Texas, the other thing people don’t know is that the surface owner cannot prohibit the mineral rights owner from capitalizing on his minerals. We always want to work with a surface rights owner, with a land owner, if he’s not the mineral rights owner. So we always take care of them, treat them right. But you get the mineral rights owners, usually it’s multiple. The big companies love to find just one family that owns 5,000 acres of minerals.

If you own minerals, look, if you own minerals in the right location, you’re in the catbird seat. That’s all there is to it. It’s the best position there is. So those folks would have, which call royalty interest. They would own ownership and get revenue out of the production of the well before expenses. Okay. Then there’s the company that operates the well. They usually will get a piece of the royalty ownership. They’ll operate the well.

Ted Smith (10:36.713)
and they may operate it for others who come in and buy a piece of the production. The minerals in the production are two different things. So the land, the minerals in the production are actually three different things. And the folks who own a piece of the production can be called, well, they’re referred to as working interest owners. Okay, so working interest owners buy a piece of the production. They usually pay for a piece of the well to get built and they own a piece of the production. The mineral rights owners,

And usually the operators have a piece of what you call a royalty interest before expenses. The working interest owners have to pay expenses. Now those get written off most times.

Bryan Hancock (11:14.776)
Yes, let’s talk a little bit about that. And that’s some of what originally intrigued me about this opportunity that we’ve been working on. Just at a full disclosure, we’ve invested in some of Ted’s deals or some of the Ted’s deals been sponsoring through his company. But, you know, let’s talk a little bit about tax benefits, because a lot of people have this high ordinary income tax problem. And I think a lot of our listeners probably have the same problem.

Can you talk a little bit about what the challenges are normally for people with these passive loss limits? How the IDCs for these projects help with that? And then maybe just talk a little bit about the specific stuff that came into play in the 80s and kind of how the technology has impacted a lot of that in terms of potentially de-risking it.

Ted Smith (12:00.609)
Thanks

Ted Smith (12:05.505)
Yeah, they’re used to back in the 70s and before the Tax Reform Act of 1986 that Ronald Reagan put through, before that, it was kind of the Wild Wild West in terms of tax benefits and oil wells. But the Tax Reform Act of 86, one of the things Ronald Reagan wanted to do was bankrupt the Soviet Union. You want to do that by lowering oil prices. The 1980s were not a great time necessarily to live in Houston. We had oil at $8 $10 a barrel.

And one way to do that is to stimulate domestic production. Well, how do I stimulate that? I’m going to give folks a tax break to invest in projects. Okay, so the tax format of 86 had two tax breaks. One is 100 % write off on the money you might put into a project. So it’s 100 % deductible off your ordinary income. Okay, so it’s an active loss. It’s an active write off. It’s not a credit. That’s section 263 of the IRS Code.

There is a second benefit to stimulate even more, and that’s section 613A, 613 alpha. That one kind of has a name. It’s called the Small Producers Depletion Allowance. And what that is is folks who would come in and own a piece of a well or drill a couple wells, they’re not big publicly-held companies. They’re not drilling 100 wells a year or more. They’re coming in and they’re drilling wells and it usually will have smaller production. You come in as a

owner as a small producer. And for doing that, 15 % of the revenue the well generates is tax free in perpetuity for the life of the well. So the first write off, the 263, that deals with what you put in your investment in the project. It’s 100 % deductible, both federal and state. So ironically, people out in California, New York and New Jersey, they actually do a little better because they put about 8 % 10 % on top of

what your federal bracket is. But then on the money going out, 15 % of the gross is tax free in perpetuity. So they’re phenomenal in a sense. So Reagan put that in place. That was before fracking. was before real sideways drilling, horizontal drilling. But then you fast forward about 15, maybe 20 years in the early 2000s. People had…

Bryan Hancock (14:17.315)
All

Ted Smith (14:27.947)
Perfected the art of drilling sideways not just at an angle but actually going down and turning almost 90 degrees you do that very very slowly the pipe slides over and Over maybe eight or nine hundred feet and makes a gentle curve And we drill into layers of rock that have oil there’s no doubt about it we know that there’s or there’s product in there It’s just a question of how much

And so you’re drilling sideways and then with the advent of fracking and now we’re onto a fourth generation frack, just like you might be on an iPhone 15 instead of an iPhone 4. They’re the same thing, but we all know they’re not. The capabilities we have and the pressure we can induce, everything’s got refined and better. And so you take the fracking and you combine it with the tax benefits that were put in the 80s.

your risk of having a dry hole, your risk of not getting anything for your investment, it’s always there. It’s oil and gas. It’s big construction underground. I always tell folks that. But you know what? It’s next to nil. We aren’t hunting. We aren’t wild cutting. We’re harvesting. And you take the new technology and you combine it with the tax savings from about 30 years ago. And let me tell you, brother, it’s like peanut butter and jelly. And it’s pretty good.

Bryan Hancock (15:43.8)
Yeah, and I think that it’s important to kind of mention from your earlier point in the conversation too, that if you find a project that you want to go drill, there’s data that’s available at the state right around where you are. So what I like to tell people that I’m talking to about this, that, you know, they’re used to immediately triggering the risk bells in their head whenever they hear oil and gas. Well, there’s data supporting what

Ted Smith (15:55.681)
Thank

Absolutely.

Bryan Hancock (16:12.824)
the and gas production is all around you through state data, if I’m not mistaken. And then you’re going, instead of putting the soda straw straight into the ground, you’re putting it in the ground and turning it sideways and going through a giant formation of shale and then blowing it up and sucking the oil out. It’s kind of hard to screw that up. I mean, I guess if you really tried hard, you probably could.

Ted Smith (16:33.037)
It’s a question of how much you’re gonna get and then what price you get for it. I always tell people the analogy is look, if you were gonna open up a Burger King on one corner and you had a Water Burger and a McDonald’s on the other corners, how would you like to know how many fries and burgers they sold every month? You’d love to do that and that we do. There’s no guessing about that. We know if it’s, hey, if it’s four miles to the east or if it’s across our fence to the west, right? So we do.

Bryan Hancock (16:36.909)
Right.

Ted Smith (16:59.835)
Everything that the big companies do, whether you’re a large producer or a small producer, you go in and hydraulically frack that rock. Sometimes these layers, they’re 250 feet thick. We’re not talking about, we’re going to go drill into 20 feet, but we’re talking about something that’s a 20 or 30 story building, if you saw it by the side of the highway. We’re going to drill through that for a mile and a half or two miles. We’re going to make cracks that go out in all directions.

like a DNA helix, and that’s gonna drain. We’re gonna put, you know, today we try to put 550,000 pounds of sand into a single frac stage. The wells are fracked in stages. Nowadays the stages are smaller, so we’re putting more sand into a smaller stage under higher pressure than we ever have. That’s gonna crack more rock, it’s gonna release more.

Bryan Hancock (17:53.602)
Right. And not only that, maybe you can talk a little bit about multi wells. So I think people, when they’re thinking about an oil and gas deal, they’re probably thinking you drill one hole in the ground and you go sideways. But can you talk a little bit about multi wells and how that sort of de-risks things and what that does overall for just a project in general?

Ted Smith (18:16.481)
Sure, mean, it’s simple economics. It’s the economies of scale. Some of your costs are fixed, like your cost to move a rig on location. The new advanced rigs that we like to use, they’re the most technologically advanced drilling rigs in the world on land. Not talking about out in the Gulf or in the ocean, but on land, there is advanced and as sophisticated as you get. They cost $600,000 to move on, right? And they cost $600,000 to move that rig on location.

It comes in about 50 or 60 different trailer trucks full of parts and they literally put it together like an erector set in about three days and they’re 180, 200 feet tall. But what they can, it’s $600,000 maybe to move that on for one well. But if you can do it for six wells, now you cut your cost per well. And so the profits that drop out at the end are better. All of your fixed, your sunk costs are the same, whether you’ve got one well, four wells or eight wells. Some costs scale.

Obviously, if you’re fracking more wells, you’re going to use more sand, more propant, more water. So those things go up, but there’s a bunch of fixed costs that when you distribute them over more wells, it’s a better outcome.

Bryan Hancock (19:29.506)
Right, so there’s definitely the cost of moving everything on and setting it up, but you can talk everybody through kind of how these wells work too, because my understanding is that it moves and then it’ll drill another hole. Can you just talk us through that just a little bit?

Ted Smith (19:38.112)
Yep.

Ted Smith (19:42.145)
Yes. I’ll tell you what, even since I joined the industry, I’ve been doing this 15 years, they have these rigs now, they roll. Believe it or not, the entire 180 or 200 foot rig, which weighs hundreds of tons is on a set of tracks and they’ll roll 15 or 20 feet over to the left and they’ll drill a well bore right there. And what you do is you drill down to below the water table.

And the water table is different for different formations all over the country, where I’m familiar with in South Texas with the Eagleford. The water table goes down to about 25, maybe 2,700 feet. We will drill down to 4,000 feet, stop, put in extra pipe and extra cement around that to protect the water table. So you have your normal pipe, then you’ve got cement, then you’ve got another pipe, then you’ve got more cement, and that’s never, ever going to move. So we’ll go well over a thousand feet below the water table. And at that point, the cement has to dry.

takes about two days for that to dry. So the drilling rig will actually roll over to the next well, 15 or 20 feet ahead. And so the well heads might only be 20 feet apart, but as you go down, they can kind of go down and kick out. And then they’ll turn and come right at you or wait whichever direction they want to go. We like to drill the lateral legs. You know, we refer to it, if you think of it as a leg and a foot, we like to think at the very end of the ladder, we call that the toe. And then we call

Bryan Hancock (20:49.988)
Amazing.

Ted Smith (21:09.631)
The curve, we refer to that as the heel. And so you start your fracking process, you drill the whole way to the end and then you, then the whole drilling rig leaves. And then, you know, Halliburton or Schlumberger or a whole other orchestra comes in and they do their piece of it. It really is, it’s an orchestra of moving parts on any given well, there’s minimum three dozen, probably 50 to 60 different contractors handling their piece. You’ve got.

Bryan Hancock (21:24.132)
you

Ted Smith (21:38.463)
the drilling rig, you’ve got the mud logger, you’ve got the engineer, you’ve got the guy who steers the drill bit, you have all the people who provide the generators and the lights, you’ve got the guys who do the perfing tools, you’ve got the frat crew, you have everybody, and then you always have a company man, right, the guy from the company that owns the project is there on site managing all that, making sure that they’re going according to plan, where we’re supposed to go, and I’ve had, you know,

This is crazy, but the technology is so good. I’ve had a guy who has steered a drill bit. He’s called a geo steer. It’s not a geologist, but it’s a geo steer. I’ve had a geo steer tell me that he can put a drill bit through a toilet seat, two miles down and two miles out. They can control it that much. It’s insane. So that’s how the technology’s grown, but the rigs will roll and it is…

Bryan Hancock (22:22.82)
amazing.

Ted Smith (22:32.125)
exactly like with a circus or an orchestra coming to town, getting set up, rolling, doing their thing, and then moving on to the next one.

Bryan Hancock (22:57.976)
Well, Ted, we talked a lot about just how these things go together. You know, and I know every deal is a little different, but can we talk just a little bit about, you know, what maybe an average project would look like? You know, people invest in it. And then, you know, there’s a certain amount of time that goes into drilling things and then certain amount of months go by before, you know, while you’re doing the IDC part of your project. And then, you you start to get the readings that come out and, you know, certain amount of, you know,

barrels of oil come out, let’s just talk through the economics.

Ted Smith (23:32.417)
Sure. it depends on each project, obviously. It kind of goes without saying, every project sort of stands on its own. Typically, our company will look at anywhere from 80 to 100 different potential deals in a year. We’ll probably select five or six. And then we’ll have that project put together in a PPM, private placement memorandum. We’ll send that out to folks who are accredited investors. They’ll take a look at it.

And in the funding of it, depending on the size of it again, the funding of it usually takes two to three months. Sometimes a little longer. We have had some short ones in really good locations, like some small raises, smaller dollar amounts. We had one go in 48 hours. They tend to go faster. They get funded faster if you’re going back to a lease, a piece of property that you’ve already hit and has done quite well.

If there’s room to come back and do a third, a fourth, a fifth, a sixth, it’s like putting the band back together. Everybody’s like, hey man, I’m in. So that’s pretty simple. So the funding goes faster, but generally speaking, two to three months on the funding, as we’re nearing the end of the funding, we break escrow. We cut our projects into pieces and we say we have 80 pieces and when we get to 72 pieces, let’s say we break escrow. At that point,

The money is in the project, it can’t come out and it’s solidified and we’ve begun releasing money to, you have to build a pad site. So oil and gas is construction. It’s big construction underground. You level a pad site, you’ve got to put rock down to support a drilling rig. can’t just go out in some farmer’s field and set something that’s 45 tons in the mud. You’re never going to get it out. You have to build a site, build a road into it, set it up, how it’s going to work on the surface and which way you’re going to drill.

Bryan Hancock (25:16.58)
Yeah.

Ted Smith (25:24.801)
Then you, you know, and at that point, you know, when we’re even before we get to breaking escrow, we’re, talking to drillers. So drilling companies and fracking companies, again, oil and gas is extremely segmented. Nobody is vertically integrated. It’s a lot different than other industries. Everybody does their piece. So we’ll be talking to a drilling company, perhaps a Patterson or an H and P rig. have an H and P rig going in the field right now. Big publicly held companies. like to use those.

They’ll schedule the drilling rig, we’ll get it out there, they’ll start drilling. And if it’s three wells or four wells, they’ll do what I said. They drill the surface casing and then slide over, drill the surface. So they’ll drill all the surface casings and then finish drilling the vertical and the horizontal on the first well. Then you have to set pipe in the ground. So when you’re drilling, you’re just drilling and making an open hole, right? And then you pull that drill pipe out. You just have an open hole in the rock two miles deep and maybe two miles out.

you have to get pipe down in the hole and get it around the curb and get it set. That’s production pipe or what we call casing. So that’s the last, that’s actually the first act of completing the well because that casing is permanent. It’s going to be in the ground forever. It’s not going anywhere. And then the drilling rig gets.

Ted Smith (26:52.033)
So then the drilling rig gets pulled apart, put on trucks and goes to somebody else. In the meantime, as that’s gone, we’re prepping the site, all the well heads. If there’s six wells, there’ll be six different well heads. We’re prepping those with what’s called a, we refer to it as a Christmas tree, but it’s a big 20, 30 foot deal. Usually they’re red and it’s got all kinds of valves coming off it, getting prepped for the frac crew. And we’ll have Halliburton or Schlumberger or…

Baker Hughes, those are big publicly held companies that people might know. They’ll come in and do the fracking. And again, that’s another orchestra that comes into town. They’ll set up their equipment. So all their pump trucks usually will have 16 pump trucks. They usually have two extra in case the pumps go down. And a pump to pump this water and sand down in the ground, Brian, that is an 18-wheeler. It’s not like a desktop. The whole back of the thing is the pump. And we’ve got 14 or 16 of those actively working.

And so they pump, they hook up to that Christmas tree with the valves, they pump everything down in and there’s a command trailer there, which our, our engineer, our, our, our company man will be there be, overseeing, Hey, back off the pressure, increase the pressure, send the sand. You do the frack job, then the frack job company leaves. And again, you frack in stages from the toe back to the heel. once you get, you don’t really frack the heel. You don’t want to frack up in the vertical. You want to stay in your layer of rock. then when that’s done.

Behind every frac stage, say every 200 feet or whatever it might be, you set a plug. So you frac a stage, set a plug, and frac stage, set a plug. And up on the surface, the frac company is actually just flipping their hoses from one well head to the other. The one is getting prepped for its next stage while one stage is being pumped. So you can literally do two wells in the same time that you would do one. That’s one of the great innovations that’s come in the last 12 years. so, how a Burtner Schlumberger or whoever’s doing your frac, they leave.

They go to somebody else. Then we bring out a company. The well won’t flow back because you’ve got plugs in between each thing. You have to drill out the plugs. That’s a whole another two day deal. You drill out the plugs and you prep the wells on the surface, getting ready for flow back. When you flow a well back, you flow it back through temporary equipment. You usually bring it on slowly. You don’t open it up enormously fast right away. We like to bring them on slow and create a nice smooth draw, kind of like a draw on a cigar.

Ted Smith (29:16.043)
You create a draw out of the formation and you’ll run through temporary equipment. And I always make the analogy, this is, look, you’ve opened the well up, you started production. This is when the baby’s born, but still in the hospital. He hasn’t gone home yet. And so we’re running through temporary equipment in the temporary tanks. We’re separating oil and water, that sort of thing, separating gas from liquids. And then after about 10 days or two weeks, we’ll flip it over.

to permanent facilities, permanent separators, heater treaters, and the tanks that you see on location to hold the oil. And then from there, in the Eagleford at least, in some locations, the oil’s pumped out, but for most of the Eagleford locations, the truck pulls up, picks it up, and takes it to a fire. For the clients, that would be, let’s say we start production in February, they’re gonna get, whatever is sold in February, they’ll get their first production on April 15th.

Bryan Hancock (29:58.638)
Yeah, so.

Ted Smith (30:11.521)
Right. And whatever we sell in March, they’re going to get that production in May. We have to wait 30 days to get paid from the refinery. And we always wait for the invoices for the bills to come in in the intervening months. So again, if production starts in February, it’s February production minus March’s expenses equals April’s check. And usually the whole cycle of it for us, depending on the raise and how many wells and that sort of thing, and also how difficult the drill is, because we can actually

turn the drill, but a lot of times we’ll drill down and drill back away and then turn and go this way so that we get more footage in the layer that we care about. Usually six months till first check, might be eight months, maybe at the longest, 10 months till first revenue back.

Bryan Hancock (30:59.748)
Yeah, and what’s the lifetime of this? mean, as a normal well, I mean, I the wells are, they vary, right? Deal to deal, but like, what is the, something that’s like a sharp depletion curve versus a more shallow depletion curve? Like, what is the lifetime of the wells generally?

Ted Smith (31:05.565)
They do.

Ted Smith (31:16.257)
Sure. So in our experience in the Eagle Ford, I tell people eight years. If it goes eight years for you, if I can make you whole on your investment in one to two years, you take a giant write off in the year you do it, and then I send you revenue for another six years, and that’s all profit after the first two, you’d be happy with that. We do have wells that have gone 10, 12, 15 years in the Eagle Ford. So the Eagle Ford is 15 years and under. Now.

there is a possibility, and people have just started to do it because the Eagleford’s about 15 years old, is where you could come back and refrac or restimulate the same well. You put another pipe inside the lateral pipe that’s already there and you frac through that. And you recrack the rock and reopen it up because over time the rock will close up due to pressure and heat. Remember, you’re much closer to the, mean, if you go out to a well site and put your hand on the well head, you’re gonna burn yourself.

That oil coming up is hot. It’s coming up from two miles down. It’s much closer to the center of earth. It’s hot as all get out. So the heat and the pressure will seal things up, but there’s always a chance you can refract. you know, I don’t really talk to people about this. I tell people 10 years, eight years, but there’s potential now because we drill the original wells with larger diameter pipes so that we can more easily put other pipes inside them later. There’s potential that these things could go 25, 30 years. Now,

On a first frack, like in the Permian Basin, the rock out there is not as tight. It’s not a true shale. It’s not really a sand, but it’s not really a true shale. There’s different layers. The Permian Basin is awesome. It’s just like a layer cake. There’s a Wolf Camp, then there’s the bone spring up above it, and there’s Wolf Camp A, Wolf Camp B, different layers. That layer cake is as much as 500 feet thick. So out there, there’s more porosity. The oil and gas can travel through the rock.

In the Eagleford, the shale’s pretty tight. You’ve really got to crack it hard. And so that means those wells will go 20 to 30 years. They might not come on with a tremendous pressure pop, and their decline curve would not be as steep. In the Eagleford, we typically see about a 75%, 80 % decline curve first year.

Bryan Hancock (33:31.332)
Okay. And so from an investment standpoint, which is probably what most of the people who are listening to this podcast care about, you know, can you just talk, I think about this almost like a bond ladder, right? Yeah. Just how, you know, how do you layer these investments on? You know, you get the tax write-off and you’re one, which is going to be interesting for a lot of people on the high income brackets. But you know, then you’re three or four. Can you just talk about how that plays out for somebody that has a limited amount of cash to invest?

Ted Smith (33:42.207)
Mm.

Ted Smith (33:55.777)
Sure. Generally speaking, we try to find prospects that will generate 150,000 barrels in year one. If we can do that, we feel we’re on our way. Again, the last 10 years, the average oil price for WTI, which is West Texas Intermediate, even though our wells are in South Texas, that’s the closest easy price that people can look up.

has been about $69 or $70 over the last 10 years. So using a $7 price tag, if we make 150,000 barrels in the first year, it will have a decline rate. It’ll decline from month one to month 12, and then it’ll decline year two. And by the end of year two, into year three, you’re probably going to be looking at about a half, a percent, up to maybe 2 % a month revenue of whatever you put in on your investment. So if you stuck in $200,000, you’d be looking…

at 2000 to 4000 bucks a month in month three, four, five. Now that’ll decline further as the wells go on out, but you should already be in the black. That’s pure profit coming to you in 15 % of it’s tax free. And again, the idea with this is for folks who look at this, especially high income earners, they take the write off, say they do one in 2024, they take the write off, we drill it, frack it, put it online, start sending your revenue. Do it again, come back in 2025.

All right, and you drill it, frack it, put that one online, start sending you more revenue. And so the first one’s starting to come down, the second one’s just coming online. We do it again for a third one. By the time, you nowadays with these modern fracks, by the time we’ve done three of these, we should have sent a client enough money that they can get in the fourth well on house money. If they take the money we sent them and just return it to them, and they write that one off too. So essentially they’ve paid for three, but they got four.

and the whole time they’re getting monthly cash flow and it’s 15 % tax free. So that’s the kind of the idea. Somebody who knows they’re gonna be in a high tax bracket year after year after year, once they understand sort of the force for the trees of what we’re trying to do here, they are long-term income producing assets. This is not a get rich quick scheme, but it’s a great way to keep money out of Uncle Sam’s pocket and in your pocket working for you.

Bryan Hancock (36:12.994)
Yeah, so to summarize it kind of at a high level, you know, if we were going to invest $100,000, you know, depending on what tax bracket you’re in, you know, maybe 70,000 of that is what you’d have to recoup net of tax benefits, you know, and that should come back in the first two or three years to recover your capital. And then after that’s maybe one and a half to 2 % a month. So

Ted Smith (36:16.513)
Mm-hmm.

Ted Smith (36:34.233)
Yeah, that’s right. So, you know, I tell people, you know, 12 to 24 % a year afterwards, obviously depending on prices, you know, if we catch a year like 2022 and somebody invades another country and all hell breaks loose, you know, and prices go up, then you benefit from that, right? Conversely, something like COVID comes along that that hurts everybody, you know, but one of the keys for us is that, you know, our projects are turnkey.

Bryan Hancock (36:46.915)
Right.

Ted Smith (37:03.508)
And we don’t have any debt. We’ve never gone to a bank.

Bryan Hancock (37:07.128)
Right. Yeah. And one of the things I like about these projects, it’s a little different than maybe investing in a venture investment or things like that. You don’t have to really wait for that liquidity event. You put your money in, you got to drill the thing, you know, there’s a wait period while everything gets set up. And then after that, the money starts coming back. it comes back a lot to start with, but then there’s depletion and that slowly tapers off. But, you know, the idea is

Ted Smith (37:16.406)
Right.

Ted Smith (37:24.374)
Yes.

Bryan Hancock (37:34.052)
as as that money comes back, maybe you’re two or three, then you take that same money and you can go put it into the next deal. And you get the tax benefit again.

Ted Smith (37:39.521)
That’s right. when we hit these, yeah, absolutely. When we hit these wells right, when they come on strong in the Eagleford, they start off right around 10 % a month, cash on cash. And you know, again, there’s never a guarantee. There’s always risk, right? It’s real investment. It’s big construction on the ground. But when we hit them right and we have nice prices, you’re looking right around 10 % a month cash on cash. Well, look, if between your state and federal taxes, if you’re 40 % tax bracket, which is the average

Bryan Hancock (37:50.628)
Crazy.

Ted Smith (38:09.555)
our average client or somebody looking at what we’re doing is somewhere around 40%. I don’t have to have too many months at 10 % for people to be super happy, right? And so that’s why, you I always tell people our goal, again, never a guarantee, but our goal and our target is to make people haul in two years or less. We kind of won’t look at a deal if it doesn’t, if we don’t think it’s got a significant chance of doing it.

Bryan Hancock (38:32.504)
You know what I find Ted is I’m a little conflicted now because I’ll go to the gas pump and I’m like, well, you know, I’m paying a lot for my gas, then I, you know, part of my brain goes to, well, that’s probably good for our investments then. So checking the price of oil, it’s kind of like, you know, I don’t really want to pay more at the pump, but if I have to pay more at the pump, at least my investments are doing well. So.

Ted Smith (38:44.554)
Yes.

Ted Smith (38:54.177)
No, I’ve had more than one client tell me, look, I went and I filled up my SUV and it was $110 and it was $4.20 for gas up on the Northeast. But then I remembered some of that came out of the ground and some of it’s mine. And I said, exactly right. mean, what we do is we offer great tax benefits, monthly income, and some tax-free income, as well as we put you into the most important commodity there is, right? Oil.

It’s the commodity that makes all other commodities possible. It’s the commodity that makes the modern world possible. There would be no plastic without oil. Right? Just think about that. So it’s not going anywhere. It’s only going to grow. There may be other energy sources and things around the edges, but we’ve got 120 years of infrastructure built into this. is the engine of it. And we’re the eighth largest economy in the world. Right? We’re just ahead of Canada and Russia as Texas, if it were its own country.

Right? Only California is ahead of Texas. So I think Germany, Japan, China and France. Right? And that is because of the product in the ground. It is the reason, if I can digress, oil and gas wells are taxed at the wellhead. The state takes a tax every month. And nowadays, counties will take a tax once a year. But it’s taxed at the wellhead. It is the reason there’s no income tax in Texas.

So it’s just blessed to have it. Blessed to have so much of it.

Bryan Hancock (40:27.384)
Yeah. Well, Ted, I can’t let you off without talking about Land Man 2, the new series. I’m not sure if you’ve seen any of it, but can you talk a little bit about what you know and how realistic it is in the real world?

Ted Smith (40:37.793)
I’ve seen some snippets of it. Well, I’ll tell you what, Taylor Sheridan is a great writer, right? And Billy Bob Thornton is a great actor. I love that guy and just about everything he’s in. Of course, they sensationalize some things. And if you’re in the business, you might not say, well, he’s not really a land man. He might be more of what you call a company man who oversees sort of project from start to finish. But there are, I mean, look, there had been more than one deal struck.

in the back of a pickup truck with over a cooler of beer. Right? That’s true. It still does happen to this day. You know, what we’ve had, we’ve had to go and find a mineral rights owner who lived in California, happened to be addicted to drugs and was homeless and living in a shelter, but we had to get him to sign off on it. And he was getting about 2000 bucks a month after that in revenue because he owned a little tiny piece of the, so it is.

oil and gas and private mineral rights ownership and the show that that sort of represents and that aspect of it, people don’t understand how, I mean, if you understood everything that went into it and then you’re only paying $3.50 a gallon, like if that was milk, it’d be 250 bucks a gallon. So it’s insane, but it’s a great show. Bring a little perspective for folks who might not otherwise, just the same way what Yellowstone did, right? Everybody.

Bryan Hancock (41:55.278)
Yeah.

Ted Smith (42:06.113)
the Yellowstone because Taylor showed up.

Bryan Hancock (42:07.672)
There you go.

Ted Smith (42:10.869)
Great show.

Bryan Hancock (42:11.084)
Well, hey, Ted, I appreciate you being on and sharing all your insight and wisdom with us. I know we’re getting together this weekend looking forward to that. appreciate the time. And for anybody who wants to check Ted out, please get with me. And we’ll talk about oil projects. Love to talk to you about

Ted Smith (42:19.882)
Yes!

Ted Smith (42:29.321)
Yeah, hey, Brian, my pleasure. We’ll see you this weekend. I hope my answers have made a little sense and been beneficial for folks. Thanks so much.

Bryan Hancock (42:37.188)
All right, thanks everybody. That’s the Executive Connect podcast.