6 Pro Tips for a High Performance Oilfield Investment Portfolio

PRO TIPS HIGH PERFORMANCE

OILFIELDINVESTMENTPORTFOLIO

FO

R A6

Break the Law and Play by the Rules

Free and Clear

Invest in the Well

Get a Fair, Transparent, Vetted Deal

Dont Give Free Rides

Harness the Power of the Crowd

TABLE OF CONTENTS

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WE LIVE INUNPRECEDENTED TIMES

America is now producing more natural gas than Saudi

Arabia.

The Bakken Shale play encompasses Western North

Dakota, Eastern Montana and parts of Canada. It is now

producing over 1,000,000 barrels of oil per day.

Investors have never had it so good!

But with so many options on the table, how do you dis-

tinguish between the good and not so good deals?

Well get into all of that and more in this eBook, but lets

first cover some basics.

BREAK THE LAWAND PLAY BY THE RULES

The oil and gas industry is divided into two parts; operators and service companies.

The easiest way to think of it is that operators find oil, and service companies get it out of the ground.

Operators employ geologists and other geoscientists to identify prospects.A prospect is a location where an operator believes hydrocarbons exist, and are recover-

able at an acceptable profit margin.

After an operator identifies a prospect, they drill a test well to see if their hypothesis is correct. If the well flows at a rate that indicates it will produce enough oil or gas to make their money back and then some, the operator will move forward with the operation and complete the well. A good test well means more wells will likely be drilled in the area.

The operator often hires a service company to drill the test well and to perform other duties and to drill other wells in the area if the test well is successful.

They might bring in a seismic company to perform additional analysis of the subsurface rock formation. Operators always bring on mudloggers to analyze rock cuttings as they come back out of the well bore throughout the drilling process.

The service companies that are in the news most today are hydraulic fracturing companies that bring the trucks and water necessary to create enough downhole pressure to fracture, or frac, the well.

All in all, its a fairly complex process that requires plenty of help to get the job done. But now that youve got the basics down, the rest is easy.

While successfully drilling and producing an oil or gas well might not be easy, choosing the best place to invest capital is quite simple.

www.EnergyFunders.com

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http://www.EnergyFunders.com

Break the Law

Places where several companies are actively drilling for oil and gas are known as plays. You will often hear people in the industry say things like, Man, that Eagle Ford play sure is some-thing, isnt it?

Yes. It. Is.

However, just because someone is drilling in the Eagle Ford doesnt mean they are going to strike oil. And even if they do strike oil, that doesnt mean they are going to hit it big.

Many people have heard of the 80/20 rule. The 80/20 rule says that in any industry the top 20% of people or companies make up 80% of the results.

Oil and gas is not different. Some companies have outstanding track records, while others pro-vide average returns. Still others are poster children of Murphys Law, which states What can go wrong, will go wrong.

Play by the Rules

The first thing to know after the basics is that nothing in the oil business is guaranteed. The recent American Shale Oil Revolution has pushed success rates (the percentage of profitable vs. unprofitable wells an operator drills) to previously unimaginable highs.

However, the chances that you will drill a well that doesnt flow after you turn it on, otherwise known as a dry hole, is still a real possibility.

But where else is that not the case?

Losing money is a real possibility in all investments. If it wasnt, Warren Buffet would not have his famous rules:

Rule No.1: Never lose money.Rule No.2: Never forget rule No.1.

And now that we know the basics AND the rules, lets talk about how to abide by Rule No.1 when youre trying to decide where to invest in the oil business.



1PROTIPYou dont have to be an expert to

invest in oil, but you at least want

to know the basics.

We created this eBook and its

companion Oil & Gas Glossary for

Investors to give you just enough

knowledge to be dangerous!



2 FREE AND CLEARYou might be tempted to think the first oil well in America was drilled inTexas. Not so.The first commercial oil well in the United States was drilled by Edwin

Drake in Venango County, Pennsylvania in 1859. The Drake Well was a mere 69 1/2 feet deep, a far cry from the 10,000 foot plus wells in todays shale plays.

It wasnt until 42 years later that Texas came on the scene. In true Texas form, the well didnt hold back!

The Lucas Gusher at Spindletop has become the stuff of legend. The strike eventually turned into 100,000 barrels a day, which set records as the most productive oilfield in the world at the time.

An industry was born. Operators couldnt drill fast enough, and lets just say the early pioneers of the oil business werent exactly masters of how well-spacing effects reservoir pressure and subsequent production.

Over time, regulators began requiring operators report different events along a wells life cycle. For example, operators must report when a well has been spudded or broke ground.

The State of Texas also requires that you report completion techniques. What did you push downhole to create enough reservoir pressure to get hydrocarbons out of the ground? How much did you use? If it was sand, what weight was the sand?

While other states followed suit, regulation is not uniform across the United States. The one sta-tistic that states require across the board is (unsurprisingly) the one that controls tax revenue; production.

But states requiring production information turns out to be a very good thing for investors. Pro-duction information indicates the value of an area over time and gives you the history of who



won and who struck out, andif youre smartwhy.

Production information can help you weigh the risks and rewards of investing in a new compa-ny drilling in an oilfield with a long history of production.

Ninety percent of oil production in the U.S. comes from small independent operators. A lot of these companies are comprised of a few guys who used to work for ExxonMobil, or another Super Major oil company, guys whose small companies got bought out by someone bigger, or people who have been drilling for generations. These small operators often have major expertise.

There are countless proven oilfields throughout the U.S., and these smaller players know how to take advantage of a good thing. Instead of chasing headlines and historic Max-IPs (Maxi-mum Initial Production rates), they decide to go the road less travelled.

While the big guys drill $15M wells, they humbly go into the forgotten fields of the oil patch. With remarkable accuracy, they drill new wells and apply modern drilling techniques to extract the oil that seemed to be impossible to recover 40 years ago.

Likewise, in recent years small independents have had remarkable success reworking old wells. This means exactly what it sounds like. As opposed to drilling a new well, an operator will re-enter a well that might have been drilled in the 1950s. Again, they apply modern best practices and achieve favorable returns.

The moral of the story is a company doesnt have to be featured in the Wall Street Journal, Bloomberg, etc. to be worthy of your investment.

With oil sometimes driving up to over $100 per barrel, you can make a pretty good living drill-ing wells, or re-working them.

Thats the beautiful thing about small independents. They are the oil industrys best kept secret. EnergyFunders shines a spotlight on the independent operators we believe in.

And we hope the fact that we only make money when you do (when a well is successful) demonstrates that we walk our talk.

But whether youre evaluating deals in the EnergyFunders system, or something a buddy



2PROTIPIn the oil business, a company doesnt have to be a household name to payoff your house.

brought you, here are three questions to ask that will help determine the strength of the op-portunity.

Established Operators

1. What are the companys historic production numbers as reported to the appropriate state regulatory agency?

2. How many wells has the company been responsible for drilling, completing and ultimately plugging and abandoning at the end of the life of the well?

3. What is the companys success rate? Out of 10 wells the company drills, how many success-fully strike oil or gas?

4. Is the company good at discovering gushers, re-working old wells, or do they have a good acreage position in a promising new play? What is the biggest advantage the company brings to the table?

Start-Ups


1. What expertise do the founders bring to the table? How knowledgeable are they about drilling and completion techniques?

2. What is the founders reputation in the industry? The oil business is the biggest little indus-try on earth. If you shouldnt do business with someone, people will not be afraid to point that out.

3. What is the historic production of the field, and how successful have other companies been drilling the same formation over time?


3INVEST IN THE WELL

For many Americans, their home is their only investment vehicle. We are often told to own homes because real estate tends to appreciate

over time.

But thats not always the case.

If you bought a house in 2006 and tried to sell it in 2009, you suddenly found out you owned a depreciating asset and you were maybe even under water on your loan.

The beautiful thing about investing in an oil well in the 21st century is that demand for oil is growing by orders of magnitude. Countries like India and China, which together are home to over 2 billion, 600 million people, are unbelievably thirsty for oil.

As economies around the world continue to grow and modernize, demand for oil will only grow higher. A countrys GDP is inextricably tied to its oil consumption.

Again, there are no guarantees in any investment. However, when you look at global trends in oil supply vs. demand, things look very good for decades to come.

Market forces like this have a significant impact on your investment. Unlike the housing exam-ple, you have two thing working for you here.

First, all signs point to increasing oil consumption and demand across the globe. Second, even if you get the money back, the dollar you pay on your house today is worth significantly less when you get it back. Even in the best economy, the likelihood you will get back the amount of interest you pay on your mortgage is highly unlikely.

Conversely, with EnergyFunders investments you pay zero interest. If the well flows oil or gas, the operator pays us our proportional share in the well which we pass along to you, minus our 10% stake for putting the deal together. Compare this with the experts on Wall Street making commissions regardless of whether you win or lose. Were in it with you.



At EnergyFunders, we also have an investor-centric negotiation. Operators we negotiate with know theyre not talking to one big whale. They have to convince the crowd. They have to do a deal thats good enough to get a lot of people to invest. We receive a 10% flat rate on the value of production. Simple. Not complicated. No waterfalls.

Moving away from the EnergyFunders model, you also benefit from investing directly in oil and gas wells because you dont have to wait 30 years to see a return. As a result, the value of the dollars you get in return is still relatively comparable to the value of the dollars you invested.

This makes oil wells a great hedge against inflation. These projects allow you to help finance drilling at todays prices, and then capture revenue on the price of oil tomorrow.

Get. Into. The. Well.

There are several other ways to invest in oil and gas. Stocks, Master Limited Partner- ships (MLPs) and royalty interest, just to name a few. However, no other option gives you the kind of return you can experience outside of investing directly in a well.

Stock market returns can be in the 12% range over several years if you are a whiz at timing your purchases right. MLPs focusing on energy typically provide dividends ranging from 1.5% to over 15%. Depending on the royalty buyer you negotiate with, royalty interests tend to return anywhere between 8% and 15% of your investment.

Unlike these options, you cut out all of the middlemen when you invest directly in a well.

You dont pay a CEOs salary or his golden parachute.

You dont pay for a fancy building downtown.

Instead of seeing a small percentage of the wells revenue, you could receive a return on your initial investment a hundred times over.

Its not unusual for oil and gas investors to make 2x to 4x to 8x on their initial investment in 5 to 8 years, and then go onto collect revenue on the same wells production for as long as 40 years!



3PROTIPIf you really want to make money in the oil business, skip stocks, MLPs and royalties. Go straight to the source if you want the sauce!



4GET A

FAIR, TRANSPARENT, VETTEDDEAL

Paying overpriced retail prices for a t-shirt is one thing.

But you dont want to pay retail for an oil well.

Oil and gas operators typically like to focus on finding oil and gas and drilling for it.

Raising money takes much time and effort that the operator would rather spend developing his business and oil and gas assets.

Thats why they use other people to raise money by promoting their well.

The promoters job is to raise capital for the oil and gas project.

Theres nothing wrong with this.

However, you need to know if the promoter is getting a fee just to raise money, or if the promot-er is in it with you.

You need to know: Does the promoter make money regardless of whether the well is successful?

By promoter, we arent talking about the guy who spent years of his life identifying a successful prospect and using his own time and money to develop it to the point that it is ready to drill.

We are talking about the middleman.

The good news is, you can easily identify middlemen if you have a copy of the title chain of the oil and gas lease.

If you work your oil and gas deal directly with the owner of the oil and gas lease, there is no middleman making money by telling you what you want to hear.



The players in the deal are all invested with their time, sweat and money.

In addition to knowing if there are any middlemen, you should also know the drilling budget, also known as an Authority for Expenditure (AFE).

Your proportional share of the well should align as closely as possible with the drilling costs, taking into account other costs such as lease acquisition costs and seismic tests.

In deals where the well has already been drilled to total depth and the well is being re-worked, the investor share will be less.

Thats why it can be advantageous to invest at the beginning of the life cycle of the oil and gas well.

To win at oil and gas, keep the players in a deal limited to those who are in it with you. In Chapter 1, we already talked about vetting the oil and gas operator. In addition to that, you should vet the project itself.

The legal documentation needed to drill an oil and gas well is similar to that needed to close on a house.

At the end of the day, its a real estate transaction. Albeit, one with many more factors in play.

You need to know that oil and gas leases have been taken from the correct mineral owners and are either in their primary term or held by production.

A lease in its primary term is the original period of time in which the lessee has the right to de-velop the property.

Leases can often contain a secondary term called an extension.

In contrast, a lessee holds a lease by production when it makes use of a provision within the lease that allows it to extend the amount of time to operate the property so long as the property is producing a certain minimum amount of oil and gas.

The final deal should be fair based on the costs and the potential returns and it should be fully



vetted.

Dont be satisfied just to see the Executive Summary. Dig deeper.Look at the oil and gas leases.

Find out who is making money on the deal even if it isnt successful.

Is that person a salesman or is it someone who put his own sweat and energy into the deal?

Find and eliminate the middlemen who make money immediately when you invest,

regardless of whether the project is successful.

Do keep in mind, however, that good deals dont grow on trees.

Those with the skill to put them together will be compensated in some way; after all, this is their job.

That being said, if the deal isnt totally transparent, walk away. Its your money, and it is truly that simple.


4PROTIPThe fewer people between you and the revenue the better.


5 DONT GIVE FREE RIDESOkay, yall, hop in! I dont mind paying for gas for the whole team. Dont worry about paying me back.This might make you popular with your friends.

Dont do this when investing in oil and gas.

When you pay for an oil and gas well, the biggest cost is typically drilling down to Total Depth (the full depth of the well).

Once you get down to Total Depth, the well will either:

1. Be determined to be capable of production and completed, or

2. Be determined to be a non-producer and plugged and abandoned.

There is also a secret option Number 3 that not all promoters will tell you about:

The well will be completed at a shallower depth then what was originally anticipated.

Theres also super-duper secret possibility Number 4 which is that a producing well will be re-worked or re-completed at some point in the future to get more production out of it.

This can happen within the same oil and/or gas formation in which your well was completed, or it can be within a shallower formation.

Dont get yourself into a situation where you paid to get the well drilled down to total depth and it turns out that other, shallower zones are more productive but you got locked out of those zones because you didnt negotiate right or you just took a bad deal.

You also dont want to be on the hook for large completion costs in a well that is determined to



5PROTIPMake sure you get paid

regardless of how the well

produces.


be a non-producer once it is drilled to total depth.

You cant actually know if a well is productive until you drill it, and completion costs dont get paid on dry holes.

Therefore, you should ensure that the deal in which you invest in is completed in stages in order to mitigate risk.

EnergyFunders negotiates deals to be completed in risk-mitigating stages.

Some promoters will charge you up front in a deal where you pay completions costs on a dry hole and you get locked out of completions at shallower zones.

Dont get suckered.

With EnergyFunders, this wont happen.

By being a savvy negotiator, you can mitigate your risks further than you could through diver-sification alone.


6HARNESS POWER CROWD

Its a scientific fact that America is the greatest country on earth. If that sounds like an overstatement, brace yourself for a serious truth bomb.

In every single nation around the world, the government owns the min-eralsexcept in the United States. In America, citizens own all of the minerals

under their property, just as God intended!

Oil and gas companies negotiate leases with landowners to determine bonus payments per acre of land, and ongoing royalty payment percentages.

Deals come in all shapes and sizes, figuratively speaking.

Many deals can be quite lucrative when they pay off, but are not large enough for investment banks and major corporations. These companies cannot devote resources to these smaller deals.

They prefer deals north of $10 million and more in the neighborhood of $50 million or more.

That leaves thousands of good deals under $10 million. Reworks can start as low as $250,000. Drilling a standard conventional well costs $3 million. Yet, while these deals can have fantastic payouts, larger companies and investors ignore these deals simply based on size.

Traditional wisdom has always said its best to diversify your investments to hedge against risk. But traditional wisdom is not worth $62.7 billion.

Diversification may preserve wealth, but concentration builds wealth. Warren Buffett

In purely financial terms the most obvious way to stop yourself from falling out of the sky is to invest conservatively. When you enter a new market, there is always a learning curve.

Who are the key players? What kind of returns does the average company experience in this

THE

OF

THE



vertical? Who are the thought leaders driving the industry forward? And, most importantly, who can I trust with my money?

There are no shortcuts when you are building relationships and trust. There are also no short-cuts when you are building your confidence in a new vertical.

Thats the beautiful thing about crowdfunding. Since so many people are participating in one investment, you dont have to lay down a briefcase full of hundreds to test the waters.

Depending on the size of the deal, you could invest with EnergyFunders for as little as $2,000 to $5,000. As your confidence builds and your risk tolerance grows, you can up your ante.

Of course, if youre an accredited investor and are ready to drop seven figures on a deal, we wont turn you down!

Either way, were not here to play games. We want to give our members access to quality deals that provide solid returns. You used to have to know a guy who knows a guy to get these deals.

Now you just have to know EnergyFunders.



6PROTIPPartner with EnergyFunders

and help us change the oil

and gas investing world!



6 Pro Tips for a High Performance Oilfield Investment Portfolio

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