Investing directly into a new drill (small oil company)

[nobb]

http://calgary.kijiji.ca/c-buy-and-sell-business-industrial-BUY-into-OIL-WELLS-W0QQAdIdZ188808624

Stumbled upon this ad randomly in Kijiji, and of course my first thought was suspicion. Basically a small oil company (they have 3 wells currently) posted an ad publicly asking for investments in the form of shares from individuals to fund the drilling of a new oil well. Each share is about $19k and this particular well requires ~$1.3m in capital. The poster claims 80% of this capital has already been arranged and so it is likely this new drill will go forward. The profit will be split amongst the investors after the well has been drilled, completed, and producing.

Out of curiosity, I contact the poster (doesnt hurt to learn a thing or two). However, I am still unsure as to why this company is contacting individuals for investments rather than going to a bank which would simplify the task of having to deal with a bunch of investors for a single well. This doesnt seem like standard practice for oil companies. Nevertheless, the poster sends me a business case as well as some geological information and economic metrics to look at. Im surprised at how readily this information is being made available.

Im just an engineering intern at a large oil/gas company, but my job is basically to evaluate the economics for various projects whether it's a new drill, recomplete, or optimization opportunities. I have a rough understanding from a high level of how fields are managed and developed. I have some basic understanding of geophysics and geology as well, so if I wanted to look in detail, I could probably get a rough estimate of what kind of production numbers to expect from this new drill and my own interpretation of the economics from public data. To hopefully pick out some of the BS from reality. Not too much experience with the drilling and completion side of things though, but the success rate of gas wells are usually 90% and above. Probably higher for an older, developed area. It is risky in that your new drill could be a complete waste of course, but it is likely that there will be some sort of production. Oil wells are riskier than gas wells though.

High risk obviously, but I can see how the promise of a fast return on investment and steady-ish income stream after that is of course appealing. The 14 month payout period seems low, but it's roughly around what I see at work with new gas drills. Not saying I am planning to invest in this, but just curious on your opinions. Elaborate scam, new business idea, or just a risky gamble for those who want to take chances?

[KappaSigma]

Investing on anything on Kijji is bush! Stay away

[Ven]

45 seconds of due diligence would tell you it's a scam.

[mr2mike]

You'd be better off buying shares in the hori beta's than chasing this down.
You're at an o&g company. Talk to your boss or someone else in a senior position. They'll tell you its a scam too but you may learn how o&g companies actually raise capital.

[Celica TVS3]

It may or may not be a scam. But high risk no doubt.

But to answer some of your questions. Banks offer lines of credit agains booked reserves. If they don't have a third-party NI-51-101 reserve report, the standard revolving credit facility probably isn't an option to them. The other options would be personal leverage (which they may have alrady maxed out) or go public.

If I had to guess, these are just a couple of guys who managed to buy a working interest in some Bakken acreage, and their partner put them on notice they were going to drill a couple of Bakken oil horizontal wells. They need to scratch some cash together to quickly or lose the land.

Someone I know personally invests in the energy space by purchasing working interests and buying gross over riding royalties from producers. Although, he doesn't find the ideas on Kijiji.

[nobb]

Yea I dont think it's a scam, but I was hoping for a detailed answer rather than just "its a scam just because." The reason why I dont think it's a scam is because when calling the guy, they seemed very professional and had a full write up on the geology, company information, business plan, etc. Besides, I figure that you can look up the information on this new proposed location through public data. It's hard to fake ownership of a section of land when that information is available publicly.

It looks like they have 100% WI with this new drill and the new drill is being handled by the company (not a non-op notice). They claim that their previous 3 drills were a success, but this new one is risky because by looking at the map, this new drill seems to tap into a fairly "fresh" area and there are only 2 offsets within 1 DSU. Then again, my only experience is with tight gas so I have no idea how the geology works for oil. I wish I could take a look at the surrounding geology myself, but my Accumap doesnt seem to work with Manitoba.

[Celica TVS3]

Haha, I wouldn't toss any cash at it myself, but I'll pull the data on their previous drills and their licensed location in geoScout in the morning.

Did he tell you they are 100% WI and operator on these wells? It's not brought up in the ad.

[nobb]

Hmm now that I look at the guy's email in more detail I cant see it mentioning specifically that they have 100% WI and operating. Unlikely that such a small company will operate the well themselves, but there are details provided on the expected op costs. It looks like they are managing the drilling/completions which is why I assumed they have 100% WI. I dont see any mention of what they will do if the drill/complete costs end up being over budget though.

If you are interested in more of the details, pm me your email and I can forward you the poster's reply which outlines their business plan, economics, and geology a bit more in detail than the kijiji ad.

[turbotrip]

lol its funny how people just jump up and say its a scam with no knowledge whatsoever; its likely not a scam but i probably wouldnt invest in it either

[adamc]

ad is gone, what company was this?

[FYD524]

I'm not sure what legitimate company raises it's capital like that on Kijiji. If they were worth anything, venture capitalists or the larger O&G companies would have bought them out.

Note that issuing stock is pretty much the last thing that companies want to do in order to raise finances. Can they not using retained earnings from the other wells to finance this one? Can they not structure a long term loan or issue debt instead? Unless it's an IPO, a lot of equity tends to be overvalued (and consequently, not good investments).

[will_e_chill]

In addition to the reserves due dili you have to make sure that the shares you are buying are actually worth something.

Just because you own shares in the company and the company is actually on title to the property and owns the reserves that still doesn't mean that the shares are worth anything.

The company could be over leveraged and owe too much debt to their lenders so that the lenders are the ones who in reality will be getting all the cash flow from the wells and the shareholders will be left with very little to nothing.

I would be wary of anyone posting investments on a site like kijiji. I would stay away. There is no such things a free lunch. If its such an amazing return on investment then why can't they share it with their friends and family first instead of some strangers online...

[Xtrema]

There are so many venture capitalists in Calgary. If the business can't raise cash thru them, it's probably WAY too risky or a scam.