In the new shale-dominated world, we all know that the industry is changing. With threats ranging from geopolitical issues to the rise in electric vehicles and alternative fuel sources, we need repeat investors now more than ever if we’re going to stay in business. If we turn people off by doing deals in which they lose money over and over, why would they ever want to invest again? Given all of this, I knew I had to start doing something differently about the way we did business at King Operating Corporation.

The way the vast majority of oil and gas investing deals have traditionally been structured has left limited running room and little diversification. If something goes wrong — and in a complex system like drilling for oil, things can certainly go wrong — there are few ways to fix it without pouring more money into a literal hole in the ground. In these types of cases, it becomes nearly impossible for investors to recoup their investment.

After speaking to a lot of people in a variety of industries about how they did business and how they approached investors, I realized that all people really want is a genuine shot. Most want to be treated not just as ‘money,’ but as true partners. They aren’t interested in a guarantee — some of them are rightfully wary of any empty “promises.” Rather, they want to believe they’ve got a real shot to make a profit, or at least make their money back. With this in mind, I knew that I needed to structure this type of oil and gas investment project for them.

In 2015, after speaking to my good friend David Moore, who’s been very successful within the real estate industry, King Operating Corporation created the ADD (Acquire, Develop, Divest) model for our oil and gas investing projects. This investment model works for sponsored oil and gas transactions and, in my opinion, represents a total change in the way much of the smaller, independent companies in the oil and gas industry operate. Instead of buying one location, drilling and hoping for the best, the operator buys a large volume of acreage, proves up a well and sells it off, while the investors come along for the entire ride.

By doing things this new way, without having to drill all the wells, projects can also be completed faster. It allows for a better opportunity with a quicker turnaround time and for money to go back into the investors’ pockets faster, while ideally starting another project with the same investors on board.

This new model essentially means that the unknown factor, the performance of the wells, is not as critical to the initial investors. In fact, by selling off the acreage to companies who want to drill, this new model has removed investors from the operation before it gets potentially dicey and goes on to something new. At the end of the day, it doesn’t matter whether a well gushes or trickles; if the sponsor has been able to sell off the acreage at a higher price than the original acquisition price, the investors will have already made back their money.

The second part of this is that, because we want our investors to be with us for the long term, from project to project, we treat them like full business partners. The goal here is to build true investor partnerships, not solely just looking for money. And, it will not surprise you to hear that when people are treated with respect, they’re a whole lot more likely to reinvest with a company. As a result, we’ve enjoyed repeat investors for several of our most recent projects.

To illustrate our ADD Model, I’ve provided an example of how our next investment project in Larimer County, Colorado will be structured:

King Operating and investors invest $100 million into the fund.

The fund leases up to 40,000 acres to drill and complete up to 200 wells. We want the scalability to develop multiple wells in multiple formations, but our goal is NOT to drill all of them. We want to leave this upside for the buyer.

After we’ve completed the leasing, we begin drilling and reworking wells in the fund.

With the purchase, we bought an oil field that has produced over 8 million barrels of oil in the Muddy “J” formation. With current reserve reports, the field shows there are 5-22 million barrels of oil left in this field. If it produces 10 million barrels of oil, at $55 a barrel, the fund generates over $500 million which we feel covers our initial investment of $100 million. We will only use a fraction of the money to prove up remaining reserves and utilize the remaining to increase the size and value of our investment.

Our team of engineers, geologists and geophysicists will be searching for many other opportunities within the acreage. The oil-bearing Niobrara and Codell both produce in the immediate area.

Once the initial work is performed, we will go to the market and look to divest the asset. If the market is not there, we could look to divest a portion of the asset and drill more wells or use the asset as collateral to obtain a loan and then “drill, baby, drill.”

We strategize to come up with three exit strategies over the life of the project because we never truly know the timing with the markets or the oil and gas prices. While we certainly cannot guarantee our future projects will be successful, in my opinion, the new investment model gives our clients a better chance to make positive returns with oil and gas investing.

Shale Oil & Gas Magazine