#014: Types of Investments: Why Crowdfunding is the Future of Oil and Gas with Philip Racusin of Energy Funders
Manage episode 188013645 series 1567518
As one of the founders of the first equity crowdfunding site for oil and gas, Philip Racusin knows a thing or two about the types of investments that are in the oil and gas market.
He also rivals me in his tech-geekery.
He reads the information technology news site TechCrunch on a daily basis, and is a hustler homie! In this interview, we discuss why he believes he’s about to have some dirt on his shoulder that you might want to brush if off for me.
Full Disclosure: EnergyFunders is a client of Tribe Rocket, LLC.
However, I’ve been fired up about the idea since I first heard the pitch back in January. With the runaway success of the crowdfunding website Kickstarter (my brother started his restaurant business using the site!), it only made sense to me that someone finally thought to do it in oil and gas.
It’s one of those, “Why didn’t I think of that?” ideas. Then again, I’m not 3 entrepreneurs who also happen to be attorneys, and could form like Voltron to successfully maneuver their way through the endless jungle of SEC regulations.
If you’re new to crowdfunding, welcome to the club! It’s cutting edge for any industry, and is dancing on the outer perimeters of the bleeding edge in oil and gas. But, while I’m no expert on oil and gas law or even kickstarting a Kickstarter company, I know one thing; competition is an overwhelmingly good force in the market.
From where I sit, driving up the number of available deals by creating a platform that can fill the gap under $10,000,000 and $25,000 to $50,000 buy-ins can only be a good thing. That’s not a PR message on behalf of a client, that’s just good common sense capitalism.
We explore all types of investments, touch on the great crew change, and wrap with a fascinating conversation on the nature of disrupting a marketplace in light the ruckus EnergyFunders is bound to bring to the market.
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Oil and gas is one of the last industries to be disrupted by the great technological changes the internet affords. (Click to Tweet)
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We got Links
- James Hahn II | Audience Hacker Podcast | Find Your Tribe & Boost Traffic to Your Business
- EnergyFunders.com, The World’s First Equity Crowdfunding Site for Oil and Gas Projects
- Gustav Nyquist Goals, 2013-2014 Season
- Is Being Disruptive a Business Strategy?
- “Should I use those annoying popups?”
- Roseland’s Texas Showdown Oil & Gas Expo
- Write a Review on iTunes
Types of Investments Interview Transcript: How Small Independent Operators and Investors Can Capitalize on Crowdfunding in the Patch
James Hahn II: Joining The Tribe on the podcast this week is Philip Racusin. He is the CEO and Co-founder of EnergyFunders, the world’s first crowdfunding platform to fund single well or multi-well oil and gas drilling projects. So you basically just think “Kickstarter” for oil and gas. The company just launched on July 1st and today, which is July the 10th, it successfully closed the world’s first crowdfunded oil well. And they did it in just 9 days. Philip Racusin, thank you very much for joining us on the podcast today.
Philip Racusin: James, thank you for having me. I’m very happy to be here and to talk about EnergyFunders.
James Hahn II: Yeah, as soon as I heard the idea, and I have a special place in my heart for EnergyFunders because y’all were the first people to fill out a Contact Us form on my website. Which was the second day I launched, so I was like, “Man, I’m gonna be rich!”
Philip Racusin: Potentially.
James Hahn II: Potentially. I’m retooling the website right now, but y’all just launched and as soon as I heard the idea back in January I said, “This could really change some things.” So, tell us about EnergyFunders and what y’all are up to, and why I think it might change some things around the industry.
Philip Racusin: Sure, James. What we do is we are basically Kickstarter for oil and gas. We allow investors to invest in a piece of an oil well, or a re-work project which is a project that is designed to stimulate a well or increase production of an existing well. And then when those projects are successful, the investor receives a share of the profits distributed on a quarterly basis.
On the other side, we have reputable oil and gas operators. We check out their history, we make sure they’re successful in the area where they want to operate, and then we offer them the opportunity to crowdfund their promising oil and gas projects. We also pre-vet those projects and make them available for the investors on our site. So we’re bringing together two different players in the oil and gas space; investors who want to invest. And some of those maybe new investors who have never invested before. In fact, that describes one of the investors in the oil well that we just crowdfunded. And then reputable, successful operators who have a good track history of drilling and re-working successful projects.
How we got our start is that I’ve known my co-founders for many years. Roger Gingell is my co-founder with EnergyFunders and COO. We met each other in law school, actually first year of law school. We had a lot of successes together in the classes that we shared and we’ve been friends ever since. My other co-founder is my twin brother Michael. He joined up with us just after we started the company and he’s been absolutely integral in getting everything off the ground. Just like the rest of us. And he is the CTO. He has a great technology background. And we all have law degrees, and we’re attorneys.
Roger is an oil and gas attorney and landman, an absolute expert. So, Roger is an oil and gas fanatic. He loves the industry, loves everything about it. He has read hundreds of thousands of years of title opinions, deals, he’s done all the contracts. He’s consulted with Majors and SuperMajors. He just loves the industry.
I like it a lot too. I am a crowdfunding fanatic. So we decided to combine our interests together into this company. We also have a great board of advisors with years of experience in securities and regulation, and years of experience running oil companies around the world. So, we bring all of these resources and experience to bear for the investor and the operators.
James Hahn II: Tell us a little more about this first well. Whatever details that you’re able to reveal, given SEC regulations and so forth.
Philip Racusin: I can give you a general overview of it. And, by the way let me say that at this time, due to securities regulations, we can only allow accredited investors to invest. Typically, an accredited investor is someone who makes over $200,000 a year, and did it for the last two years. Also has a reasonable expectation going forward of achieving the same. Or $300,000 if they are filing jointly with a spouse. Or they have over $1,000,000 in net worth, excluding their primary residence. It can also include a company that is composed solely of accredited investors, or a company with assets over $5,000,000. Right now that is the category of investor that can view all of the details of the project and invest.
James Hahn II: I want to jump in on that real quick because I signed up for my investor account and I went in there, and it’s a bit of a 2-step process, is it not?
Philip Racusin: It is. What you do is you go on EnergyFunders.com and you sign up for a user account, if you’re an investor. If you’re an operator, you’ll find the operator sign up. Buy, by and large most people who logon are going to be investors. Once you do that, you’ll be taken to a dashboard where you can see current investments. Due to SEC regulations, you can only see the name and the basic location. Unfortunately, we can’t show you any other details. But, the process to get to that point is really, really easy.
You just click on one of the buttons that says “Become an Accredited Investor”. Actually, it says “Become a Verified Investor”. That means we verified your accreditation status. And then you are guided through the process. It’s a 3 to 4 step process at that point. And we will ensure that you are an accredited investor. At that point, we allow you to see everything, see the virtual data room that’s there. Invest as little or as much as you want, starting with as little as $2,000 or $3,000 depending on the project. You’re guided through that process as well.
James Hahn II: In that 3 or 4 step process, you’re submitting bank statements and 1099’s or something like that?
Philip Racusin: It’s actually a lot easier than that. There are different methods you can use. You can state your salary and the profession you’re in, if it’s a traditionally high-paying profession. You can take a screenshot off of your iPad, your iPhone, or your computer showing the account balance in one of your accounts that adds up to $1,000,000 or more. Certainly, we don’t need to have your account information. We don’t want to see any confidential information. You can also upload tax returns. If you’re a company, you can upload a private placement memorandum, or a financial statement. And finally, you can also download a form accreditation letter and give it to your investment advisor, CPA, attorney, or any other licensed professional who can take a look at some documents that show you’re an accredited investor.
All they have to do is fill out this letter and send it back to us. And it basically says, “I have seen documents that say that Mr. Jones is an accredited investor.” We’re then able to rely on that, and you’re done. You don’t have to do the process again, and we’re able to now allow you to do everything. Including invest, view all of the details, view all of due diligence documents, everything.
James Hahn II: Personally, when you think about signing up for something on the internet, you’re used to it being a click, click, click, and you move forward. I actually really appreciate is that thorough on the front-end. Because, for instance, last month PayPal stopped a client of mine from paying me for an entire month. I finally heard about it, so I called the 800 number and the said, “Well, certain amounts come through and we have to verify them.” I said, “It’s the same person giving me the same amount of money.” And they said, “Well, you have to have your client go ahead and call our 800 number.” I was shocked and baffled. I restated, “Did you just ask me to tell my client to call your 800 number?” She said, “Yes, sir.” I said, “I think I’ll just go somewhere else.” So, I switched and I can’t even remember the name of the company right now (no wait, it’s Braintree.com … which was acquired by PayPal since we recorded this podcast – grrr!!)
Regardless, up-front they did all of that due diligence where they got my bank statements. They asked me what the largest deposit I could get, or get a few times a year, so that when I do get those large payments, they’re not doing the PayPal thing and shutting me down. I guess I’m just trying to put a positive spin on this thing because when you handle things correctly up front like this, then it just makes everything moving forward easier for everyone.
Philip Racusin: Absolutely, James. That’s what we’re about. What I see on the internet and via other solicitations is I see that sometimes there are oil and gas marketing companies. They’re allowing people to self-verify their accreditation status. That was OK prior to September 2013. That is not OK any longer. The law changed in September 2013, as amended by the Jobs Act. And prior to that by the Dodd-Frank Act. So, we are compliant with the law as it changed last September. We are fully securities compliant in every way, and there’s absolutely nothing to worry about.
If I were an accredited investor, I’d be a little concerned with some oil and gas marketing company that says, “Just check this box that says you’re an accredited investor and we’ll send you everything.” I’d be a little concerned about the possibility of that investment not complying with the accreditation barrier process that’s been put in place.
James Hahn II: It just shows if you’re that thorough on the investor side, we don’t even need to get into it. We already know you’re thorough on the operator side. Back to this first well, now that we have all of the housecleaning out of the way. Tell us about it.
Philip Racusin: Sure. I’ll generally talk about it. What details I can say. It’s a shallow well in Indiana, and the project is a re-working project. It’s a multi-step process. This is operated by a very reputable operator. He’s been doing this for 30 years. He’s done a lot of re-work projects in the area. He is first going to do a string of acidization, and then he is going to mini-frac with water and sand. It’s a relatively safe project, and it should be able to be done relatively quickly because he owns the equipment and he’s experienced at doing these sorts of projects.
We thought it was a good project to start with, and we received the entire amount within 9 days. We’re pleased to transfer the funds from our custodial account to the operator as he needs them, and then announce the success if the project is successful. It seems that it will have a good chance of success. We can’t guarantee success, of course. But, we try to do everything we can to ensure the projects we make available have the best chance of a successful outcome.
James Hahn II: Just listening to you explain that process harkens back to my days on the Small Business Account team at Drillinginfo because I worked with very small operators in that time. Thank God I did because I learned the industry very well in those conversations I had. This is amazing to me because for small operators, well you can’t drill unless you have the fund. So, if you can make it easier for them to get funds, then they can just go and drill more wells instead of having to go and have all of these face-to-face meetings with x, y, z banker. Instead, they can do what they really want to do, which is find and strike oil.
Philip Racusin: Absolutely. That’s some of the thinking behind what we’re doing. We want the operators to focus on what they’re good at doing. When you’re called upon to do something else that’s outside of your core competency, of your profession, that takes you away from doing what you’re good at and what you want to do. When an operator has to go out and raise their own capital, it can be quite difficult. Additionally, even if they are successful in raising their own capital, then those investors may not have as much money to give for the next project. They maybe happy with the first project, but they may not have all of the funds for the second project.
The other traditional sources of capital to finance oil and gas projects are a bank loan, a stake from a venture capital fund, or private equity. And all of those, according to our research and many conversations with operators across the country usually contain terms that operators are not very happy with. And they usually also contain a very strict exit strategy, and so there’s not much upside for anyone at that point.
James Hahn II: What are some of those terms?
Philip Racusin: Some of those terms, for instance, if they’re taking VC money there has to be an exit within a couple of years after a successful project. But what if the well is one of a common type of well that can produce for 40 years? Then the operator is not going to gain from all of that future value. They make get a price that takes into account 60 months going forward revenue, but after that if the decline curve is really shallow, you could expect that well to keep producing year after year after year, but they’re missing out on that. Other onerous terms are when private equity demands a huge stake in a non-operating working interest for really not very much money in comparison to the value. And some operators are forced to take those deals.
There are also very successful operators out there who have plenty of projects and plenty of financing, but what they want to do, and they’ve come to us for this, is they want to expand their capital network. They say, “All of our investors are located here and here geographically” or “We know them through these networks, but we don’t know how to reach the investors over here and over here. For instance, Chicago, California, other areas of the country, and eventually internationally. We don’t know how to reach those investors, so we would like to expand our capital network.” We can do that for them, and that’s part of what we’re all about.
James Hahn II: Before we got on the phone, the call, on the show, we were talking about disruption and the future of funding in oil and gas. My friend Mark Shaefer had a really great podcast the other day asking the question, Is disruption a strategy?” I’m going to pose that question to you, and get your thoughts. If it is a strategy, or if not, where do you see the future of funding given the success of this first program.
Philip Racusin: Disruption is a word that’s thrown around a lot, and it’s used in a lot of different contexts. A lot of the public has heard Mark Zuckerberg say that we’re disrupting this or that. Let’s move fast and break things. They hear about maybe these ride-sharing operators disrupting established, regulated industries. I think if you’re going to apply disruption to what we’re doing is the way we look at it is let’s disrupt the old, tired ways of doing business that really aren’t affective for anybody.
Is it affective for an operator to have to go out and do a bunch of conferences at different hotels, to make a bunch of phone calls, to align with a broker-dealer who is going to take a huge cut? Is it affective for an investor who wants to get involved in oil and gas to invest in the stock of a Super Major? By low, sell high? Hope you sell at the right time, and you’re never going to get the same upside as those operators. It’s just not as affective, and it takes these people away from what they really want to do.
We prefer to think of ourselves as disrupting these old, ineffective ways of doing business. To make it easier for investors and operators to do what they want to do, and that is invest in oil and gas and get their legitimate, pre-vetted projects funded. We also do that by allowing investors to put in amounts that were previously not possible to be put in.
Traditionally, a minimum buy-in for certain oil and gas projects usually starts around $50,000. I’ve seen them go as low as $25,000 or maybe even $15,000. Although it’s questionable what kind of deal the investor is actually getting at that point. And many of them have buy-ins that start at $100,000 or so. What we do is we allow the investor to invest as little as $2,000 or $3,000, and we think that is pretty disruptive as far as the investment industry. And, we give the inventors a great deal. We’re giving them the same deal they would get if they were an operator, or if they had insider connections. Or if they had a real network and line into the oil and gas industry.
That’s really what we’re about. And I think as far as disruption going into the future, you and I had talked about this. And I know listeners of your podcast are probably familiar with this term, and it’s that of The Great Crew Change. The age that you are, the age that my co-founders and I are, we are all part of the leading edge of The Great Crew Change where there was that period of time in the oil and gas industry when prices were very low, and no one was going into the industry or getting degrees in petroleum engineering or geosciences. That time has absolutely passed based on all available research. With the NYMEX and demand across the world we won’t see that time come again. And if it is, it may not be in our lifetime.
We have this interesting stratification of the oil and gas industry where we have senior folks that are getting closer to retirement age. Then we have all of these younger folks that are in their mid-30’s and younger who are going to ascend to these leadership positions when the older folks start retiring. And the older folks have a wealth of experience to teach the younger folks, that’s why we’re so happy to have a very experienced oil and gas advisor who has over 35 years of experience in the industry. But, the reason I talk about this is because I think the oil and gas industry is one of the last industries to be disrupted by the great technological changes the internet affords.
You’ve seen it in publications. You’ve seen it in video. You’ve seen it in commerce. And several other major industries. Finally, it’s coming around to oil and gas. I think it’s taken a while because of The Great Crew Change affect. So we’re really happy to be on the leading edge of this technological change and make things better for everyone.
James Hahn II: The thing I think of when you’re saying all of that is the fact that all of these older guys that are getting up to retiring; they have these networks established. They already know (people). They grew up in the Permian Basin, and many of the leaders started out pushing tools. They’re going to be replaced with people with not only much less experience, but also much smaller networks. They won’t have the ability to just call up Bill and Bob and Joe and the rest of their network to find out and put their feelers out there. This kind of technology is the stuff that The Great Crew Change, us digital natives grew up with. So, if we were to look around five years from now and this technology wasn’t out there, like an EnergyFunders, we’d all be going, “What the heck? Why do I have to work so hard to find out where I can put some money and get a return?”
Philip Racusin: Yeah, you’ve got a good point there. This is sort of late in coming to the oil and gas industry, but this is something that a lot of people are comfortable with. And if anyone has any hesitation we certainly make ourselves available by phone, email, chat. We will do whatever we can to communicate what we’re doing. Our mission is to be completely transparent to the investor. In that regard, we’re able to answer any questions any operator or investor may have and build a level of trust with them as well.
With regard to not having these networks, I think that we’re going to be able to fill that gap. As The Great Crew Change takes over more industries and builds their networks — they have to build a network, they don’t have a network. Or they may have a network, but they don’t have a network that’s as big as my friend’s or Uncle’s company that’s been operating for 35-40 years. They don’t have that level of experience yet. We can help them build a network and establish a name for themselves. Because the investors that invest in our projects are going to know who the operator is. They are going to see what the operator is all about. And when they’re happy with a project, they’re going to want to fund more projects by that operator.
This is a great way for an operator to expand or build their network. And we’re not working with brand-new green operators. We’re working with established, successful operators. But they still have to build their network. That’s what we allow them to do.
James Hahn II: One last question, the one objection that I have floating around in my mind that I want to get cleared up is that you’re letting people with $3,000 chip-in on a well. Are you just diving up the well to such minuscule fragments to such a large population of people that I’m not actually getting that much of a return?
Philip Racusin: Oh no, it’s not that way at all. If you put in $3,000 into a project that has a projected ROI of 250% over five years. Let’s assume that it’s a project with a pay back of 12 to 18 months. You’re going to get a good return on your investment if that project is successful. You’re not going to experience a much lesser return because you put-in less. Proportionally, to your investment you’re going to have the same return as anyone else. If you want to put in more than $3,000. If you want to put in $25 or $50,000, or more than that you certainly are welcome to and you’ll experience the same proportionate return on investment as anyone else.
The operator doesn’t have to take care of the accounting to investors, the division orders to the investors, and the distributions. We take care of all that. We’re specifically set-up to take care of all that. That’s why we’re able to offer these small buy-ins.
James Hahn II: Well, I’m sold Philip. Where can people find out more?
Philip Racusin: You want to go to www.energyfunders.com. I would encourage anyone listening to this podcast to please check out our website, we just launched. It would mean a lot to us if you would give us a look and sign up for a user account. We’re also happy to take any feedback because we’re a growing business and we want to make everything as easy and transparent for everyone as possible.
Again, that’s www.energyfunders.com. Just click on the “Get Started” button and sign-up for a user account today.
James Hahn II: Awesome. I will link that up in the show notes. Philip, thank you very much for joining us on the show. This has been wonderful conversation, and I’ve learned a lot over the past 30 minutes. Thank you for all of your time and expertise, sir!
Philip Racusin: And thank you very much, James, for taking the time to speak with me today about EnergyFunders. I’m certainly happy to follow-up with you anytime.
James Hahn II: OK, alright. Yeah, fantastic. We’ll have to maybe have a 6-month or a 12-month check-in to see how things are going. So we look forward to talking to you in the future.
Philip Racusin: Sounds good.
James Hahn II: Alright, thank you, sir!
Philip Racusin: Thank you, James.
*This podcast and transcript is not a solicitation for investment*
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