A soon-to-be university graduate is looking for some oil & gas investment advice

These are “boom” times for oil & gas, and as a resident of Houston I am seeing firsthand the positive economic effects of the industry on the local economy!  It’s well accepted though that for the “up” times, there are “down” times; indeed, investing in oil & gas is a risky proposition, and strong economic returns like we’re seeing now are necessary to compensate for the inherent risk in backing oil & gas projects.

Despite the risks, this week’s question comes from a Young Professional looking to follow in the footsteps of other successful oil & gas entrepreneurs.

Remember, if you also want to participate in “Building Hydrocarbon Bonds”, please get in touch with me either through my website, LinkedIn, or through email.  If the answer to your question ends up turning into something substantial, I’ll post it (keeping your details anonymous) so that others can benefit as well.

Big fan of your blog and Twitter account and I look forward to reading more of your posts. I am soon to graduate from university with a degree that has no relevance to the oil and gas industry.  The problem is that I find myself very passionate about the industry.  My question is: how difficult would it be for someone without any technical knowledge or petroleum/geology degree to get into the business of purchasing oil leases? The aim here is to purchase marginal oil leases with upside potential and rework them to increase production. Any do’s and don’ts? How can one go about getting financing, what are some red flags when looking at some properties? Your professional opinion on this matter would be greatly appreciated.

Thanks so much for the email and the encouragement, I’m really glad that you like the articles!

Regarding your question, I’ll be honest in telling you that you’re veering away from my direct area of expertise, but my short answer based on what I know is…don’t do this now.

The longer answer is as follows.

When a company looks to enter a new market, it can take three paths:  start from scratch developing its own capabilities in that market, partner up with an existing player, or acquire an existing company in that market.
As I understand it, you’re basically looking to enter (as an individual) a market that’s new to you, and opting for option 3, which is to acquire assets that are already producing.  In a way, I’d say that’s good since I’d argue it’s less risky than the “start from scratch” alternative which would involve looking for leases on which to place new wells.
Having said that, whenever you’re looking at doing an acquisition, you then need two things:  capital and “know-how” as it relates to the industry you’re looking to enter.  You’re disadvantaged going into any new industry without some foundational training, but that knowledge is even more crucial in the oil & gas industry, where you’d be very hard pressed to find anyone (even experienced professionals) who’ll give a 100% guarantee on a production forecast.
Yes, I did say that in my opinion investing in producing properties carries less risk than looking to find somewhere to drill new wells, but let’s be honest, if there was such a thing as a “sure bet” in oil & gas, someone would already be all over it by now!  Given that I know it’s hard enough for professionals to make the right call when it comes to acquiring producing assets, I can’t imagine how someone with no specific knowledge or experience would go about it.  How would you know if/why wells are producing sub-optimally?  How would you know how to quantify the gap between current/possible production?  How would you then know what operations to perform to close that production gap?
If you had capital, you could remedy the know-how gaps by partnering with someone with a technical background, but capital will be very had to come across for you.  From your email, you sound like a very bright, ambitious person with a plan, but when you’re looking at securing financing, that won’t be nearly enough.  When a group or individual is looking to place money to do this type of thing, they’re going to be looking for someone with years of experience doing it, with a track record of providing an acceptable return (which is probably somewhat high given the risks for this kind of investment).  This will make raising capital completely impossible for you.
Now, that’s not to say that you should give up completely on the idea.  If you’re still interested in learning more and getting involved in the buying and selling of oil & gas properties, you should check out the North American Prospect Info (NAPE, www.napeexpo.com).  Depending on where you live, you may not be able to easily attend, but that would be a good entry point into the community.  They would also be far better positioned than I am to tell you about do’s and don’ts when looking to do this type of investment!
You probably also want to start gaining some experience.  You didn’t mention what your plans are after graduation; do they involve joining the oil & gas industry?  You won’t get hired on for a technical role, but if you could get into a company’s finance department for instance, you would be in a good spot to learn the financial ropes, as well as speak to the technical team(s) and learn about the kind of due diligence that has to happen in determining a property’s producing potential.
My question to you now is more high level:  why are you interested in this type of investing?  Do you see a high potential upside that you can’t match anywhere else?  Are you just interested in the type of work this investment represents?
Certainly, there are other, far less risky ways to invest in oil & gas, though please note that what I’m about to say comes with a GIANT DISCLAIMER, since I’m not offering specific investment advice, just one possible answer to your question.
I’m more risk-averse, so the only investment vehicle I’m really comfortable recommending is the stock market, either investing in individual company stocks, or funds which will capture the movements of a collection of companies (so you’re more shielded from events that could happen to one organization).  There are many, many more options out there, all likely existing on a continuum of risk and return, but now we’re getting way past my area of expertise.  There are investment banks out there focused just on energy (for instance, Simmons & Co, Tudor Pickering & Holt, or PPHB), and of course the large, well known banks will have oil & gas departments.  I would suggest looking through your network to see if you know someone that knows someone that works there or someplace similar, they might be willing to give you more information than what I can provide!
To tie all of this together, I’ll give you the one piece of investing my father gave to me when I first started having some money available to invest:  “if you don’t understand it, don’t invest in it”.
Sure, someone may give you a tip one day and you might get lucky, but if you invest in something without having a very good grasp of its ins and outs, it’s highly likely you’ll end up getting hosed.

I apologize if the reply comes across as negative:  I hope you’re able to be very successful in the future, but based on your email I think you need to cover a few more bases before going ahead with your plan!