For many decades, there was only one way to drill a well – vertically.
Now, with advanced drilling technology, operators can add steerable motors that enable “slant” or directional drilling. They can drill down vertically, build a curve, and drill at angles of 90 degrees or more in the horizontal direction. This is called horizontal drilling.
This means that hydrocarbon-bearing formations with oil and gas reserves that were previously nonviable drilling prospects are now economically feasible.
Drilling these types of horizontal wells is called unconventional or directional drilling. The Permian Basin, Bakken, Eagleford, Haynesville, and other important shale plays rely on directional or horizontal wells.
Today, 95% of capital is going into directional drilling projects.
There’s little to no dry hole risk, and there’s also quick payback on your investment, improving capital efficiency.
Often there are opportunities to drill more wells nearby if the first is successful. On average operators will drill four to 16 wells per section. This makes it more of a factory model of production and payback than a luxury one.
HOW ARE CONVENTIONAL AND UNCONVENTIONAL DRILLING PROJECTS DIFFERENT FOR INVESTORS?
Directional drilling has higher drilling costs (simply put, it’s simpler to drill straight down). This means that rather than cost $1 million per well like with conventional drilling, it may cost $2+ million.
However, directional drilling is less of a gamble on whether you’ll find oil – the vast majority of the time operators know oil is in the rock and that the rock is present. It’s simply a matter of whether they can economically extract the oil or gas from the shale, and if so, how much of a profit they can score.
On the flip side, because with directional drilling it’s rare to get a dry hole, you sometimes see a lower return on investment (ROI) on your investment because the leases are more competitive, well costs and facilities more expensive, but results are more predictable.
WHY CAN DIRECTIONAL DRILLING PROJECTS MAKE GOOD OIL AND GAS INVESTMENT OPPORTUNITIES?
- Predictability: Operators can drill wells quickly. Costs are more predictable than with conventional drilling. And because someone has already drilled in the area, you know there’s a high chance of striking oil. You just have to extract it with low enough costs that you can still profit.
- Pooling: Current regulations pool investors together, so you invest in a section (multiple wells). When each well in a drilling unit or section strikes oil, all the investors in the section share in the profit, regardless of where in the unit or section their lease is.
- Potential: There’s basically unlimited opportunity – operators always require more money to drill the next well because oil and gas is a diminishing resource. The only way to grow quickly is with growth capital. Otherwise, operators must wait for each new well to produce in order to pay for the next well. They may want to expand drilling in a section or go to a new section. Since oil and gas is a resource-intensive endeavor, they need investors. Oil and gas operators often can’t issue more shares of stock in low commodity environments. They need capital quickly to grow production, which means they need a new source of capital – retail investors.
This is where EnergyFunders comes in.
INVEST IN THE OIL WELL
You can bet on several kinds of directional oil and gas drilling investments such as buying from brokers and promoters; however, these can be expensive (due to the promotes) or “fringe” assets on the outskirts of the oil reservoir and less productive. You can also try traditional stocks, private equity, personal connections or owning acreage.
But whether investing in a directional or conventional drilling project, our advice is always the same.
OUR DIRECTIONAL DRILLING OIL AND GAS INVESTMENT OPPORTUNITIES
We’ve started an unconventional fund for oil and gas unconventional projects. When there’s a cash call for more money (and interest owners either must pay up or forfeit their investment), EnergyFunders can step in to invest.
A CASE STUDY
An operator drilled one horizontal well, then decided to drill seven more and delivered seven Authority for Expenditures (AFEs). The interest partner is cash-strapped and can either non-consent to pay more money and lose his interest or farm out the acreage to a capital provider (such as EnergyFunders).
WHAT KIND OF DIRECTIONAL OIL AND GAS INVESTMENT OPPORTUNITIES DO WE LOOK FOR?
We leverage our experts’ relationships to buy directly into established “drilling units.” Our advisers have decades of experience in oil and gas and know what types of projects to look for and the professional connections to buy wholesale.
- Non-operated, working interest positions
- Directional wells (horizontal drilling, big fracs, low-permeability rock)
- Core acreage positions (avoiding fringe areas)
- Blue-chip basins (Permian, SCOOP/STACK, Eagleford, Marcellus, Williston and Haynesville)
- Premier operators (top-tier independent operators with proven track records)
We jump in as minor interest owners when drilling begins in 30 days. Pooling and drilling unit regulations create opportunity for all investors to share equally in profits.
WHY IS WILLISTON BASIN A GOOD OPPORTUNITY?
The benefits of this basin include:
- Established drilling units
- High deal-flow volume
- Efficient operators
- Plenty of production data and real results to model
- Well-defined core acreage
- Predictable returns in core areas
- Consistent deal and leasing terms, allowing for scalability with due diligence
TYPICAL RETURN PROFILE FOR DIRECTIONAL OIL AND GAS DRILLING INVESTMENTS
- High teens to upwards of 30% IRR
- Payback typically in less than two years
- Long life of the asset (the bulk of the production)
Generally, investors can’t access these kinds of opportunities unless they’re in the know. We’re providing another option for investors to take advantage of growth in the oil and gas industry.
EVALUATING OIL AND GAS INVESTMENT OPPORTUNITIES
We always encourage due diligence. With directional oil and gas drilling investments, you’re less likely to need to pour over geological data because you already know that operators have found oil in the area. Instead, evaluating oil and gas investment opportunities becomes more about calculating ROI and looking at the financial structure. You want to be sure that you can get a fair ROI and that money is allocated properly.
Looking at low, middle and high-case production scenarios (like EnergyFunders does) becomes more important. Since you know there is oil in the well, you know that you will have some return, but how much oil will you find, can you extract it economically and how much profit will you earn?
We always advise evaluating oil and gas drilling investments and reviewing whether they meet your goals. We also recommend creating a diverse oil and gas investment portfolio. That’s why we give you all the data we review about investments on our platform so you can invest your way.
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