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Investing in Oil Wells Like a Venture Capitalist: Conventional vs. Unconventional Wells

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At EnergyFunders, we get the opportunity to work with some of the best oil and gas operators in the business. One of our operators, James Mertz, president of Mertz Energy LLC and venture capitalist, gave an interview with Oil and Gas Investor in the January 2019 issue about conventional wells. He’s working in South Louisiana and had good analysis of why conventional wells have often-overlooked potential.

“The conventional markets are contracting. There are some incredible opportunities, but the marginal developments are simply not viable.”

Before technology advanced, conventional (vertically drilled) wells were essentially the only option for drilling projects. Now that many conventional plays are depleted, it takes a skilled operator to find the ones with untapped potential and take advantage of it.

Why Conventional Wells?

“I like conventional development. The outcomes are binary; there are hits and misses. But the hits are big, just like in my venture-capital business.”

We’ve seen that at EnergyFunders – we’ve participated in dry holes – but we’ve also had big discoveries, like the Theall project (EF VC14). And when you have a diverse portfolio, we think the wins make the potential risk worth it … just like a venture capitalist does.

Investing in Oil Wells: Conventional vs. Unconventional

“In the resource plays, it’s easier to deploy large amounts of capital in a short time. That is why the big private-equity houses are attracted to the shale plays. Those have a risk profile more like bonds. The risk profile in conventional development is more like equity, and the bond market is many times larger than the equity market.”

Many of EnergyFunders’ projects to date are conventional drilling projects, where we explore for new oil and gas. But in 2019, EnergyFunders unveiled its first unconventional drilling fund to complement our conventional wells.

Conventional wells can be riskier than unconventional projects. Even with the best data in the world, you never truly know if there’s oil or gas in the ground until you drill. But their risk also makes the payoff bigger when you strike oil or gas. This can make conventional projects attractive to investors who diversify their oil and gas portfolio and don’t put all their money into one project.

Which One Is Right for You?

When investing in oil wells, you have options for two types of projects: conventional or unconventional. (Conventional wells are vertical and unconventional wells are horizontal or some other form.) Unconventional wells tend to have less dry-hole risk – and more predictable (and often smaller) payouts. You know there’s oil in the ground before you drill with unconventional, whereas with conventional wells you never truly know until the drill bit meets the ground.

EnergyFunders has both kinds of oil and gas investment opportunities – so with a diverse portfolio you can invest in both. Learn more about our strategy for investing in oil.

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