When Energy Prices Fall - Opportunities Abound

WHEN ENERGY

PRICES FALL,

AGAIN!

The View of an Industry Veteran

By Paul Anthony Thomas, CPGS, RL 

RARE OPPORTUNITIES TO CREATE

GENERATIONAL WEALTH ARE PRESENT FOR THE
WISE BUYER WHO KNOWS

WHERE TO LOOK, WHAT TO BUY AND
HOW TO MANAGE THE ASSETS.

TO LEARN MORE, CONTACT ©2016, Paul A. Thomas
PAUL A. THOMAS V2.1 4 ‐20‐16

LEDGER PETROLEUM, ABILENE, TEXAS
325-695-1329

OpportuniWtiWesWA.bLEoDuGndERDPuErTiRngOLAEnUMO.ilCaOnMd Gas Bust

NOTE: FROM EXPERIENCE, WE KNOW THAT THE EVENTS DESCRIBED IN THIS REPORT
ARE MOST APPARENT IN OIL PRODUCING REGIONS, BUT THE ECONOMIC EFFECTS ARE
FELT THROUGHOUT THE GLOBAL FINANCIAL SYSTEMS. THE GENERAL POPULOUS IS

MOSTLY UNAWARE OF THESE EVENTS.

My father and mentor always told me that if your portfolio included oil and gas Who Is Paul Anthony Thomas

production without debt, you would survive during economic hard times and prosper Paul Thomas is a Certified Professional
during good times. This was true for my family in the 1960’s, 1970’s, 1980’s, in 2009 Geologist and money manager with over
and today. This was also true during the Great Depression of the 1930’s because Oil 30 years’ hands-on experience as a well-
& Gas are required commodities, not desired commodities. This paper is a discussion site superintendent & oil & gas exploration
of the opportunities to create wealth that are presented when energy prices decline professional including 20 years in upper
and remains low for two years or more. management of petroleum operations.
Paul broke into the oil and gas business
When the price of oil is mostly stable for an extended period of time, like it has been buying his first oil and gas lease in the
Austin Chalk of South Texas in 1978 and
from 2006 to 2014 (hovering between $60 and $90 per barrel), the US energy industry drilling his first well in 1979. Under the
gets spoiled. Thanks to human nature, oil people begin to believe that the price can mentorship of his father, E.P. Thomas,
never drop again. They become overleveraged. But, when that income is interrupted, PhD, an investment advisor, engineer,
cash buyers are presented with tremendous low risk buying opportunities that can geologist and wildcatter, Paul generated
create wealth for generations. I was visiting with a man the other day who is living prospects, drilled wells and operate
proof of this wealth generation. His father had used his life savings to purchase assets pipelines from South Texas to Calgary in
during the Resolution Trust days of the 1990’s. The Resolution Trust was established the 1980’s. He has a proven history of
by the US Office of Thrift Supervision to manage the demise of the US Savings & evaluating and implementing successful
Loans starting in July 1982 with the failure of Penn Square Bank in Oklahoma City private equity investments throughout
– a large oil lender and the first of 139 banks that failed in the 1980’s in Oklahoma – North America and abroad in many
all a result of the decline of the price of oil. This savvy buyer bought several large investment strategies. Mr. Thomas has
commercial buildings and vacant lots for pennies on the dollar and today, those supervised the drilling and completion of
properties are cash-flowing 100% of invested capital monthly. He reported that his over 220 oil and gas wells and currently
family fortune had grown from $1 million to $200 million by ownership and owns an interest in over 350 producing oil
management of assets purchased during a two year period in the early 1990’s. and gas wells throughout the US.

Guiding Rules for this strategy include: a) Oil is a required commodity, not just a Distinctions:
 Certified professional geologist #7243
desired commodity. The globe requires oil to function each and every day and the
United States is the biggest glutton of all. b) When the price of oil drops, oilfield  Member, American Assn of Petroleum
activity does not cease, it just slows and becomes more deliberate. As the business Geologists (AAPG) & SWS Section
slows, certain rare economic opportunities arise for the savvy investor. Councilor

IF PRICES STAY LOW FOR 18 MONTHS. Unlike the efficient  Registered Landman

stock markets, the oil business is “slow” inefficient money. This fact creates great  Member, American Assn of Prof
opportunities for the experienced. Things do not happen overnight, but they do Landmen (AAPL)
happen, slowly, in a certain order. The actions of the global oil producers that caused
the decline in price beginning in December 2014 took place in April, May and June  Member, Abilene, Houston Geological
of 2014, not the day before prices began to drop. If crude oil prices remain low for Societies
18 months or longer, oil producing countries will begin to falter affecting the global
economy in a negative way. We are seeing large scale political unrest and defaults in  Member, Rotary Club of Abilene
2016, only a year after oil prices began to decline, and this is just the beginning.
 Former Member: Dallas, Houston,
As I predicted in early 2015, with lower oil prices for 12 months, oil operators Austin Society of Financial Analysts

canceled their near term plans and drilling rigs became idle. The working rig count  Former: RIA (Series 65, 6, 63, 22)
in January 2016 is at historic lows. The US government has estimated job loss in the
oil sector at over 110,000. My estimation from the field is closer to 350,000 direct
jobs have been lost nationwide plus another 500,000 indirect jobs due to the price
decline. As individual savings dry up, these numbers will become more apparent. Out
of town laborers, many on food stamps, are leaving the oilfields to return to their
permanent homes abandoning living quarters. Banks are foreclosing on housing,

Opportunities Abound V2.1 4-20-16

commercial property and land. All of these things slowly (slowly is the operative word here) ripple up the economic food
chain, eventually hitting the bottom line of hundreds of public and private companies. As predicted in January 2015, oilfield
auctions have increased. Large auction companies that, in 2014, were struggling to have one medium sized auction per quarter
are now having one huge auction per month in January 2016, with new equipment and pipe to be sold in the next 24 months
for pennies on the dollar. INVESTORS WITH CASH AND GOOD MANAGEMENT WILL CREATE WEALTH.

A REAL WORLD EXAMPLE The price of oil had declined from around $40 per barrel in 1980 to a rock bottom

price of $10.25 per barrel on March 31, 1986 (notice this took 6 years). I remember numerous times, standing in a public
auction in Midland/Odessa, Texas in the summer of 1986 when the hammer went down on millions of feet of new oilfield
tubulars at cents/linear foot, less than the price of scrap metal (assets that 6 months earlier were selling for $4.50 per foot).
Auctions like this happened for 24 months after the price of oil declined as banks, oil companies and private lenders finally
had to sell assets to pay down debt. Within 2 years, these assets had been resold for a significant profit by the new owner,
only because they knew what to buy and how to manage the asset. If you understand the oil business and can manage the
assets, you know that certain equipment is always in demand in the field. Remember Economic Rule #2, when prices fall,
the oil business does not stop, it just slows.
There is always demand for energy, especially
in the US (see table to the right).
OPPORTUNITIES LIKE THIS ARE
NEAR AND INTELLIGENT BUYERS
WILL BE READY WITH CASH.

One bright star in this mix is that producers
with experienced management, who own
diversified oil production without debt will
continue to receive income. Marginal wells
will be shut in, but more profitable wells with
low lifting costs will continue to be profitable
and continue to be drilled and produced.

AFTER 24 MONTHS OF LOW PRICES, ALL CUSHIONS ARE EXHAUSTED.

At the writing of this paper in January 2016, we are in month 12. During a downturn, many oilfield companies will have

some sort of short term economic cushion in case of price declines, but after 24 months of low prices, all cushions are

exhausted and assets must be sold. If prices stay depressed for 24 months or more, oil operators will totally abandon their

long term plans and layoffs of the most experienced professionals will occur. Generations of experience will be lost. With

only 12 months of low prices as of January 2016, oil companies with long-term debt are today selling off non-core producing

properties and real estate to focus on their core holdings. If prices stay down for 24 months, oil operators and investors will

sell core production that, in their mind, has no further development potential, to provide capital for new prospects that hold

greater value and growth opportunities. INVESTORS WITH CASH WILL CREATE GENERATIONAL WEALTH.

Shale drilling will all but cease for the smart investor, as shale drilling dynamics do not meet any investors expectations.
Infrastructure assets like tank farms, pipelines and rolling stock will be sold by Master Limited Partnerships (MLP’s) that

must adjust their capital structure and increase profitability. We are seeing a major consolidation in this marketplace in 2016
and this is just the beginning. MLP’s will cut their distributions AGAIN, as the amount of product flowing through their

pipelines reduces. More pipeline projects will be cancelled. Tremendous opportunities will exist for the well-financed

buyer as credit tightens in the industry. Credit facilities will dry up and very low risk deals will not be funded because
investment bankers are “scared of the space”. Saltwater haulers and disposal facilities will waver as operators reduce

production and make cheaper arrangements for disposal or shut in wells all together (also known as curtailment). Auctions

will increase as higher quality properties and equipment come to market for far less than replacement cost. CASH buyers

will be able to make instant deals at half current appraised value because they can close in a week. The slow moving

oilfield will overcorrect, creating opportunity. Real estate will be WHEN PEOPLE ARE DISTRESSED,
PROFITS ARE MADE.
purchased for cash for twenty five percent of replacement cost. Assets will
come through the Federal Bankruptcy system for pennies on the dollar…

CASH BUYERS WILL CREATE WEALTH.

Opportunities Abound V2.1 4-20-16

Here are just a few examples of the opportunities that are coming for the cash flush buyer in 2016 and 2017…

A. In 2015, a natural gas producer in Texas was informed by his bank that he would have to liquidate the production that
secured his loan and repay the debt – production that is profitable at less than $1.00/Mcf.

B. In September 2015, we had the opportunity to purchase production that would pay 100% return in 10 months at $2.00
natural gas prices. This production was hedge-able at $2.25/Mcf.

C. In January 2016, we are buying oil barrels in the ground (Proved Developed Producing reserves) for $3.00 per barrel
or less with no value places on behind pipe potential.

D. In 1986-87, on many occasions, I witnessed first-hand the sale of oil and gas production for a 2015 equivalent of
$2.50 per engineered barrel (Proved Developed Producing only).

E. In the late 1990’s, I personally know of banks that foreclosed on Permian basin oil and gas production of 1000 barrels
per day, selling that production for less than $4,000,000. In 2015, that production is still cash-flowing and at
$30/barrel is worth $20,000,000, having paid out an estimated 5x since the sale. Wealth was lost and created by the
financial system and THE BUYER WAS THE WINNER.

F. In the late 1980’s, I was bidding on an entire foreclosed residential subdivision (135 homes) with 10 commercial lots
for pennies on the dollar.

G. In the mid-1980’s, we were in negotiations to purchase 1000 nice single family units for less than $10,000/unit.
H. In 1995, I was making offers to purchase homes in the upscale M-street section of Dallas for $25/sq.ft. or 25% of

replacement cost. In 2015, those same homes sell for $250-$500/sq.ft.
I. January 2016, national rig count is down >50% from June of 2015, and it is just the beginning.

THE GOOD NEWS…PROVEN ECONOMIC RULES GUIDE US

The following economic rules, in my opinion, make this the most opportune time to buy in the past 35 years.

Economic Rule 1: There are no greater assets to own, in certain or uncertain economic times, than producing
energy in the ground, without debt.

Economic Rule 2: The oil business does not stop; it just slows when prices decline.

Economic Rule 3: As oil and gas production declines, the price rises and the cycle begins again.

Economic Rule 4: The supplies of hydrocarbons are finite & non-renewable.

Economic Rule 5: The demand for energy will continue to grow as global populations grow.

Economic Rule 6: Oil is a required commodity for the human race, not a desired commodity, and finally
Economic Rule 7: The old adage: “Low prices are the cure for low prices” has never been more true.

WHEN ENERGY PRICES FALL, OPPORTUNITIES ABOUND AND BUYERS

WILL CREATE WEALTH WHILE DEMAND FOR ENERGY GOES UP.

Author Philosophy

The need for energy in the form of oil and natural gas is “Omnipresent”. Over 80 years of opportunistic public and private investing
experience in all types of markets has led the author to believe that actively managed, fractional ownership in hundreds of producing oil
and gas wells provides a solid base for generating cash-flow and profits in any economic environment. Proven hundreds of times
throughout history, these types of hard asset holdings have proven to be the greatest assets that anyone can own in times of economic
uncertainty or prosperity. In this strategy, success is never defined by whether or not a single well meets or exceeds expectations. Instead,
drilling risk is removed and performance risk is diversified over multiple wells in a wide variety of proven producing fields. Commodity price
risk is reduced using simple hedging strategies available on the open market, a characteristic which is not available to the real estate
owner. Today, our holdings encompass ownership interests in hundreds of oil and gas leases located in several states. We invite you to
examine how we manage risk in the oil and gas business and make exceptional profits. This is not a solicitation to purchase any security.

© 2016, Paul A. Thomas, Abilene, Texas

Opportunities Abound V2.1 4-20-16