Acquisitions Anonymous - #1 for business buying, selling and operating - What do Oil Field Drilling, Cannabis Farming and internet marketplaces have in common? - Acquisitions Anonymous Episode 85

Episode Date: April 13, 2022

Michael Girdley (@Girdley) and Bill D’Alessandro (@BillDA) are joined by David Rontal (@davidrontal) to talk about the Oil & Gas Industry, its value chain, industry trends & opportunities, covid effects & labor issues.We discuss an Oil & Gas services Deal, and a Cannabis farm Deal based in Colorado, which surprisingly have many parallels. -----* Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel.* Do you enjoy our content? Rate our show!* Follow us on twitter @acquanon Learnings about small business acquisitions and operations.-----Thanks to our sponsor!MicroAcquire is the #1 startup acquisition marketplace. It is simply the most efficient way to buy and sell startups when you’re ready to make your next move.-----Show Notes:(0:00) Intro(2:15) What is the value chain of Oil & Gas companies? What does each player do? What are the stages?(8:08) Why is the business so tough from a legal perspective? How is the mineral owner mindset?(11:05) Exit strategy? How does the Oil & Gas interest marketplace work?(16:32) Deal 1: South Texas Well Cementing & Acidizing Company (18:03) What does the company do? How do they operate? Where are the costs?(23:58) Services business in Oil & Gas: Is it lucrative? What should you look out for? Where is the value?(27:28) Why do they have more trucks than employees? What’s happening with labor?(31:37) What would you recommend to investors looking to enter the industry?(37:01) Microacquire(38:58) Deal 2: Cannabis farm based in Colorado(41:27) What does the Marihuana retail market look like? What does the location tell us?(45:32) Is there information missing on the listing? What hidden costs should you ask for? Is there a permitting process to be considered?-----Links:* MicroAcquire-----Past guests on Acquanon include Nick Huber, Brent Beshore, Aaron Rubin, Mike Botkin, Ari Ozick, Mitchell Baldridge, Xavier Helgelsen, Mike Loftus, Steve Divitkos, Dzmitry Miranovich, Morgan Tate and more.-----Additional episodes you might enjoy:#83 Can you grow a business in a shrinking market? Featuring baller @WilsonCompanies as a special guest!#82 How Great Operators Win! How PE does it like pros with Mark Brooks#Subscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

Welcome back to another episode of Acquisitions Anonymous, the internet's number one podcast about acquiring and operating small businesses. This week's episode is super fascinating. We have a great guest, David Rontal, and our discussion runs the gamut from oil field drilling to internet marketplaces that sell developed oil assets to cannabis farming in rural Colorado and more. And the parallels actually really surprised me between all of these industries. So David is fantastic. Welcome to the show. I think you guys are all going to really enjoy this week's show. All right.

And we're very excited today. We have a fascinating guest with us today, talk about some really interesting stuff that I think you guys are probably all read about in the news, but probably didn't know a lot about. So today we have David Rontal with us. David, glad you're here, man. Yeah, thanks for having me. Can you tell our guests a little bit about who you are, what you do? Sure. David, I'm one of the partners in General Counsel at Overland Oil and Gas based out of Denver. We're a privately held business that acquires oil and gas minerals and royalties with a focus on the Rocky Mountain Basin.

So Williston Basin of North Dakota and the DJ Basin of Colorado and Wyoming. We're back by a handful of family offices. We've been doing this with outside capital since about 2016. currently manage a portfolio of about 20,000 acres, normalized to one-eighth based on our lease rates. And, yeah, we're invested out of our fourth fund right now, Overland 4. We'll be raising Overland 5 sometime later this year. And, you know, my job primarily is to lead our acquisitions. So get to spend a lot of time in the oil field, you know, understanding and underwriting, you know, our deals, since it's a passive asset and we require someone.

else to drill, it does require understanding the oil and gas business. So, you know, get to spend a lot of time looking at the services businesses, the operators, the whole suite of things to kind of help us understand ultimately the timeline to development and when we can monetize our assets. Yeah, very, very, very glad to be here. Great. Yeah, thank. Great to have you. So I am an oil idiot. I don't know, Michael, you're texting, so maybe you know something, but I know very little about this. Can you help me and any other oil idiots that may be listening kind of understand the value chain as far as, you know, you're not actually pulling the oil out of the ground yourself? Nope. So help people understand the whole value chain, the stack of value that. Sure. So and this is something

that's very unique to the United States because of the private property rights here and that individuals or the state or the federal government own the subsurface, the minerals and can correspondingly lease those minerals to an operator to come in and develop. So it really starts with the oil in the ground that's owned by the mineral owner, whether it's an individual, the federal government, specific states. And it starts with the oil company, ConocoPhillips, ExxonMobil, Shell, all of the big operators that you would think of. Those operators will come in. They will lease the minerals. They'll aggregate blocks into drillable units. And then they start to bring. bring in the services, right?

And that's usually first a drilling rig. And the drilling rig will come in and they'll drill down and, you know, drill the pipe all the way down to the target formation and they'll cement it in place. And then next they bring in, you know, the fracking crew. And the fracking crew is the one that, you know, comes in and they'll pump tens of thousands of pounds of sand and water down hole. They'll frack the well. And then it starts to flow back.

And in each part of kind of the life cycle of the well, there are, various services that the operator will need in order to drill, complete, and produce the well. Some of those are provided by the big guys. Everyone probably knows Halliburton. They're the largest oil field services company in North America, Schlumberger. There's been various forms of Baker Hughes and BJ. And there's been a lot of private equity companies that have, you know, come into what we would call the pressure pumping services. Liberty was one that went public. and again, BJ is another one that's been in various forms through bankruptcy and reconstitution and otherwise. And so at each stage, the operator requires different services.

And, you know, it's a highly cyclical business, right? The services are somewhat determined by price, right? The price of oil and the commodity that's sold at the wellhead ultimately determines the level of development and the level of money that operators are willing to spend to maintain the production out of the well. Because some of the older conventional wells can produce for 30, 40, 50, 60 years. But every so often, someone needs to come in, they need to clean them out, they need to rework them, in order to maintain the economics, right?

Because it's not just producing the barrel. There's costs associated with it. You have to have electricity to run the pumps. you have to have someone get the product, the oil and gas to market. You have field hands, right? And so there's what they call lease operating expense. That's effectively, you know, the cost to get the barrel to market. Okay.

And those fluctuate. Sorry, go ahead. So we've got the middle rights owners. And then big oil companies come in and lease up the mineral rights. It could be small companies too, right? It's big and small, right? So there's, think of the big publics, but there's also large private operators out there. Yeah, so the oil companies will come in.

They'll lease up the mineral right owners. And you get paid an upfront lease bonus and you get paid a royalty. The royalty typically is from one eighth to 25%. Up in North Dakota, most leases are one six. Okay. And so you guys at Overland are you, that's where you guys come in that you try to aggregate There's mineral rights and then either pay services companies to extract the minerals or flip them, I would assume, to a larger aggregator. Yeah, like, well, we do not, like as a mineral owner, you have no control over the development.

Right. I can't tell Conoco come drill my well right now, right? When Conoco comes and drills the well is when Conoco decides. Now, it's our job to analyze and make sure that we're underwriting the time to develop. that makes sense to our return hurdles. But the actual process is actually quite clever, and it's one of the few businesses where there's not really any price discovery.

So in order to figure out what someone owns, we have to send someone to a courthouse in North Dakota, whether it's McKinsey County, Williams County, Dunn County, Montreal. And they go and they have to run the title back to an index and bring it forward, because everything that's recorded at the public level in the counties, only says gross acreage and it doesn't have a purchase price, right? It's typically just your $10 of consideration. So if I go and look at mineral deeds in the public record, I can only see

what someone owns in a gross acreage, right? So when you get west of the Mississippi, a lot of the United States is broken down into section township and range. So each section is 640 acres, and a township is 36 sections. And in North Dakota, we're fortunate, that most drilling and spacing units are two sections. So we'll go and we'll look at a drilling spacing unit and we'll send someone in to get title. They'll send us back a report. It's an ownership report.

And we'll send out mailers. We'll make offers. And then we have guys in Denver that will pick up the phone and cold call. Okay. Wow. So I feel like every time we have a guest on here and they explain what they do, I go, holy crap, like, you know, this is what you're up against. I think is Patrick Roshadise's favorite saying.

The intricacy here from the legal side, the discovery side, the deal-making side seems incredible to me. Yeah, and frankly, in a lot of ways, it's hand-to-hand combat because you're dealing with landowners who, for many of it, it's an exceptionally tough business, right? Like our hit rate when we send out a mailer is probably 1%. And that's not just sending out the letter. Like, we have to have someone follow up and call and call and call. We're closing a deal next week that I've spent working with this.

sellers for three and a half years. So it's literally hand-to-hand combat. And in large part, it's because for many of these people, there is no price that you can offer them in which they would sell. That they were raised, never sell your minerals. Granddad, you know, homestead of this farm out here, and he told his kids never sell your minerals. And my dad told me never to sell my minerals. And I'm never selling my minerals. You offer me a million dollars an acre. I'm not selling. Interesting. Interesting. So I imagine. given that it's such hand-to-hand combat, much like, you know, a lot of the other small mid-micromarked businesses we talk about on this show, there is probably, I'm guessing, an aggregation market,

right, where you guys can go in and do the hand-to-hand combat, and then the Conoco's of the world, they don't want to do the hand-to-hand combat. They come somebody like you and go, oh, great, you've aggregated all of these mineral rights. Now we'll pay you a higher premium than you pay it to aggregate them. Is that? Yeah. Yeah. I mean, that is one model of doing it. I think of us as a warehouse. So the big advantage that Overland has is our capital. Our capital can be very patient. And a lot of mineral buyers need to buy with like imminent cash flow and imminent production.

So we'll go into a drilled spacing unit. They'll have a single well. And that well was probably drilled in 2010, 2011, 2012. It's like making a couple hundred barrels a month. So it's very little value in the existing production. but we know by looking around that there's going to be infill right it's like buying a piece of raw property and being able to add a you know 30-story apartment building there's a ton of value in the infill and the development and so we play that arbitrage and unlike most mineral buyers we can sit and hold that single well unit for an extended period

of time because we know what to buy it for and we can buy it for you know if we can buy it for cheap enough where we can have an extended hold period, we could wait 10 years for it to be developed. It doesn't matter to us. Whereas a lot of our competition, they need that imminent production. So there's a subset of deals in which just get entirely looked over, and we have some pricing power and the ability to take advantage of it. And in terms of our exit strategy, we sell a lot. So, you know, we've probably invested $115 million at this point,

and we've returned close to 80 million of that with retaining a large residual. Each deal kind of stands on its own. So we have sold things as a partial portfolio sale, but a lot of stuff we do, we sell on Energy Net, which is an online auction market for oil and gas interests. Oh, wow. Now, you keep opening up all these things. Yeah. Whenever these deals are so interested.

This is great. Yeah, and energy net's been a great, I mean, we've been using energy net for years, and it's a great platform because it just opens up. Buying minerals is so hard that there's only certain access points for people to get deals, and that's one of them. So we've had a lot of success selling there. We've sold to other, like you were saying, the mineral aggregators. So those are typically private equity backed. And so they're looking just for cash flow. So within our 20,000 acre portfolio, there's currently, I would say, you know, a quarter of it is going to be developed in the next year.

And so now we can start to think about breaking that up into little pieces and starting to move it and sell it. We sell it to the operators at times. So there's a really good opportunity set in terms of monetizing because once the asset is drilled and cash flow, that can all be engineered, right? There's no longer any speculation. Now you're just arguing over a discount value. Yep. Who owns this business?

I want to own this business. Forget the deals. Tell me how I can own EnergyNet. Yeah. Michael, there's a guy on Twitter, Chris Atherton, who I'm happy to make an introduction to. He's the CEO of Energy Net. He'd be happy to come on. You should have a mind.

He's an unbelievable guy. I believe it's Ross Perrault's family. that owns most of that. Oh, okay. I don't want to buy anything for those guys. It's been around forever. Yeah, it's been around for a long time. So is,

and there's other. Does this act more like a network of brokers, or does it act more like a platform like biz buy sell? It acts more like a platform like biz buy sell. Wow. There's a, the network of brokers exist kind of at our level, right? So we get,

we get under capital, like the, brokers in the oil and gas business are called landmen, even though they're just brokers. I mean, everybody's a broker, right? So the landmen typically are undercapitalized, but they have access to deals. And so they'll come to us and either make a commission or a spread or they'll hang on to it. And for us, like, you know, we've had a lot of success because we know our return hurdles really well. And a lot of buyers are very stingy on what they pay the landmen. Whereas we say to them, here's the price we'll buy. If we can make it work, I don't care if you make $1 an acre or $1,000 an acre. Here's my price. Same dynamic in real estate where people try to squeeze the brokers

and then never see any deal flow. If you take care of your brokers, you see the best deal flow first. Yep, yep. And I think we see like we sit in this, what I would call like a vortex because again, like there's very, I mean, there's capital. We're not. We're not. We're not. immune to competition. There's plenty of it, but unlike most industries right now, there's not the huge floods of capital coming in, especially at the ground level, because in part, the underlying business has been so volatile and somewhat uninvestable over the last half decade to decade. And so it results in just, you know, less end users of minerals and royalties, but still arguably the same number of brokers and landmen out there. And if you treat people right,

to want to do business of you. Wow. That is awesome. The coolest thing about this EnergyNet website, by the way, and Bill, tell me when the last time you saw this. Look at, they have every single one of their employees, emails, and direct phone numbers on their website, including the software developers. What was the last time you ever saw it?

Headshots everything. It's insane. Like this, look, this guy's a programmer. Like, what was the last time you ever saw a technology company list their programmers? Their names, they're full everything, and put it right on the website. Like, like, there is, that is something that when I see something like this, I'm like, this place is doing something special where they have no problem with retention. And I have a theory as to what it is.

Do you want to know what it is? Their office is in Amarillo, Texas. There are not a lot of tech jobs in Amarillo, Texas, so they don't have to worry about getting poached. But anyway, that's just fascinating. Yeah. And the, they also do all of like, when the states do their, lease sales, right? Because the states will lease their minerals to operators, that all goes through

energy debt. And they've been the beneficiary of some huge lease auctions, especially in New Mexico. I mean, go back and read about some of these crazy lease auctions. You know, they're getting a point off of it. So it's a good business. Wild. All right. We do have to talk about some deals. So, David, I can go on forever just dig in in your business. So interesting. But I would love to hear your expertise on some deals that are related to the space in which you play. So Michael has our first one. Yeah. So this is near me in St. Antonio. And we looked up more Texas is like an hour southwest of San Antonio down by a town called Pearsall. And so this is from Bizby Cell. And it is titled South Texas Well Seamenting and Acidizing Company at Dash discounted sale $9 million located in Medina,

County, which is more Texas, which is southwest of San Antonio. So they are asking $7 million. So how does that work? The title says discounted sale $9 million, but the asking price says $7 million. I guess we'll get into that. Further discounted. Yeah, it's just everything must go, I guess. They have no cash flow numbers, no gross revenue numbers.

They have inventory of $12 million. So that's fascinating. They pay rent of $8,000 per month, and this business was established in 2020. So the business description, what is business name, yard employees current MSAs listed. Boy, this broker did not check their work before putting cent. So anyway, it is a well-sementing and acidizing company for sale. So, David, for those of us that are numnuts, what is a well-sementing and acidizing company? company. So in the traditional when you're when you're drilling the well and you put the drill

pipe down the well, you need to be able to hold it in place. And so they they will cement the well in place. And so on the kind of when they talk about primary, I think they mentioned primary cementing. That's what they're doing is, you know, cementing the well bore in place. It sounds like they only do primary cementing for water wells. And that's usually just a function of the type of equipment, right? Like, you need a lot of horsepower to force that cement down hole. The deeper you get, the more horsepower you need. So they just might have some horsepower limitations here. Acidizing is interesting. So if you think about, you know, the oil and gas that comes out of the ground isn't necessarily fully pure, right? There's paraffins, there's wax, there's heavy metals that are

brought into it. And over many, many years, this will accumulate around the well bore. And so you'll see a decline in production because the well bore itself is think about like your arteries and cholesterol, right? And so over time, you know, the well bore will start to build up with the stuff. Again, paraffins, wax, heavy metals, other kind of impurities within the oil. And so one way to increase production later on in the life cycle is to acidize the, well, which is to effectively come in, they pump acid down whole, it breaks apart all this stuff, and then they flush it back out. Typically, we see this in more conventional production, right? So not horizontal drilling and fracking necessarily, but the older just conventional wells,

which are just effectively straight down into a trap where the oils found. The other thing that this company does is it looks like they have a plugging and cementing business. So at the end of the well life, you know, every time an operator drills a well, they have to post a bond. Typically, each state requires the operator to post a bond that will cover the cost of plugging and abandoning a well. With remediation, that typically costs about $50,000 per well. And most of the cost is in this cementing and plugging process. So what they'll do is, again, they'll go back in. They'll, you know, analyze the cement around the well bore, right? Make sure it's still good. And then they actually create a series of cement plugs that they put down hole.

So it's not just one, but they'll place typically between five and six cement plugs, depending on where the oil-producing formations are and how deep it is. This specific topic has garnered a lot of recent attention, especially from the Biden administration. People are seeing a tremendous amount of tail risk in wells that are abandoned effectively, but not properly plugged. So if I think about, you know, when one, I think growth opportunities in the oil and gas business

are pretty limited, but one way to think about is, you know, if you have access to a business that already has an established plugging and cementing business, there might be additional runway if the government starts to get into subsidizing or actually paying for the plugging and abandoning of wells that have been a bit,

that have been previously abandoned. Yeah. Okay. Okay. Cool. Okay. So I think I understand this business. So let me go through the equipment and some of the other stuff they have going on and to go from there.

But I understand that this deal specifically with a lot of the cementing during the oil drilling process or rejuvenation. And then also like cementing and capping off and stopping wells that need to be, need to stop being an environmental, an environmental threat. So cool. Okay. So more details. They're on an eight acre yard. They claim to have bulk plant silos, lab, and maintenance building with the option to purchase the yard or all equipment and can be relocated. The company was appraise. So it's listing for $7 million. The appraisal was done in September 2020 and was appraised for $10 million. Interesting about this, it appraised for $10 million in September 2020. The established date for the business, 2020. So nine months in, these guys had somebody come. come in and tell them it was worth $10 million. Then it says the next line is discounted price of $9 million, which by the way, agrees with the title, but disagrees with the other listed price, which is they want to sell for $7 million. And then next tier, they go through and they talk about

all the equipment. So Bill, we talk about heavy CAPEX equipment-based businesses. This appears to be one of them. 17 heavyweight tractors, 10 lightweight vehicles, three Freemeyer double pump cementing units, a cement batch mixer, I know what that is, three water and acid line transport units, and it just keeps going. Wilcoe bulk units, four tiger cement bulk units, upright cement silos and a setter truck, bull plant, acid plant, portable cement lab, a bunch of wellhead connections, high pressure testing, iron and hoses, low pressure hoses and connections in various shop tools. And then if you're interested in more of this, you can get an NDA with Dean Davenport or Jana Davenport, who are the two brokers who have Gmail and Outlook.com email addresses respectively.

And they actually list the business website. It's top force energy services. And interesting is the owner wants out to focus on more other projects, more in line with his expertise. Like, how do you get into this without knowing what you're doing? Like, I wouldn't go into this without knowing what I'm doing. So, and I think that's, I mean, And I don't think it's that uncommon for this to happen, right?

Like the services business, especially on the smaller side, is littered with, you know, is a graveyard of people that are, you know, either have experience in running other services businesses and say, oh, I could do this or are just in the oil field and naturally, you know, fall into this. You know, when the getting is good on a services business, it's great because the margins on the equipment can be, you could be out. with a $600,000 piece of equipment doing $30,000 a day pump jobs. And that's extremely lucrative over time.

I think the problem now is that the inputs also are significantly higher, right? The labor costs, the fuel costs, the sand, all of the underlying inputs in this business have to have gone up over the last, you know, 12 to 18 months. And you wonder whether or not the pricing powers there on the, on the revenue side to help offset that. I mean, there was a huge red flag to me all of like the discrepancies on the dates and then the guy being like, you know,

a couple years into this is like, I'm ready to try something different. I mean, I think with most oil services, businesses at this point, you're kind of at the top of the cycle. It's really hard to kind of, I think, find a good deal out there. And, you know, we're firm believers in the oil field

of like, you know, prices where you pay values. what you get. And just because something is like cheaper discounted, it doesn't mean it's a good deal. So is the way to underwrite one of these businesses to essentially look at the quality of the assets? I mean, there's so much hard equipment here. And if you go to that website, Michael pulled up, the tractor trailer that pulls up to cement your well, it looks like a freaking power plant, cement manufacturing facility on a flatbread. It's extremely complicated. So is it basically about trying to understand the quality in the remaining life of the assets, and then can you generate

enough demand and what's the pump job per day and just like calculate out of yield? Is it basically like that? Yeah, I mean, I first want to take a look at the underlying MSAs to see what they're pricing on and kind of the terms of those. And if they're cancelable or, I mean, the MSA is only as good as it's terminated, the counterparty's ability to terminate. And so first I'd probably start on the on the revenue side and think about kind of what am I going to be bringing in. And part of the issue of just looking at it from the asset base is not all of these assets have uses outside of oil and gas. And so there's a lot of mothballed horsepower that exists in the oil field because there was

overbuilt during the last six to, you know, during the shale boom. and then the industry contracts, you have horsepower that doesn't really have a use outside of the oil field. And so it's somewhat obsolete. They could tell you it's $12 million worth of inventory, but like what are you really going to get if you go and try to sell it? Yeah. I think the other thing that we're saying. But there are some things like the cement, but the cement mixers, all of that stuff would have uses outside of oiling gas. but there are some very big-ticket items here that those tractors are likely pretty

limited in use. So one thing that, you know, I'm curious about David, so they have only eight employees, but they have 27 trucks. So I'm very curious kind of about that. And we've already, I think, got to the point we're not necessarily trusting this listing to be 100% correct. But like, like this is also located, you know, and I'm ignorant about this, but this is located in the area just south of St. Antonio. And I'm totally blinking on what the name of it was.

The Eagle Fort Jail is kind of this area. This isn't, this isn't what I'm hearing is really the more kind of growth areas in terms of the actual fields, right? You're hearing more about the Bokkin up in North Dakota and still out West Texas, Midland and all that kind of area. How much? Yeah, the Permian, everyone's focused on the Permian. Eagleford's probably, I believe, the third largest producing field in the basin in the country. So there's still a tremendous amount of activity. And rig's running there.

I think you highlight a very important point is that COVID transformed the oil and gas business forever. The crash was so severe, especially on the oil field services side, that a lot of the skilled employees that had the knowledge base and knew how to do this left for good. And they're not going to come back. And so when people are talking about, oh, why can't we raise production? Why can't we raise production? People are really ignoring that there's a huge labor issue. There's tens of thousands of oil field services jobs that are very high paying, right?

I mean, six figures plus, huge signing bonuses, who are crawling all over one another for skilled labor. And it's just not there. and it's not going to come back. Why is it not coming back? I mean, it was just that it took forever to kind of convince people to move to the middle of nowhere to do these jobs and like now it was the reset and you got to slowly fill the puddle again? Yeah, yeah.

I think in part, like, I mean, I can speak specifically to North Dakota. Like, do you want to be in Williston, North Dakota in January? Right. Right. It's a hard sell to begin with. And then you add in industry volatility over the last decade with, you know, recently it seems like everything is kind of busted a bit and that might be new to people that have been you know started investing since the the great financial crisis of 2008 but in the

oil field like there's been repeated bus and after a while as a worker you're just like I don't want to do this anymore I don't want to you know work work work get laid off have to sit around for a year not doing anything only to be rehired work work work get laid off it's not there's other opportunities that are you know potentially more consistent and because like the you've seen this rapid rise in price the jobs are not getting filled proportionate to kind of where we'd expect it to be in previous downturns so i i was going to say i interviewed a guy in north dakota yesterday and he's like i want out of here i don't want to work in the oil field my brother works in the oil field and my brother wants out of the oil field like Like, I just don't think the lifestyle is very good. You're living in a man camp out in Snyder, Texas. Like, there's one barbecue restaurant for 60 miles. Like, I totally understand where these people are coming from.

I can't, I don't know that I've ever talked to somebody who's like, you know what, I want to keep working in the oil field. This is great. Like, nobody ever, it's never said by anybody. Yeah. I mean, if you're, if you're an experienced hand on a Rick with that, like, a really good team and you're fine with like two weeks on, two weeks off, like you could make a really really good living. Yeah. And there's definitely like the, you know, the big players have been

able to manage to keep their best teams together. And that's the other thing, too, is a lot of operators are very suspect of newer services businesses because these wells are not cheap to drill and maintain. You don't want some green hand getting in there and, you know, messing up your production. Fascinating. So what, let's say our typical listener is somebody considering kind of of a second business or is looking for a first business for them to buy and operate. Like, is there a world in which you would encourage somebody to look at a business like this or consider it? And if so, like, well, if the answer is yes, how would they go about actually evaluating

how something like this would make sense for them? I mean, I wouldn't suggest looking at anything in the oil field services business unless you have already the subject matter expertise or the geographic location and an existing business or something that's ancillary to it. I think that like the, again, it isn't a business that's easily understood by a non-oiling gas person. And so there is kind of required subject matter expertise to hit the ground running. Plus, I think just the the cycles in the oil field services are very severe. And I question whether at this point, like, you know, the the other deal that we were potentially going to talk about,

talked about like, you know, there was 10x growth already. Like, I just question how much meat is left on the bone and that you're paying for something that the growth has already been, you know, baked into it. The prospects are not that great. And you're going to be doing hand-to-hand combat to keep your jobs and keep your workers. So I wouldn't be totally, you know, bullish about getting into this business unless there was a very compelling reason.

I guess the one thing would be that there may be less capital chasing it. So you might be able to get a better deal. And if you're patient, maybe something like this where you can kind of monetize some of this equipment, the inventory ends up. I'd probably go in and just figure out what this inventory is worth. I'd start with that, right? Because if you could get comfortable that the underlying inventory is worth more than the purchase price, starts to get a little bit interesting, right? And then you definitely want to take a look at those

MSAs. Think about the term. Think about how the counterparty can cancel them. Who is the counterparty? Are they well capitalized? Are they, you know, users of oil field services? Most MNAs don't really have like a, you know, a take or pay component to it. So it's kind of services as needed. Yeah, and then I'd want to, you know, meet the key employees that understand the customer relationships and understand, you know, how the business actually operates in terms of getting, you know, the trucks out to the site and the job's done in a timely and efficient manner. Yeah. So it sounds like, again, one of those instances of the guy that owns this cannonballed into a business

he didn't understand in a hot market. And now he's probably getting out at a haircut and looking for somebody who is as enthusiastic as he was the first time around to hold a bag. So don't be that guy is basically what you're saying. Yeah. And it's like, you know, just like the timing, like this guy got into the business in 2020 during the COVID lows. Like that would have been the time to buy something because there was so much blood on the streets. And nobody, there was so much uncertainty and so much, you know, horror that that was probably a good time to pick up stuff. when oil's made a run up to, you know, $100, it's not really the time to be like looking to get into it because of the uncertainty and, you know, the business cycles.

Yeah. One of the other things I always think about is why am I seeing this deal right now? You know, like this one has been, looks like the price being cut from 10 million to 9 million to 8 million to 7 million. And you go, surely I who do not live in North Dakota or Texas and have nothing about, you know, no knowledge about this. not the first person to see this deal, which means all of the smart people have passed on it at 10 million, 9 million, 8 million, and 7 million. So why do I think I simply have this edge, right? It's the same thing in our minerals business too. We use SEO and Google and stuff.

And if we see, we don't do business in the Permian Basin. We never have. And when we see a deal from the Permian Basin, we ask ourselves that question. Why is it coming to us, right? 85% of the private capital and minerals and royalties is invested in the Peruvian Basin. backed by some of the smartest teams out there. Why are we seeing it at this point? Clearly, because all those guys passed out at the price this person wants. Exactly. So I Googled the broker bill, and she's not actually really a broker.

She's also an oil field services company owner. So it is fascinating. The story of this whole business is like, what? It won't surprise you, man. It's like the oil field. is also like one daisy chain after another. Yeah. Like everybody's just trying to get their, their piece, right? Like, oh, I got, you know, I'll help you sell your business

and I'll take a cut of it. Like, again, this is, this stuff is pretty common. Crazy. Crazy. Crazy. All right. Let's keep it rolling because we've got,

we've got another really interesting one. All right. And before we jump into the next deal, we have a word from our sponsors. Today's sponsor is Microacquire. And Microacquire is the number one startup acquisition marketplace. And it is simply the most efficient way to buy and sell startups when you're ready to make your next move. So we've had Andrew, who's the CEO and founder of the company on the pod before.

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And here's back to the episode. So Michael, you want me to read this one or are you going to do it? Yeah, go ahead. All right. So this one is an area that we don't know a ton about, we thought was really compelling. It is a 118 acre outdoor retail cannabis farm for sale in Boone, Colorado, which is in Pueblo County, Colorado, which is south of Denver. They are asking $5 million for it. And it cash flows $2.5 million a year. So it's 2x cash flow they're asking for it. That being said, it also says the gross revenue is $2.5 million. a year. And EBIDDA is NA. So I have a few questions about the definition of cash flow and EBITDA and revenue in this case. So I think it was established. You have to be careful that the answer there is, we don't report any income. So we're cash flow in the hell of this thing. And by cash flow,

they mean like actual suitcases of Hondos. Yeah. So yeah, as cash flows like crazy. You know, so they've got, it says it's an indoor and outdoor farm. They've got two licenses and 3,600 plants. The owners are retiring after only four years in the business from 2017 to today or five years in the business. It is a fully operational turnkey multi-license growth for sale. The sale includes two tier one retail marijuana cultivation licenses, 100 acres of land, two irrigation pivots, three wells, three-bedroom custom ranch home. live near all of your cannabis plants.

Two cultivation and processing buildings, a whole bunch of power, three-phase power that's already there and all the growing and processing equipment. So that's about all it says here. But one thing that's interesting that says, Pueblo County has a moratorium prohibiting new grow licenses. The two included licenses are both Tier 1, 1800 plants each, which seems like they're fully saturated on their licenses. and they can also be upgraded to much higher plant counts through the MED, whatever that means.

The current license outdoor field is 800 by 400 chain link fence barbed wire cameras flood irrigated. Growing cannabis under the center pivot would require a modification of premises application with compliant fencing and cameras. And it says the guy is retiring and it says it's a home-based business, but as we've learned, the home is on the farm. So you live right here at the business. So I'm just interested because there's probably so many layers of this business. What do you guys think of this one?

I do like that they say they'll accept trades because I'm like, what would I trade for a pot farm? I love that one. I'll trade you my poppy farm for your cannabis farm. Yeah, why not? You know, go full Ozark on this stuff. Yeah, David, what do you think? Yeah, this one just popped out again as like, I feel like one of these like the parts are probably more valuable than the whole. I think Bill made a good point about the licenses. I think

there's like more marijuana dispensaries in Colorado now than there are liquor stores. And so, you know, the wholesale market is very competitive. Even, you know, we have recreational marijuana here in Massachusetts, and it's a much more limited regime in terms of licenses. And you can just see that in the pricing. Like, you can go out to Denver and it's, you know, 60, 60,000. costs at the retail level 60% less than what it costs here. Or it's like 40% less than what it costs here. And I think that's in part because there's just so much product flooding the market. I also think it's interesting that this is only kind of suited for outdoor.

Probably missing a couple growing cycles given the climate. You probably do, right? There's probably not a 12-month growing season. But, you know, irrigated land in Colorado probably has some underlying value. I'd be curious if there was water rights involved with this too, because those could also be quite valuable. Yeah, and again, like just the curious, you know, romantic idea of owning a pot farm in rural Colorado seemed somewhat interesting. That's an interesting point about the weather, because for folks who have never been to Pueblo County, Colorado, it is the desert. It is freezing in the winter, and it can get very hot in the summer, and it is also quite dry.

So super interesting point to, David, about the water rights and how are you getting enough water to irrigate this land? It gets very complicated out west. Yeah. And it sounds like maybe they have wells there or something. But, you know, if there's underlying water rights, too, those could be quite valuable of something just to consider when doing the Bureau evaluating this business. And I wonder about like the. I was going to say, let's talk about something important. You're only like 90 minutes from a ski resort if you do this business.

So anyway, sorry. Yeah, I mean, it's not like the, and you're on the Arkansas River. I mean, it's, I mean, I wouldn't say that that Pueblo is the number one choice for people moving to Colorado. But it could be a, you know, it's definitely improved like most of the front range locations over the last couple decades. Yeah, this is a solid hour east of Pueblo. Yeah. Just looking at the map, maybe 45 minutes east of Pueblo. Do you guys think this one, are they selling the dirt here?

Is it clear that they own the land? or are they potentially leasing it? I got the impression they own the land, but just because I guess with the ranch house, but that's fair. I'm kind of implying that that it came with it. Well, it's just interesting because they list the real estate at $1.2 million in the listing, but then they're asking $5 million. So maybe they do, maybe they do own it and then it's like the real estate plus the business.

Yeah, yeah. Well, that's what I was about to say. At its core, you're buying a farm here and you're dealing with, the vagaries of farm economics, which is, you know, you have to dig into, you know, how much limitation on supply is there. Turns out there's only so many licenses in Pueblo County. What about the other counties? You know, is there, is there a, you know, the equivalent of the kind of the big buying chains that are going to come in and dictate to you what your prices are, you know, like there is in chicken production or corn or soy production, like all of those, ultimately, like,

I understand why they're selling for two times earnings because it's a form. You have to dig in all that stuff. A couple other interesting points here. When I lived in Colorado, I knew a guy. He was a commercial real estate broker, a young guy. And when marijuana was recreationally legalized in 2014, he pivoted his business to become a commercial real estate broker exclusively for grow operations in Colorado. out and he absolutely crushed it.

He became like the guy if you were trying to lease a commercial site and then upfit it for indoor grow. And the thing that reminded me of it is the power here that they explicitly go out of their way to mention in this listing that their indoor grow operation is already outfitted with 300 KVA of three-phase power and lights and all that stuff. because apparently it can be millions of dollars just to get the utility to come in and put in the power that you need to run all these lights. So I think if you were looking at this business, much like the last one where you're underwriting, you know, really what are the assets worth here? Like what is the replacement value on this setup?

Like it's 100 acres irrigated land with wells and an indoor grow operation with power in place and all the equipment. If I had to build this from scratch, what does this cost even assuming I could get the permits? Yeah. Yeah, plus the permitting process. And, you know, the Colorado regime is very well known at this point. It's been many years. So I think at least from a regulatory environment, you kind of know what you're getting into. Yep.

It does say on here that there is a moratorium on new grow licenses in Pueblo County. Now, my question is, does that matter? because I'm probably shipping my product from Pueblo County all over the state of Colorado, right? And so similarly, unless there's a moratorium on new licenses in Colorado, does that actually provide me much protection? Right. You know, or is this a local, you know, local product thing where people wanted to come from where, you know, consume it where it's grown?

I don't know. Yeah, I mean, I was going to say the, I think it gets transported throughout, you know, the state, I think it's just a function too of zoning. And you know, you're saying about your friend that moved into the, the, the, the, the, the, the, the, the, the, the, the space, you know, all of the industrial real estate in core of Denver got bought up and converted into grow operations. Yes. Because of all the reasons you said with power and the like. It was bonkers. So, I was there in Denver and Boulder at the time looking for a warehouse for my e-commerce business at the time. And I'm going to butcher the numbers. But it was.

something, as I said, marijuana got legalized in 2014. And from 2014 to like 2016, which is about when I left, the per square foot lease rate on like grow suitable, but basically also e-commerce warehouse, real estate in Boulder and Denver area went up by like 50 to 80 percent in like two years just from the demand, the grow house demand, which was fascinating. I don't know where it's gone since. I mean, I've been gone from there for five years. The disruption to the local market economics from the legalization of marijuana, even unrelated to the marijuana industry, was fascinating. Yeah, yeah, yeah, because it's such a tight corridor of industrial space there. Right, right. And we ended up not leasing anything. I ended up moving to Charlotte,

North Carolina, I did it here, partially because it was so expensive. It was wild. So I think there's assets here, much interestingly, much like the cement pumping, understanding the replacement value the assets you get and it's important. All right. Anything further on this one, guys? All right. Awesome. Well, let's wrap it up.

David, it was awesome having you here today. So insightful on the oil and gas industry and the parallels to cannabis farming were also super interesting to me. So I'd love to just give you a chance to make an ask of our listeners. Where can they find you on the internet and what can they do to help you out? Sure. You can find me on Twitter, David Rontel. You also find me on LinkedIn.

If you have any questions about the oiling gas business or minerals and royalty specifically, feel free to reach out to me. My email is D-R-O-N-T-A-L at overlandoil.com. Awesome. Thanks so much. I bet you will get some curious emails from folks. So thanks for being here, David. It was awesome to get to know you a little bit and learn about your business.

We'll see you next week. Thank you.