Having the biggest driving population right now, the common stereotype about oil and gas is that they are simply for fuel. However, they are more than just that. For Financial Friday, Chief Executive Officer of LoneStar Asset Management, LLC, Beau Flowers talks from a 30,000-foot view about the oil and gas industry – where it is at right now, and where it is going. He touched on the impact of the new millennial generation, the green movement, and the downsides of the industry. Sharing lessons for success, Beau also gets into what makes or breaks an opportunity, how to set up operational structures, and what are some of the poor choices in the industry that have led to bad outcomes.
Financial Friday Episode 5: Breaking The Common Stereotypes About The Oil And Gas Industry with Beau Flowers
I have an interesting topic. It’s oil and gas investment and I have as my guest, Beau Flowers, who’s the President of Lone Star Asset Management. He participated in the Cash Flow Wealth Summit and also was one of the sponsors. My relationship with Beau is still new so I’m excited to learn more about his business and also about the oil and gas industry that I have some experience in. I can’t wait to get into it. Beau, welcome to the show.
Thanks for having me.
We talked a little bit before we started this interview and I look at the oil and gas industry. There are so many different facets of it. With the social opinion of the biggest driving population right now, which is the Millennial generation who are making their ways in the workplace and they’re living differently. You look at oil and gas, the stereotype is that it’s for burning fossil fuels and it’s for cars and for transportation and there’s a big movement for green. It’s one of those things where the stereotype and the misconception people often have about the oil and gas industry is it’s just for fuel. Why don’t you talk maybe from a 30,000-foot view about the oil and gas industry, where it’s at right now and where you think it’s going and then we’ll go from there.
The new Millennial generation starts establishing itself as the prominent figures in the economy and in society. The oil and gas business is starting to get somewhat of a negative connotation towards it with the old pushing for the green movement. Wanting to eliminate fossil fuels is becoming more of a thing that you hear about. At the end of the day, where we are right now and where our civilization is right now is we’re nowhere near being in a position to where we can eliminate or even come close to eliminating the use of fossil fuels. It’s still the most prevalent and probably one of the most important industries in the economy now. This is where we are right now.
Oil and gas business is so big and so broad and there are so many different ways to get into it. What we try to do is find our little niche, find our little corner in the industry and do specific things that are profitable to us and profitable to our investing partners. Essentially, our main concentration is wealth preservation. You can go out into a wide variety of aspects of the business where the risk factors can be really low and really high. It depends on what your tolerance is. We try to carve out our little niche in to this already prevalent and essential aspect of our economy. We try to be as profitable as we can at that and not concern ourselves with the rhetoric or any connotations that might be evolving with this Millennial-driven society.Fossil fuel needs to make advances; we need to have different kinds of renewable energy sources.CLICK TO TWEET
You look at the perspective that we have as Americans and we often place our perspective of what life is, how things work and assume that everybody else in the world has that perspective. My wife grew up in Mexico and I had no understanding of what poverty was right until I visited and experienced the neighborhood she grew up in and how people live there. People are happy there, but yet it’s a totally different perspective. If you go to third world countries, it’s the same thing. If you look at the emerging markets and the massive economies that are on the rise, whether it’s India or China or Africa, these are economies that don’t have this massive dependence on fossil fuels.
However, because they are emerging and because technology is integrating into their emergence, they’re obviously going to have demand. You look at the demand now for oil in China, the demand in other parts of Asia, in India, as well as in Africa, it’s massive. Maybe the US and in our production, we’re headed toward more of a green and setting trends there. The transition from being exclusively dependent on fossil fuels to slowly decreasing that dependence, it’s not a one-year, five-year or ten-year. It’s probably a couple of decade transition. What do you think about that?
That’s a very good point. There are two things that I would address about what you said. The first was our dependence and our demand for fossil fuels and the things that fossil fuels provide us is not decreasing. If you look at the actual facts and statistics of the supply, the demand and the usage of fossil fuels to provide the things that we need, even above and beyond in transportation, it’s still a very needed commodity. One thing that I would address, we mentioned the push for Millennials and now being such a big member and prevalent member of society, is they’re also a very vocal generation class with social media.
They have a different medium to vocalize their opinions. It’s not like it was in the past where it was close to your neighborhood or the bar where you hung out with your friends and the coffee shop. Now, it’s like they take that message and because they grew up on technology, the message and the opinion just magnifies.
Just because their opinion or their word or message is broadcast in such a wider spectrum now than it ever has been in the past, that doesn’t mean it’s right. It doesn’t mean that they’re right all the time. I’m not saying that we don’t need as a society to start transitioning into other alternatives. Fossil fuel needs to make advances and we need to have different kinds of renewable energy sources. I’m certainly not saying that. I’m just saying right now, we are where we are. From an economic financial standpoint, our goal is to take advantage of where we are and where we’re going to be for the foreseeable future. That’s what our goal is in our firm. The second thing I would address, you were mentioning of geographic locations and cultural backgrounds influencing what your views are and then perceptions are of different things. That brings me to why am I in the oil business.
Financial Friday: The opportunities with any industry are what exist in the past and what exist in the future.
I’m from Texas. When you grow up in Texas, from an outsider looking in and the guys that aren’t familiar with our industry and aren’t familiar with our culture, when they think of oil business, they get this negative connotation because they think of J.R. Ewing sitting at the top of a big building in Dallas, smoking a cigar with a big cowboy hat and making money hand over fist. That’s the general connotation that folks outside of our industry look at it as. When you grow up in it, when you’re in Texas, you look at it not as something like that. You look at it as your lifeline, as our livelihood. It influences every aspect of our day-to-day lives at some point or another.
We’re talking about people that are running the companies, producing the oil all the way down to 80% of the working families that I grew up with in my small town were employed and fed their families from this industry. Where we’re from, it’s definitely quite the opposite of a negative outlook. It’s our lifeline. You can even see our business is very cyclical and it has its ebbs and flows for sure. You see how detrimental those ebbs can be and those low points in the business can be. That’s why we hang onto it and try to push it and still be a part of this industry because it’s what got us here from every definition of the word.
The opportunities with any industry, it’s what exists in the past and that’s what exists in the future. I’m looking at just the oil and gas industry, it’s a major part of our country. The opinion and the stereotype of guys with the big hat, sitting up and smoking cigars, I’m sure that that’s changing. I want to go there really quick because one of the things I’ve perceived in the financial industry over the last ten to twenty years is there is a significant shift. The 2008, 2009 financial crisis forced it in a sense where individuals were taking matters into their own hands. Individuals were not using stockbrokers, were not using money managers but also they pivoted to these Robo platforms or technology. There’s such a quick evolution and a lot of financial advisors or the financial industry has a difficult time keeping up.
By the time they try to steer their battleship in the direction of where things are going, it’s changed again. There are new trends and there are new demands. I look at the same thing with the oil and gas industry where it’s controlled by some big players. Because of how big they are, it’s sometimes difficult to pivot which provides opportunities for smaller firms to go in and find a niche and capitalize on that. Maybe talk just briefly about what you see as your industry and how the guard is changing and how things are evolving and the opportunities that are presenting themselves to smaller firms.
I’m glad you brought that up because what you mentioned and what you talked about is our driving motive why we started this company and why we do what we do. It is because of the different natures of the business between large scale operator like ExxonMobil and ConocoPhillips. Did you hear about Valero? Did you hear about every day? You pump your gas in? A lot of people think about the old business, that’s all they think about. They are the biggest players, but there’s a whole lot in our industry that goes on outside of that. Since about the mid-late 1990s and early 2000s since we went through what’s called the Shell play revolution where we have essentially discovered a brand-new way to efficiently produce this massive wealth that the big guys produce. That’s all they’re concerned about with now is going in and looking at $50 million developments, drilling 30, 40, 50 wells or whatever it is. All at once of these extremely expensive wells to drill to have these astonishing production rates.It’s easy to get stars in your eyes in this business. You see opportunities and all you think about is the upside.CLICK TO TWEET
When that shift happened, it started happening in the mid-2000s. Whenever the big companies completely shifted their focus to those developments, there was a ton of what we call the conventional place that was left. That wasn’t what they were concerned with anymore. What we do in our company is we follow where these big companies started and spent their money researching and developing and then all their resources, figuring out where to drill and then how to drill in certain areas. They never finished essentially. When they shift their focus to a different business model of the Shell play, we go in and acquire their data.
We acquire all their records, everything that they had and we picked up where they left off, which for us works out well because we get a plethora of research and data that would be uneconomical for a company of mid-level or small level producer to be able to afford that level of research. We can acquire that from them for a much reasonable financial compensation. We can go in and pick up where they left off. They had every intention of doing and then the revolution came along, they shifted their focus and they forgot about this stepchild. It’s not quite as good as what they’re doing out there, but it’s good for producers like us. That’s our philosophy and what we try to do. We’re evaluating our prospects and it’s worked out well over the last six or seven years.
That’s where things shift with the discovery of new ways in which you can extract oil and then finding big places that have never been tapped before. That’s where all the big players can go, but there are limitations where they need to have a lot of money at work and require a lot in return to get a good return on investment. When it gets to be smaller, that’s when the numbers don’t make as much sense as they did previously. It allows you guys to go in and to clean up. I look at this and we’ve had some guests on over the last several years in regard to oil and gas. I know that a lot of your education and what you provide in your website and talk to people about what goes into a lot of the details of why this is a significant opportunity which I completely agree with. I want to get into what makes or breaks an opportunity, which isn’t necessarily the opportunity itself. On the Cash Flow Wealth Summit, the presentation that I gave talked about Robert Kiyosaki’s B-I Triangle and how a successful product is supported.
A product could be an investment, it could be a commodity or it could be a business. That’s where the least important thing is the actual product, service and investment. The most important thing is the underlying infrastructure that supports it. My exposure to oil and gas, I’ve seen some big success but I’ve seen also some failure because of mismanagement and poor management, poor understanding of details and poor communication. It wasn’t intentional, but I’ve also seen some intentional things too where it was a complete fraud. I look at you have an asset management company and you’re in this industry, I’m sure you’ve heard way more stories than I’ve heard. How do you use the lessons of others and use the failures and the successes to build your operational structure? How you’ve set up your business to be different and successfully execute on your business objective in this massive opportunity?
There are several different answers to that. One is in some cases learning the hard way. One thing about our business is that you get amazing tax benefits better than any other investment vehicle that I know of and any of my investors have known of, but these investments did not come without risks. Anytime, no matter what you do and in our business, it’s going to have a risk factor to it. Probably a little bit higher risk factor than any other investment vehicle most of our partners have invested in. What I found is the old saying, “Keep it simple, stupid,” is what we’ve learned works best for us. In this business, especially when you start having a footprint in the business over a few years as we do now. You can imagine the opportunities or deals that come across our desk of folks that think they’ve got the next biggest well in Texas or whatever. It’s hard and I’ve seen companies that I worked for in the past and even my company and being guilty of it myself to some degree.
Financial Friday: A product could be an investment, a commodity, or a business.
Sometimes it’s easy to get stars in your eyes in this business. People come and you can see opportunities and all you think about is the upside. We’re talking tremendous upside. We’ve had deals that pay back the entire investment within 30 days, which is unheard of in any other typical investment vehicle. Those deals are few and far between. We’ve built our team. I’ve got a very dynamic team of close-knit group of guys, a 50-year veteran in the field, Andy Whitehead, our operating partner that has an old school mentality of evaluating our deals. He and his dad has been doing this for 50 years using his own money for the most part. He evaluates them very conservatively. We’re not necessarily looking to knock one out of the park every time, but we’re trying to put us in the best opportunity to make some money that puts us in the lowest risk opportunity of losing our money.
That’s the real hard thing in our business to evaluate is to be able to walk away from those opportunities that are presented to you that have this tremendous upside that put stars in your eyes. It sometimes makes you forget about the heavy risk factor that comes along with it. We’ve got to be disciplined in our company checks and balances system to be able to pull the reins back, walk away from deals and stick to a more conservative approach that might not have the tremendous upside as the other deals. It also doesn’t carry near the risk factor and it gives our investing partners and ourselves because in every deal we do, we’ve got our own money into it. We’re shoulder to shoulder with our investing partners in everything that we do. We also have more motivation than anyone to preserve our capital. It gives us the biggest opportunity to help that grow and not lose it, which is something that can be done pretty easily in this business if you’re not careful.
It’s the worst thing to happen in any business. I always look at it because we’re in Salt Lake City and our office is right next to a huge conference center that takes up an entire city block. I sometimes equate it to a restaurant starting two days before one of the biggest conferences comes into town. It assumes that the rest of the year is going to be like that weekend where they have people out the door and you’re hiring and you’re ordering food. Before you know it, everyone’s gone and there are three patrons in the afternoon. It’s one of those things where you have to be very cautious. I’ve seen that and that’s one of those reasons to have good structure. A good structure allows you to make good decisions when things don’t go as planned. You have plan B is you have communication, figuring out what can we do at this point relative to whatever the challenge is.
Every opportunity and every business get these curve balls that you’re not prepared for. It could be legislative curve balls, it could be economical curve balls and in your case, oil prices. You don’t know what OPEC is going to do here and here. I have massive options market in the oil and gas industry. It’s one of those things where if you have a good structure when things go wrong, you make the right decision, not when things are going great. What have you seen maybe as a result of poor choices in the industry that have led to some pretty bad outcomes?
I’ll look at it from a different perspective because what we try to do is we try to make a good outcome for us based on some poor decisions of other companies. It is not predatory or it’s not something we go and prey on companies. With this cyclical environment, just like you’re talking about when nobody knows what oil prices are going to do. When they’re hot like they were in 2008 and then again in 2012 and 2013, all the typical governing rules of economics go out the window. It’s the Wild Wild West. That’s what I call it in the business. When oil prices are hot, nobody cares about what they’re spending. Nobody evaluates budgets. Nobody looks at anything except what can we do to get the most oil out of the ground right now. A lot of companies make a lot of money doing that. I can see where those mistakes are made, but a company did that in our area. They’re in Southeast Texas where we are very active.A good structure allows you to make good decisions when things don’t go as planned.CLICK TO TWEET
A company that was doing well right there in 2010, 2011 and 2012 were bringing in after expenses $34 million a month, really big money and got overextended. They got greedy, put a bunch of money into some stuff that they weren’t with. They borrowed a bunch of money against their production to expand their operation into something that wasn’t their bread and butter. Then when the prices fail, that was it. They were done. Their financial backer out of New York pulled their funding and they were done. I went in 2016 or starting in late 2015 and we finalized the deal in 2016. I went in and bought up. If you put it in perspective with all they spent probably $22 million, $23 million worth of their assets for pennies on the dollar. When I say pennies on the dollar, I mean that in the truest form. I went in and revamped them, repumped it up and made a lot of money off of what they couldn’t keep going because of their poor decisions whenever the prices were high.
The big part of the structure is knowing what you say yes to and what you say no to. It’s hard sometimes to say no to that greed factor because that’s one of those irrational drives that usually kills people. When the decision is made because of that and not a rational model that dictates what your business parameters are. I think we’re all guilty of it. I certainly am, saying yes to way too many things. You lose focus and you don’t have any focus anywhere. Things end up not working out in a few areas and it hurts. If you go into and understand, “This is what we say yes to. Here are our parameters. This is what we say no to,” it makes it easy so that when that volatility produces something that seems like, “This is a five-star star in my eyes, we’re going to make a killing.”
It’s one of those, “Should we do that?” That’s why having a good team, having a good debate, having a good perspective allows for the best outcome. That’s where I went down that road is because you’re hitting on certain things where that’s evident in so many industries. Real estate is one of them where people are buying stuff, pennies on the dollar. It was only the people that understood what was going on that had the pennies to pay. The people that are letting it go, they didn’t have pennies.
I haven’t learned only from other people’s mistakes, I’ve been guilty of it myself. I tell my business partners, the guys that we do business with every day that four or five years ago, what I thought was literally the worst thing that could have happened to me in business and even in life at one point with some deals that didn’t go as we planned. That in our early stages when we needed them the most, that turned out to be one of the most beneficial things that ever happened to me in my career. Because had I not took those bumps and bruises early and saw those curve balls that this industry can tell you first hand right off the bat and learn how to sustain from those curve balls, then I wouldn’t be where I am now and we wouldn’t have the business model that we’ve over the past 18 to 24 months has proven to be successful. Like the tortoise and the hare, go back to slow and steady wins the race. It’s exactly what’s worked for us.
In business and investment, I’ve learned whether it’s hiring employees or investing in a company or bringing a company on as a strategic partner, aligning with this firm or that firm. If they haven’t had their bumps and bruises, you have no idea how they’re going to behave when they get them because that’s an inevitability. When things are at their worst and people do the right thing, that’s one of the greatest signs you can have. That’s ultimately what happens is when things don’t work out and people are not used to failure, they’re not used to things not going as planned and what to do about it. You could get a person that has great morals, great ethics and do the right thing or you can get the other side where they don’t make the right decisions.
Financial Friday: People who are not used to failure are not used to things not going as planned.
That’s the thing, we all have our bumps, we all have our bruises and knowing that and having someone that you align with in whatever capacity and that hasn’t had them, I think that’s one of the worst decisions you can make. This has been awesome. I appreciate you being candid because this is what investment is about. There’s always an inherent risk you have and there’s not just one type of risk. Like we mentioned, you have political risks. You have an economic risk. I would say though the prevalent risk that you have is people risks. That’s where understanding the dynamic of a team and the dynamic of a company, how to communicate and how to have good operations, that’s where businesses make or break themselves. Thanks for sharing your opinion and perspective there.
Thanks for having me on. I enjoyed it. As I said, the investments that we offer and folks that invest in our project are specific target audiences. It’s definitely not for everybody but at the end of the day, we’ve hopped on the risk and the downside of the business. At the end of the day, we wouldn’t be in it and keep doing it if there wasn’t more money to be made in this than any other business that I know of. We go out there and we sustain those risks and we sustain those bumps and bruises. When we do have success, which is way more often than not, the return that we see in this business, even in this modern oil prices are just astronomical compared to normal investment vehicles. There’s a reason that our folks keep investing with us time and time again. The reason we keep putting our money into the projects time and time again because there is a lot of money to be made out there. That’s why it’s one of the biggest backbones of our economy and society in my opinion.
Why don’t you give the listeners ways that they can learn more about you, learn more about your company, learn more about the industry and the specific opportunities you have available?
The best way to check us out is to visit our website at LoneStarAssetManagement.com. From there, you can get the history of us and the background of our company and links and resources to help you learn about the industry and the tax benefits of investing in oil and gas, which are phenomenal and things of that nature. If it’s something that everybody’s interested in discussing further, when you get on the website, right there at the bottom of the main page. You can schedule a free one-on-one consultation. Usually that consists of about ten to fifteen minutes conversation with me or somebody here in the office to explain to them what the investment upside is, what the risk is and what we’re currently offering. What our goals are for our folks in building a small oil and gas investment portfolio outside of their primary investment portfolio and just go from there. If you have any questions, all our contact information, phone number and everything is on there. We would be happy to talk with anybody interested and get any questions answered that we can.
It’s been great. Thank you again for your time. Thanks again, Beau. I’m sure you’ll have an awesome year. Best of luck to you and thanks for being on.
Thank you for having me. I look forward to talking to you soon.