Please reach out to Paul on his LinkedIn here
Highlights of the Podcast
00:00 – Intro
01:37 – Market Updates
07:31 – What is 10:31 Exchange and How it works
08:55 – 1031 exchange and diversifying income sources with non-traditional assets such as oil and gas, mineral rights, and ESG.
10:04 – Why are 1031 exchanges hot right now?
15:01 – 1031 exchanging in the oil and gas
21:48 – Where can people find Paul Graham
22:29 – Outro
Follow Stuart On LinkedIn and Twitter
Follow Michael On LinkedIn and Twitter
Video Transcription edited for grammar. We disavow any errors unless they make us look better or smarter.
Michael Tanner: [00:00:16] What is going on Everybody, Welcome into another edition of the Daily Energy News Beat Stand Up here on this gorgeous Wednesday, April 26, 2023. As always, I’m your humble correspondent, Michael Tanner, coming to you from an undisclosed location here in Dallas, Texas. Another solo show for me today. But we have a special treat at the end, which I will get to after our quick market update. [00:00:37][20.1]
Michael Tanner: [00:00:37] Guys. It’s a pretty short show for me today there’s not much going around there’s just a lot of green energy news Stu will be back tomorrow. So I figured we’ll cover all the green energy stuff today. We’ve got a couple of earnings and some oil and gas finance news to cover, so I’m going to stick with that. [00:00:49][12.2]
Michael Tanner: [00:00:49] Mainly what we’ll cover is Matador and Range Resources drop their earnings. I think that’s interesting and it quickly cover what happened in the oil and gas markets, guys. And then at the end, I have a great interview with a team member, Paul Graham. I will get to that after our segment here shortly. [00:01:03][13.6]
Michael Tanner: [00:01:03] But guys, as always, these stories come from the world’s weirdest website, EnergyNewsBeat.com we need to continue to beat Stu, so please download this episode. Tell your friends, share this this specific episode so that we can have enough downloads to beat Stu because his solo shows somehow do better than mine which is depressing, but that is okay www.EnergyNewsBeat.com the best place for all of your energy news. Stu does a fantastic job of making sure all of those stories are up to date. Dashboard.EnergyNewsBeat.com our data and news combo get it while you still can. [00:01:36][32.3]
Michael Tanner: [00:01:37] I mean from it from an oil and gas finance standpoint today’s guys prices slumped a little bit on two things. We had the dollar index rise. A stronger dollar again is going to indicate lower oil prices, but also some interesting weakness coming out of not just the global economic stuff, but, you know, obviously first Republic, you know, over 100 billion in deposits sliding over the last two days. You know, not going to be good when the dust settles on that. [00:02:01][24.9]
Michael Tanner: [00:02:02] I think mainly we saw consumer confidence drop a little bit I’m a little bit concerned. You know, we also had some weak refining margins that are dropping globally. You know, the EIA or the IEA dropped some interesting data there. [00:02:13][11.3]
Michael Tanner: [00:02:14] So, you know, I need to quote from Dennis Kessler he’s the senior VP trading over B OC Financial, some sort of best. The near-term pressure has been from rising interest rates and the refinery run rate margin contracted would be a sign that demand is slipping. So that’s not good. At the end of the day, we are a supply-demand business. So as demand goes, so will prices go. [00:02:34][20.4]
Michael Tanner: [00:02:34] But again, today we are keying off that dollar index and some of that global fear. I thought something is very interesting we got a 6 million barrel draw estimated from the API. As you guys listen to this on Wednesday you will know what the EIA crude oil storage draw is. But as we sit here about 715 API on Tuesday, the API thinks it’s going to be a 6 million barrel draw. So take that into account when we see that number why it’s so crazy as of a forecast that of 1.6 million barrel drop so we got to love that. [00:03:02][27.4]
Michael Tanner: [00:03:02] Move it over to natural gas we actually saw a little bit of a rise up to about $3.32 as we opened the nightly trading session. Currently, yesterday’s session ended about $2.15, which is a little bit lower off the ring. Again, nat gas weather specifically said that the pattern for the second week of May favors the northern United States, warming into the perfect 60 to 80s while the southern portion warms in the 1780s for light to very light national demand, there’s some risk that cooler air lingers across the Midwest. But generally speaking, the background should remain bearish through mid May, according to the firm, unfortunately so. We will see. We will see what happens. On the natural gas side. [00:03:36][34.3]
Michael Tanner: [00:03:37] Two companies drop earnings they range resources out of Fort Worth and Matador we’ll start with Range Resources again. These are natural gas specific operators. You know, to give you guys an idea, this is where we’re going to start seeing some of some of the different types of views because now we’re going to get into a little bit of choppier waters. Natural gas specifically is going to be a little bit different. [00:03:58][21.6]
Michael Tanner: [00:03:59] But in this case, I like the highlights you know, Cash flow from operator is bought for in a 75 million. They only spent about 150 million in capital on 26% of the 2023 budget. I did a small repurchase program of 400,000 shares and accumulated cash balance. It’s a 228 million price realization, including hedges of $4 per MCF is pretty crazy considering that’s about 50% over natural gas. They’re getting some pretty good NGL realizations out of the Mont Belvieu and there are positive NAT gas differentials, 2.14 Bcf per day, approximately 70% natural gas. Good job for everyone over there at Range Resources. [00:04:35][36.2]
Michael Tanner: [00:04:36] Next up, we’ve got Matador there just actually down the street from us, you know, turning left out of a lot of places they go. I see they’re big plays down there in the Galleria. Pretty, pretty crazy. You know, they closed their acquisition of Advanced Energy Partners for 1.6 billion. Added about over 100 million barrels of oil and natural gas to their reserves. And you know, specifically on top of the 375 that they are 387 that they already had gives an idea. [00:05:00][24.6]
Michael Tanner: [00:05:01] They’ve got over a 150,000 net acres in the Delaware Basin, PV out there, PV ten values like 2.6 billion. But to give you an idea, you know, they’re doing about 58,000 barrels a day and. Cash provided by operating activities 339.5 million adjusted free cash flow $57 million net income 161. Net adjusted net income hundred 180 million adjusted EBIT 365.2 million. [00:05:23][21.5]
Michael Tanner: [00:05:24] And to give you an idea, they spent about 294.9 million from here. So, you know, they keep continuing to crush it on oil and gas as oil prices stay up, everything will stay up. So we’re going to see a lot more of these earnings drop. And it’ll be interesting to see what everyone decides to tout. But what I want to do right now is in the absence of Stu, I want to bring on somebody. And and I had actually had an opportunity to talk with Paul earlier. [00:05:51][27.3]
Michael Tanner: [00:05:52] You know, Paul Graham is is a managing director here at Sandstone. He heads up our capital raising division, which is really a behind the scenes. It’s kind of funny. Capital raising you’d think would be a front facing product. But these really are our capital raising efforts have really gone on one behind the scenes, led by both Stuart and Paul. [00:06:07][15.8]
Michael Tanner: [00:06:08] And Paul has, you know, backgrounds of commercial real estate, he’s been around the game, you know, owned, has owned and acquired every type of property you can imagine and can really speak the language of the average everyday investor. [00:06:21][13.5]
Michael Tanner: [00:06:22] And the interesting part is we’ve been seeing some huge, huge movement in this idea of what’s called a 1031 exchange from real estate to oil and gas and, you know, I could do a great job of explaining it now that handed over to us, but we’re going to explain it there. [00:06:37][14.7]
Michael Tanner: [00:06:37] So, you know, again, we appreciate I appreciate everybody checking us out. Stay tuned. I’ve got a great interview with Paul coming up, but I’m going to go ahead and throw it over. Enjoy the conversation, guys. We’ll see you tomorrow. [00:06:47][10.2]
Michael Tanner: [00:06:48] One could argue I gave you too much of a hype up in that intro, but nonetheless, we’ve got the one and only Paul Graham here. Appreciate you taking some time out of your busy day to talk with us because, man, we’re seeing some absolutely crazy things going on right now at the intersection of oil and gas and real estate, which is really where we live, specifically here at Sandstone. [00:07:08][20.2]
Michael Tanner: [00:07:09] You know, I think the easiest and the best way to start this off is to talk a little bit about what exactly at 1031 exchanges from a high level. And then I think we eventually get into how that sort of intersects with oil and gas. But being a resident real estate expert here at Sandstone. Talk to us a little bit about what that 1031 exchange is and what it looks like. [00:07:31][21.6]
Paul Graham: [00:07:31] Yeah, you bet. So just to give like a high level for it, right? It certainly those can research more into it, consult tax professionals to ensure like what those amounts could be as was also talked to tended to an exchange intermediaries. There’s a bunch out there they’re certainly willing to help you with a 1031 exchange. Therefore they can be good resources as well. But just you get, you know, the quick and dirty here. [00:07:54][22.5]
Paul Graham: [00:07:54] Really. Section 1031 of the U.S. tax code is allowing investors to defer capital gains captured from that or really take it in from the capital gains of in this case, you know, real estate, you know my expertise and avoiding depreciation recapture. So what that really gives you the ability to do, it’s just like you played Monopoly, right? You had that little house, you bought it, and then you eventually, you know, scale to that hotel, right? [00:08:16][22.0]
Michael Tanner: [00:08:17] Yes. [00:08:17][0.0]
Paul Graham: [00:08:18] Monopoly fan, you went to the skyscraper monopoly, Max, favorite game of all time. And so as you go through those different things, you sell the property along the way. The 1031 exchange allows you to take the to avoid paying the depreciation recapture and the capital gains that you’ve had. [00:08:33][14.9]
Paul Graham: [00:08:33] So especially if you’ve had properties on these past couple of years and you’ve seen a crazy appreciation on either the residential or commercial side, you’re then able to take that. And after, you know, sales expenses, right, typically working with the broker, you then be able to roll that in directly into a property. There are some rules around it. So you talk a little bit about those. So people have a good understanding too. [00:08:54][20.6]
Michael Tanner: [00:08:54] I think it’s a great overview. I think the biggest you mentioned like kind. What does that exactly mean? Like, I mean, I’m assuming just like real estate for real estate business for business, you know, Is that what does that what you mean by that. [00:09:07][12.8]
Paul Graham: [00:09:08] Exactly. Yeah. And so at least from my research, you know, doing a residential property, for example, cannot be considered like kind for getting the business right, not like right. But when you look at a property, whether it be residential or commercial, going into something creative, if you will, such as the oil and gas, mineral rights, ESG, just all those things that a traditional real estate person would have no idea that’s even possible. They just barely pump gas in their car. Right. Because they probably have a Tesla at this point. [00:09:38][30.0]
Paul Graham: [00:09:38] You’re then able to, you know, understand those options for like for like. So that’s really where, you know, someone like us comes in to understand, hey, what do you have? What does that overlay with? And then working with those 1031 professionals in those myriad intermediaries to ensure that, you know, they fit the bill of which you’re off to the races and you’re able to have a diversified income source with something as oil and gas. [00:10:03][24.8]
Michael Tanner: [00:10:04] Why are 1031 exchanges hot right now? I mean, that’s all I hear about right now calls every day from stew man he’s telling it we are knew 1031 exchange you. 1031 I didn’t hear this for a year last year. You know, I would say the themes of capital raising and, you know, I’d be interested on your side on the real estate, but in the in the oil and gas side of it, the capital raising in 2022 was all centered around or excuse me, in 2021 was all center around tax deductions. [00:10:29][25.5]
Michael Tanner: [00:10:30] Everybody got huge stock market gains. The pitch was tax deductions, tax deductions, tax deductions. In 2022, nobody cared about tax deductions. Why stock markets suck? So it was really interesting that the way you had to pitch dismissively to raise money in oil and gas, which is a tax in itself a tax deferred asset, much like the 1031 exchange. So I guess my question is rolling into 2023, what’s making the 1031 exchange hot? Because I’m somebody that doesn’t even know what at 1031 exchanges and it’s all I’m hearing about. [00:11:02][32.1]
Paul Graham: [00:11:02] Yeah, you bet. And so I got a little bit about my process of doing a 1031 exchange. So fundamentally, at least what I’ve seen and the people I know, circles I’m in and investors in the market again, really just from the past, call it 3 to 4 years, they’ve just seen a wild amount of appreciation in their properties, even going back far, as you know, in 0809 type piece where they purchased post kind of real estate crash. They’ve then, you know, written the wave, even know 2012 – 2013 is when that wave, you know, really kind of took off And we saw a wild spike in most markets across the country with real estate appreciation. [00:11:37][35.3]
Paul Graham: [00:11:38] So it’s really just to say, hey, look, I now I’m kind of looking at this, you know, big powder keg, right? And I have this value and it’s worth, you know, in some cases double what I paid. What is it doing right? It’s just sitting there. And especially as interest rates are higher and inflation is higher, it’s then to say, you know, how could I reallocate this capital? Certainly you could use some sort of line of credit. Maybe if you lock, especially if it’s a personal residence or some sort of, you know, barter, if you will, or simply a refinance but typically refinances are going to make sense, you know, in these cases, especially for a smaller property. Right. [00:12:12][33.4]
Paul Graham: [00:12:12] So if I can then take a smaller property again, those little houses of Monopoly upgraded that hotel. You also see an opportunity to candidly, you know, retire in a lot of ways. Right, Because you have enough income coming in with those hotels or even those, you know, big skyscrapers of which people are now maybe getting asked back to the office or, you know, work just isn’t the same or all these different aspects where people are re evaluating their life to say, like, how else can I deploy this asset in this capital and having a, you know, big number on my personal capital or status to money Excel spreadsheet of my net worth means absolutely nothing to me other than my ego. [00:12:50][38.5]
Paul Graham: [00:12:51] And so looking at opportunities to redeploy that specifically for cash flow as well as you know, exit multiple and even tax deductions along the way are advantageous. Right. So it’s it’s a multiplier effect, not just in addition cheat code. Right. [00:13:06][15.7]
Paul Graham: [00:13:07] So my starts from a temporary exchange as a former commercial real estate broker, it seem complicated, right? It’s also related to taxes and finances and what have you. So, you know, can have those nuances between, you know, those moving parts. And you certainly want to be knowledgeable of how it operates before you get into selling a property that way you don’t get caught, you know, kind of running the wrong way. Right. [00:13:28][21.4]
Paul Graham: [00:13:28] But it’s a great opportunity again, to, you know, leverage and use that multiple. And really just in my personal experience, it’s really straightforward. Cost about $1,000, you know, very informative and helpful along with the process. Candidly, I’d rather do another 1031 exchange any day, then a refinance or a purchase. For other reason I’ve had the worst luck with the underwriting individuals, not the salespeople upfront. So you might just do another 1031 exchange just to experience pure bliss again, because it’s a hard world out there. [00:14:00][31.3]
Michael Tanner: [00:14:00] So no, it really is. I mean, one is extremely fascinating. I think, you know, your insights into into this from both a residential and a commercial standpoint I think are fascinating because I can imagine that that that commercial real estate sector is really kind of going crazy. [00:14:17][17.0]
Michael Tanner: [00:14:17] So I guess the real the real back half of this, guys, is, well, what does all this mean? So we when we talk about like kind for like kind, I mean, you think real estate to real estate, you think business to business, you think oil and gas to oil and gas. [00:14:30][13.1]
Michael Tanner: [00:14:31] But as we’ve been mentioning, what’s hot right now is real estate to oil and gas and the answer is, well, how does that happen? That doesn’t jive as a as a like kind of like kind exchange in you know, I know you’re not a a tax consultant, so don’t you know, don’t don’t come sue us when you get into a scam 1031 Exchange. [00:14:53][21.7]
Michael Tanner: [00:14:54] But what, Broadly speaking, from a real estate point of view, what would make you be like, Oh wow, I’m interested in 1031 exchanging in the oil and gas because I’ll give you my reasons, but I’m interested in your results. [00:15:08][13.8]
Paul Graham: [00:15:08] Yeah, I mean, I really it really comes down to what someone’s goals are, right? Some people may want an opportunity to not, you know, deal with tenants either on the residential or commercial side. [00:15:18][9.7]
Michael Tanner: [00:15:19] Good point Good point. [00:15:19][0.2]
Paul Graham: [00:15:20] As well as you know, they could be, you know, just looking for different kind of returns, especially as different seasons of life come. Right. For example, again, my comment of kind of retire even semi-retired right out of the world, if you will. [00:15:32][12.4]
Paul Graham: [00:15:32] So I think it really depends on the individual why someone would look at it and how they would look at it is they would consult their CPA, recommend getting one if you don’t have one, or at the very least paying a CPA called $300 an hour to go through your tax returns to understand specifically with the property, with the depreciation schedule and, you know, the capital gain that you have with the property. [00:15:54][21.5]
Paul Graham: [00:15:55] Also, look up, you know, if you’re on the residential side, specifically the two for five rule, right? So if you live in your primary residence two out of five years, you’re able to sell that with limited supply there, $250,000, no issue of paying capital gains as a single individual or 500,000 if you’re married. So that’s another kind of cheat code, if you will. [00:16:15][19.7]
Paul Graham: [00:16:15] But for the most part, we’re talking about you investment properties or individuals with investment properties such that you would see those line items on your taxes and see, hey, if I were to just sell this without 1031, I would then basically lose, you know, 40 grand, 100 grand, you know, whatever the numbers are. [00:16:31][15.8]
Paul Graham: [00:16:31] And if I was able to use that amount of money, I could then, you know, purchase something like this. Right? And then that type of property allows me to do that. Right. So it’s really playing the future game and kind of bringing it present is really where you know, things are or, you know, their options. [00:16:46][15.3]
Michael Tanner: [00:16:47] I know why I would do it. I it’s because I like I want to put all my chips to the table and I want to drill some long horizontal wells and go for gold, baby. But I’m just kidding. Maybe that’s why I like the 1031 exchange, specifically from real estate to oil and gas is not actually for the working interest. [00:17:05][17.9]
Michael Tanner: [00:17:05] I think it’s an interesting proposition to go buy working interest part of why I’m against working interest, though, is that’s just basically wellbore assignment only. You have to really know the rock that you’re in. You mean you have to know that well that you’re buying working interest in better than anything it’s not necessarily a partnership I mean, there are ways to do it structurally. I’ve seen it. I’ve seen it done before. [00:17:26][20.3]
Michael Tanner: [00:17:26] But for the minerals aspect of investing in minerals is, in my opinion, the route that basically takes the best parts of real estate investing and the best parts about oil and gas investing and merges them in minerals and, you know,. [00:17:42][15.5]
Michael Tanner: [00:17:42] In real estate, you generally you don’t have a do your asset value doesn’t necessarily decline from a cash flow basis if it does, that’s because expenses are increasing. Generally, rents stay the same. Now sometimes rents go down because of market stuff, but you don’t necessarily per se account for that per se. We’re in every oil and gas well that we drill thanks to our piece in 1950. We know that they decline at about 80. We we know they decline exponentially. [00:18:07][24.5]
Michael Tanner: [00:18:08] So this is what it is, guys. That’s so that’s where people will say, oh, you’re an oil man, you’re a gambler. Well, yeah, because if the well hits, I’m going to pay out in six months. If it doesn’t hit, I’m going to be the tail end of an exponential curve. 15 years later, I’m hoping that three barrels a day puts me over the edge. [00:18:24][16.6]
Michael Tanner: [00:18:25] What is nice about minerals is it’s to steady is you eliminate some of that boom or bust from buying working interest and get you into much more steady assets with the idea that if somebody drills a new well on it, you can access the metals because remember the minerals is off the top you’re that that’s your 25% cut off the top and I encourage you to go to Sandstone-group.com connect with us. [00:18:48][23.0]
Michael Tanner: [00:18:48] We’re going to have some information upcoming very shortly on specifically what mineral investing in minerals is specifically that’s going to be marketed. You know, I know most people listeners in energies that you know what minerals are If you don’t know what minerals are we’ll make sure to have some documentation. [00:19:03][14.4]
Michael Tanner: [00:19:03] The point is I like that move much more than I do than I do like buying working interest. Now, I’m not opposed to buying working age. And they’re actually you know, we’re working with with a company right now that has a really great blended option where it’s a 1031 exchange from whatever. [00:19:18][14.7]
Michael Tanner: [00:19:18] Obviously, most of you know, most of the deals that we’re working on are in the real estate going into a blended little bit of mills, little bit of working interest, which if you find a good blend, could again maximize the upside because in real estate there’s not much upside other than appreciation. [00:19:35][16.0]
Michael Tanner: [00:19:36] You know, if your property doesn’t appreciate someone’s not going to come in and buy it for a inflated value. Now, if in play, if you do have if you the asset does if the asset is worth more, you know, in two years than it was that, yeah, sure, you’ll get that incremental gain. But the quote unquote potential returns are much, much higher in oil and gas. So if you go the blended route, you, in my opinion, you find a risk profile that, broadly speaking, seems to be working for a lot of people. [00:20:04][28.2]
Paul Graham: [00:20:04] Yeah, you bet and I mean, just to highlight the past 5 minutes of you speaking, especially for those who may not have a full understanding of what you’re saying of working interests and things like that. I would highly recommend, you know, reaching out to us reason being is, you know, there are different oil and gas opportunities out there certainly some of them are simply poking holes in in the ground right in our very risky. [00:20:27][22.7]
Paul Graham: [00:20:28] And so for, you know, the deals we’re kind of working with, they are blended and typically are, you know, using working interest and a variety of different solutions. And I only say that in the sense of I’ve been fascinated by mental rights in oil and gas because of it’s not straightforward, which really just relies on the right people giving you the right information to understand. Right? [00:20:49][20.8]
Paul Graham: [00:20:49] So it’s not a multifamily property that has, you know, six capitals call it these days that’s very bread and butter. And it you know, it’s replicated across the board like a multifamily is a multifamily is a multifamily, right? [00:20:59][10.1]
Paul Graham: [00:20:59] That’s not the case with oil and gas and so it’s imperative that as you, you know, might do some due diligence on investments in this space to understand the different kinds, the risk tolerance that you have, and then see if it’s a fit for the deal. It’s just like eating before going to the grocery store. Don’t go to the grocery store hungry because you might end up, you know, getting things that you don’t want. [00:21:19][19.4]
Michael Tanner: [00:21:19] Then you get all the snacks, though. [00:21:22][2.5]
Paul Graham: [00:21:23] Remember when you eat my big old chocolate chip waffles, I still do. [00:21:25][2.8]
Michael Tanner: [00:21:26] I eat a lot of your food growing up, so I eat a lot of your food. [00:21:29][2.9]
Paul Graham: [00:21:30] Sure. But in the important aspect I just wanted to mention. Right. You know, whether you can do a transaction with us or someone else, I mean, really, it’s just we’re here as an educational opportunity to share, you know, the opportunities we have with the people that we work with, really just to help you, you know, with your life and your investment portfolio. [00:21:47][17.2]
Michael Tanner: [00:21:48] Absolutely. Where can people find you, man? [00:21:49][1.2]
Paul Graham: [00:21:49] Online, typically, best way to get a hold of me specifically is yeah, just should to contact us on the sandstone-group page. Reason being as those get filtered to all of us, sometimes a couple of us will hop on some time and or you know, could just be one of us individually. But appreciate you have me on talking about this happy investing. [00:22:09][19.9]
Paul Graham: [00:22:10] We’ll get your contact info in the description. We appreciate you popping on. Take a little bit. Time out of your evening, man. We’ll talk soon. [00:22:15][5.4]
Paul Graham: [00:22:16] Thank you. [00:22:16][0.0]
