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Tuesday, September 27, 2022

Starting the cannabis business of the oil tycoons

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March 2020 is seen as one of the most unfortunate times to launch a business, as the COVID-19 pandemic has paralyzed entire industries almost overnight.

But that’s when a group of Texas oil and gas entrepreneurs launched Delta AG into hemp.

Hemp is a hemp sativa plant that contains 0.3% or less of THC, the compound that yields a high percentage of marijuana. It is legal in all 50 states and is found in wide-ranging products such as cosmetics, clothing, and electric cars.

Delta AG planted its first crop of over 5,000 acres of hemp across Colorado, Kentucky and West Texas in May 2020 and harvested its second crop of over 10,000 acres in October.

In less than two years, the business reached profitability. It generated $16 million in revenue in 2021 and expects $100 million in revenue for 2022, and Delta’s founders say they hope to become a multi-billion dollar company by 2025.

“We haven’t scratched the surface yet,” said John Paul Merritt, Delta AG’s CEO.

The founders — Merritt, Chief Operating Officer Nick Citroen and CEO George Overby — met to work at Dallas-based, independent mineral investment firm Pony Oil, which was founded by Merritt and generates more than $100 million in revenue annually. Merritt said they noticed similarities between the cannabis industry and the oil and gas trade in the early 2000s.

“Onshore production from it. Yield on a per-unit basis, like crude oil. It has a range of revenue streams that can be drawn from it. He previously incubated two cannabis companies backed by Pony Oil,” Straw said.

2019 brought a special season of hyper-excited cannabis. From 2018 to 2019, the total area of ​​cannabis growing across the country jumped from about 32,000 acres to more than 146,000 acres, according to the U.S. Department of Agriculture. Cannabis biomass prices have dropped from $40 a pound to $10 a pound, according to Bloomberg.

“We knew that with the crash price of cannabis and our agricultural practices, we could be the least expensive provider of cannabis and take market share,” Merritt said.

The company has 10 employees at its headquarters in Dallas, plus some employees who work on the lobbying side in an office in Washington, DC. It has about 20 workers at any one time in processing facilities in Colorado, Kentucky and West Texas. Each facility also works with 10 to 12 agricultural partners or producers to grow crops.

Delta AG is unique in that it is the largest full-service cannabis producer and processor in the United States. The company controls every part of the process, from growing hemp to manufacturing to reaching a marketable state and, finally, to packaging and shipping orders. This allows it to cut costs and provide a steady supply, the team said.

“We saw in some of the economic variables that came with COVID that there was an opportunity for us to grow our business when many were looking for a way out,” Straw said.

“It gave us the opportunity to accelerate the business model and gain a foothold,” he said.

While most cannabis companies choose to focus on hemp grain, hemp fiber or hemp flower, Delta has chosen to grow triple-crop varieties so you can do all three of them. Harvested hemp flower for CBD, body care and pharmaceutical products; hemp pills for animal feed, supplements and cosmetics; and hemp fibers for textiles, paper and insulation.

“We’ve focused on a part of the supply chain that no one else really has,” said Overby, a Bonny Oil co-founder and former chief operating officer, leading the deployment of more than $1 billion in capital into the energy industry.

The global industrial hemp market was valued at around $5 billion in 2019 and is expected to reach $18.6 billion by 2027, according to market research.

Along with the opportunity to scale a business similar to what they did with Pony Oil, the Delta AG team said they like an acre of hemp baffles, or absorb, about 11,000 pounds of CO2. Delta AG hopes to be one of the largest carbon dioxide sequestration companies in the United States in the next two years and one of the world’s largest carbon credit producers. They hope companies like American Airlines will want to partner with them to reach their emissions offset goals.

To sum up what they bring to the industry, the guys say they saw an opportunity to bring their management expertise to an industry that is still “green”.

“It’s basically a Wild West vibe,” Overby said. “It is largely managed by brokers focused on the 2017 CBD green rush, which has led to an oversupply in the market.”

Delta AG believes it can avoid this by controlling every aspect of the supply chain. The team found its farming partners by moving from barn to barn making it clear that it wanted to build the entire supply chain, not just one part. Overby said the company now believes it has the ability to talk with big companies like Pepsi and Coca-Cola to supply it with raw commodities.

“There was a cloud hanging over the industry – and some of that was from farmers who were motivated by conservation who were not getting paid. They didn’t have the right management practices in place. We want to provide an institutional environment for this industry

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