Oil Investing

5 Most Popular Ways To Get Rich
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Investing in oil and gas can be accomplished in many ways; from purchasing stock in large public companies to partcipating in private, independent projects. You can invest in oil and gas exploration, refineries and service companies and you can invest through mutual funds or derivatives such as commodities futures. Offshore investing has produced many billionaires.

While stocks and mutual funds return small rates of returns there is also potential to receive much higher rates of return - some exceed 100 percent - depending upon your ability as an investor to accept higher degrees of risk. Investing with independent operating companies on a direct participation investment is one option. This is similar to what the major companies do when they invest with each other in developing projects.

There are over 4,000 independent oil and gas companies located in the United States. Many of these firms offer the opportunity to invest with independent producers in industry development projects as well as exploration. These direct participation investments are called private placement. Private placements do offer a much higher rate of return and can, in most cases, have a much higher degree of risk. One important fact to consider is that 90 percent of wells drilled on an annual basis in the United States are drilled by an independent oil company. These producers may vary in size from one-man shops to multi-level corporations.

Understanding or assessing potential really starts with a two phase process:

1) The company that will be sponsoring the program.
2) The property that the company will be developing or acquiring.

The Company

One of the best ways I have found to analyze the company is to look at their management and track record. Look for solid financial records as well as integrity in their management and operations. The easiest way to find this information is to ask the company for what is commonly called a Due Diligence document.

A due diligence is basically a summary report of the company, its management, its staff, reserves, inventory, equipment and track record.

From the due diligence you should be able to determine how well an investor has fared in prior programs, how economical the programs have been and how sound the proposed undertaking might be. Technical due diligence will help eliminate most of the unsound investment proposals.

One area of the due diligence I like to focus on is "Prior Activities."

Basically, this will summarize the programs the firm or company has drilled in the past and how they have fared. Prior activities will cover when the offer commenced, the amount of the offering, the minimum size of units, the method of offering (private or public), the number of wells in the project and the type of wells (development, waterflood, exploration). It will also cover the net revenue, the frequency of payments (monthly, quarterly, dry hole) and it should also state the amount of the promoted interest.

The projects should then be summarized by lease name and a yearly account of the gross revenue, operating expenses, net revenue and cumulative barrels. You should be able to determine an average return on revenue as well as a total return on investment. I have found that these

numbers can and will provide you with a fairly accurate track record of the types of projects that this company has developed.

As an investor you should try to determine the credibility of the company under investigation. One of the best ways I've found is to refer to the section of the due diligence covering corporate references. Here you will find a list of references and areas in which they do business. It may be accounting, supply stores, service companies, etc.

TIP - refer to the company that purchases the oil or gas that the firm has produced. Call the crude oil buyer (or gas purchaser) and they will be able to give you an objective opinion about the company you may be interested in. After all, this is the focal point of all exploration and development companies. The bottom line is whether or not the company has the ability to find and produce oil and gas on an ongoing and daily basis.

The Property

There are many ways to evaluate drilling proposals or acquisitions of producing assets. Generally, the sponsor will provide you with a geological report or engineering report discussing the potential of these reserves.

Unless you have a proper understanding of geology and/or engineering your best course of action may be to consult with an energy analyst or advisor that is knowledgeable about the company and/or projects you are considering. Quite frankly, the hardest part about determining whether an oil and gas project will be successful is trying to locate the specific benefits of the project through the terminology the geologist or engineer is using for a given area.

The best way to evaluate an oil project is to try to determine how successful the other wells that were drilled in the area were. What we are really looking for is a history of wells that have been drilled in a given area and what type of reserves have been recovered. This should serve as a benchmark in determining the probability of success in this project. In most drilling proposals or geological reports, what has been produced in the past will give a summary or probability of what might be expected in the future or throughout the drilling process.

Analyzing geological and engineering reports is a process that should be undertaken by someone with the proper investment acumen as well as understanding of geology and engineering. The best description of this individual would probably be an energy analyst. However, with a little common sense and time devoted to research and understanding, a non-industry individual should be able to determine the proper investment scenario.

Again, we come back to the question of how we asses the potential of an oil and gas investment. The two phases that I referred to in the preceding section are only a cursory review. There are many aspects of an oil and gas project that need to be addressed. Some of these are sharing arrangements, deal terms, liabilities, market for product, transportation, further development and many other subjects.

There are a few books that are specific to oil and gas investments. They are "The Why's and How's of Investing in Oil and Gas" by Lewis Mosburg, Jr. and "Money in the Ground" by John Orban.

Because of the diversity of the industry and its investment characteristics, as well as the fact that they are recovering oil and gas from traps located several thousand feet from the surface of the ground, the industry has always held a certain mystique and aura. This is why it has always been misunderstood and why it is vital to thoroughly educate yourself before investing.