Directing Investing In Oil Wells

One of the best investment opportunities that yield amazing results is investing in Oil Wells. This is because investing in oil provides the opportunity to earn additional profit from tax. Also, despite the current improvement in solar power, oil is still in popular demand and there is every tendency that this would not go down anything soon. Even in the ongoing Coronavirus pandemic ravaging the entire world, oil is still being sold and purchased. Petroleum is still being used to generate BTUs (British Thermal Units) and Kilowatt hours. 

Similarly, natural gas provides another great benefit for investors. Since these two sectors are usually tied together, a company might trade in both. Hence investing in one means investing in the other. Natural gas is used for cooking, heating, and converted into diesel for the effectiveness of some big technologies. Natural gas is also being used to produce chemical fertilizers.

Historically, although the price of crude oil and gasoline has been on the increase, it is currently suffering a decrease which began since 2012. In fact, the ongoing pandemic has affected the price of both gasoline and crude oil. It means that the best time to invest in these two great sectors is now. Since the price of both gasoline and petroleum is currently low, stocks in this sector would also be low. However, before taking the step to either invest or sell, it is important to take note of the risk involved. Also, there is no one way to invest in oil and gas, these different ways should also be considered before investing. More importantly, there are different types of direct investing in oil wells. But before explaining all these, we would first consider what direct oil investing is all about.

What is direct oil investing?

Direct oil investment is also known as a direct participation program. This program is further subdivided into two categories; limited partnership ownership and working interest ownership. 

Limited partnership ownership.

The idea of partnership with oil and gas began in the early 70s. This singular act leads to the expansion of the sector. This expansion also brings about the major differences between the working interest ownership and limited partnership. This difference is that limited partnership ownership incorporates working capital so as to give more money to the general public. Once a payout is fully carried out, management fees and revenue sharing are calculated. 

Working interest ownership

Working interest ownership is a standard investment strategy that was popularly used in the 1920s for oil drilling programs. In working interest, the investors are given the opportunity to own an aspect of the oil well. Hence in this type of investment, the investors have more duties and obligations than the limited partnership investors. 

In the explanation of direct well, it was stated that there are different ways to invest in oil and gas, these different ways would be later be examined in details. But before this, it is important to note that the oil and gas companies are similar to a collection of business entities that produce products and services to stakeholders and consumers. Investing in oil and gas gives you the opportunity to earn as the price of petroleum and gas changes. The different ways to invest in oil and gas include:

Ways To Invest In Oil Wells

Mutual funds and ETFs 

One of the best ways to get started in Oil and gas is to invest through Mutual Funds and ETFs. The major advantage of investing through any of these medium is that it gives you the opportunity to be exposed to the product without encountering direct risks in spot prices.

Private Placements

This method of investing in oil and gas is by investing directly in oil and gas drilling projects. There are different benefits attached to investing in oil and gas through private placement. Some of these benefits are;

Tax advantages

Tax-sheltered income

Portfolio diversification

ADRs and Large-Cap Stocks

This method of investment allows you to invest through publicly traded forms. There are several benefits attached to this method. A good example of companies that use this method of investment is (NYSE: XOM). Aside from (NYSE: XOM) being one of the largest oil and gas traded companies in the world, it offers investors a lot of benefits. There are other companies that engage in this method of investment. Most of these companies are involved in oil exploration. This implies that you can purchase direct exposure through ADRs with the help of your non-traditional investment adviser.

Future Contracts

Investing in futures contracts is also another great way to invest with oil and gas companies. However, it is important to note that this investment can be very risky. One of the reasons for the high risk is that contracts can expire without attracting any monetary value.

Micro-cap Stock and Limited Partnerships

Another easy way to take a direct equity position in the oil and gas sector is by investing through the oil and gas industry “food chain” into a small or micro-cap stock, or even a limited partnership that focuses on oil and gas. Investing this way is more specialized. However, if the business is not public, you would be required to engage the service of a broker. The broker should be very knowledgeable in the micro-cap Stock and limited partnerships so that he or she can help monitor the investment. But if you are investing with a substantial amount of money, you can engage in direct business with the company's manager. 

Things to consider before investing in oil wells

• Have you made a stable income of up to $200,000 per annum in the past two years?
• Is there any chance that you would be making more than this year?
• Is your net worth either as an individual or together with your spouse up to $1 million?
• Can you bear the loss if the investment does not pay?

Having considered the questions, here are the types of oil well you can invest in. 

Types Of Oil Wells Investment

There are basically four types of oil and gas investment, these four types of investment include: exploration, developing, service and support and income. 

Exploration

These are the types of oil and gas companies or projects that buy or lease land and invest the money in drilling. If the companies should use borrowed money such as leverage to carry out this service, there is the tendency that stock would pay off 10 times the actual market worth. Companies can also get the same reason if they strike oil. However, if the money is not gotten from strike oil or by leverage, there is a chance that companies would lose out. Companies' plays are also highly speculative. The best kind of investors to invest in this kind of well oil is high-risk tolerance investors. 

Developing

Companies or projects that engage in developing kinds of direct oil investment often drills near proven reserves hoping to unlock further value. Although these projects are not as speculative as exploration, there is usually no guarantee that the efforts would yield any tangible result.

Income

These kinds of companies or projects focus on the acquisition of plots of land usually by lease or by purchase, over proven oil and gas reserves, and seek to create a steady stream of income over and above expenses. Income direct investing oil wells is considered the safest way to get involved specifically in the drilling and extraction operations. The only risk attached to this is that there is a tendency for oil to run out faster than expected. However, this is more like an income play than a speculative play.

Income direct oil investing is advisable for investors interested in using the opportunity as a passive stream of income. Investors must also be able to take more risks than people investing in other areas such as annuities and investment-grade bonds.

Service and support

These types of companies provide unlimited support to the oil and gas industry. Examples of companies include shipping and logistics companies, transformation companies, construction and rigging companies, pipeline companies, and refineries 

Investing in any of these companies is almost the same as investing in companies involved in B2B services, and logistic companies.  Also, some of the investment in these companies does not rely on the increase in the price of oil to make a profit. For instance, pipeline companies make their profit by charging a fee per barrel transmitted. As long as demand remains consistent, this profit remains the same whether there is an increase or decrease in the price of fuel.

Advantages And Disadvantages Of Direct Investing In Oil Wells

Pros

• Diversification

Oil and gas companies have constantly produced brilliantly diversified opportunities against the overall market economy.  Usually, when there is an increase in the price of gas, it slowed down the economy. These slight changes can drastically affect stock and funds. However, in the case of oil and gas stock, an increase in price would automatically result to an increase in stock value. Investors with oil and gas portfolios can use this to contain the loss in other stocks.

• Profit potential

Occasionally, investment in a limited partnership and small companies can pay off greatly, especially if the driller is strike oil. A single well with strike oil driller can generate ten times its worth and can continue to pay dividends for a long period of time. 

• Tax advantage

Oil and gas investing attract some unique tax benefits. A good example of these benefits is that the IRS allows oil and gas companies to deduct for depletion. This advantage is similar to depreciation value on rental real estate. Hence depletion becomes a way companies can easily account for the gradual exhaustion of mineral supply in a specific plot of land. As an investor, if you buy a membership in a limited partnership, this tax deduction would be easily noticeable in the value of the stock. However, if you invest in a publicly-traded stock, this benefit would not be noticed. This is because the publicly traded stock is C-corporations. They don't include shareholder tax returns in their gains and losses. The value of depletion could be a major difference between a property that is cash-flow positive and one that is not. 

Cons

• Volatility

Generally, oil and gas stock is highly volatile, especially when you are investing in small companies. If, for instance, you invest in wildcatting drilling projects there is the tendency that you will easily lose your money. The key to oil and gas investing is diversification. It is not unusual to lose 50% on your investment or even lose all. Hence it is advisable to diversify.

• Liquidity

In oil and gas investment, it is easier to find buyers for large companies stock than small companies. In fact, if after a futile search for buyers, you may have to partner directly to redeem your interest with the company. The companies that usually suffer this are limited partnership companies and non-publicly traded companies. Therefore, it is advisable to avoid these companies when investing in oil and gas.

• Commission

Usually, you will pay a commission to an intermediary or broker when you invest in a limited partnership. Most times, these commissions are greater than the standard stockbroker commission and can exceed 20% for every illiquid company. This additional fee would be a loss because any money paid to a broker would not be invested for you. 

• Complexity

It is not everyone that can invest in oil and gas. There are conditions and tax rules attached to investing in this sector. There are also rules attached to a limited partnership that may affect you - especially as you file taxes or account for share after you have sold them. Unless you are experienced, it is advisable to stay clear off MLPs (master limited partnerships, which are limited partnerships that are publicly traded) or limited partnerships. This is because investment takes a very long period of time and has a high-risk potential. However, there is the possibility that shares in MPs that are not publicly traded would sell easily. 

Note:  While there are lots of limited partnerships that are legitimate, there are also a lot of scammers. Hence, beware of anyone who tells you that an investment is only available for a few people and that investment can't miss. Also, be wary of anyone convincing you that there is no risk attached to the investment. They might all be scammers. Do not buy any limited partnership over a phone conversation. 

Ensure you do your own investigation very well. If possible, get an experienced personal financial advisor. 

Summary

Before investing in oil and gas, ensure you are someone with a high-risk tolerance and know your investment horizon. Do your research to avoid being a prey to scammers. Oil and gas investment has a high-risk potential and is also volatile. Hence it is advisable that only experienced investors should venture into it. 

If your risk-tolerant ability is very low, you might want to invest in more conventional shares such as shares in companies like Halliburton and Exxon Mobil. You might also want to go for mutual funds that focus on oil and gas.