Oil and Gas Best Kept Secrets: Secrets of Oil and Gas Investments for the Average Individual

Breitling Oil and Gas CEO Chris Faulkner has written a must read article on oil and gas investments for the average individual.

May 2, 2012
Chris Faulkner

Original Article: http://www.oilgasmonitor.com/oil-gas-secrets-secrets-oil-gas-investments-average-individual/1938/

The best kept secret of oil and gas investing is that there is no magical secret – even my own company is constantly evaluating current and prospective investments and making adjustments as market dynamics change and commodity prices fluctuate. There are, however, some tried-and-true keys to choosing investments in oil and gas.

Of course it should go without saying, but the oldest rule of thumb bears repeating, and repeating, and repeating (and you should be able to recite this with me): if it looks too good to be true, it probably is. This can be a particularly difficult adage to keep in mind when you’re looking at oil and gas investments that promise a 50% return in a couple years.

The dilemma, as is true of any high-risk investment, is that there is a real potential for such astronomical returns in limited situations. There’s also a potential that the oil or gas well will come up dry and investors should be aware of that going into any project.  Investing in oil and gas drilling programs is a good choice, if you go into it with realistic expectations. And remember that a direct investment in drilling offers investors high and immediate tax deductions, whether or not the well comes up dry.  If the drill hits oil or gas, you’ve reaped the tax deductions along with the highest returns available from any investment.

For investors who are less risk-tolerant but still interested in direct investments, consider investing in oil and gas royalties with operations that are already active and producing.  You’ll want to understand which basins the oil and gas wells are in, how long they have been producing and, most importantly: how many years of reserves are left in the ground.  Oil and gas royalties have return potential of 8% to 12% or even higher and offer you a steady stream of monthly revenue for decades.

And you couldn’t pick a better time to invest in gas and oil. Between the Bakken, Barnett, Fayetteville, Marcellus, Horn River, and the re-ignited Permian Basin plays, the US is in the midst of an oil and gas boom that could still be resounding generations from now, thanks in large part to new technologies that have helped the drill bit reach previously inaccessible reserves.  As more wells are drilled using new techniques, expect even more innovations and improvements in drilling to lead to even greater accessibility to formerly off-limits reserves.

Simply do your due diligence before committing to a drilling investment. To help find successful companies, industry partners, and operators, follow a few key steps:

  • Find out the operator’s success rate: if you’re thinking of investing in a new drilling project, compare the operator’s number of wells drilled to the number of wells producing; also compare the company’s performance to the county and state averages
  • Get ahold of production and financial estimates: if you’re looking to invest in producing wells, the operator should have projections you can review (and if an operator balks at sharing these estimates, it’s time to walk away)
  • Look at the operator’s track record: don’t focus solely on the project you’re interested in investing in—look at the success rates of several of the operator’s last projects
  • Invest only in direct working interest –  If you invest in oil and gas through working interest you are sure you get your tax deductions and you will receive a deeded title to your interest in that well; partnerships and joint ventures should be looked at with skepticism
  • Look at the operator’s track record: don’t focus solely on the project you’re interested in investing in—look at the success rates of several of the operator’s last projects
  • Seek innovation: the most successful operators are constantly looking for better, more economical ways to find and extract natural resources; find out what types of investments an operator is making in technology and research and development to increase chances of successfully drilling productive wells

The current market offers stability and growth potential that should be attractive to any investor.  As the economy continues to improve, leading to higher gas and oil usage, careful oil and gas investors can surely only win.