Oil & Gas Investing Tips

When reviewing oil and gas prospects for possible investment, every investor should understand that all oil and gas projects have a great deal of risk. That is the nature of the business. Even the safest geologic project can result in disaster due to drilling and/or completion problems. All Operators, Engineers, Geologists, and seasoned oil and gas investors have drilled dry holes and will drill them again! However, some of the risk can be reduced by proper evaluation and asking the right questions. Below is a list of areas that each investor should investigate and understand prior to committing to an ongoing oil and gas project.

Know Who You Are Dealing With

The main things to look at are the Geologist and Operator. Try to avoid a group that is just “getting started” or has more dry holes than producers. That is never a good sign. This could mean they are promoters and not earning their living by producing oil and gas. Know the group that you are dealing with or know someone else that recommends them. In short, it is best to bet on the rider and not the horse. The best geological prospect can be a disaster with the wrong operator.

Diversify

Once you make the decision to invest in oil and gas ventures, set a reasonable amount of money that you want to invest. In Las Vegas, that would be called “limiting your loss.”

Most importantly do not try to put all the chips down and hope for the best. No matter how good a deal looks, it has risk. After you have selected the group you would like to work with, select numerous projects to invest in. Always diversify into numerous wells to spread the risk. This will increase the chances of hitting a successful well. Your investment will result in either a non-producer, a well that exceeds your expectations or somewhere in the middle. If an oil and gas investor properly diversifies, the “bell curve” will hopefully be in the middle.

Understanding Monthly Revenue

At the end of each production month, the landowner’s portion or royalty (generally about 25% of production) is deducted from the month’s production revenue. Once deducted, your proportionate share of the oil and gas is divided up and allocated to your account. The expenses are then divided up and allocated to your account. A good thing to remember is the landowner has royalty so they do not pay the lease expenses. That means you pay 100% of the lease expenses and receive 75% of the production.

Ongoing Investment

Investing in oil and gas is a long term investment. Each well can last several weeks to several decades. As the well produces, it is natural for pressure and the resulting production to decline. At some point the production will decline to a point that expenses will catch up with production. At this point the well should be plugged. Until the well is plugged or until the project is sold, the investors have an active investment. Each investor will from time to time vote on the future of the project, such as re-working, plugging, or selling.

Education Reduces Risk

Oil and gas investing can be exciting and rewarding. The best way to reduce the risk is to learn about the energy industry. As you are involved in projects, learn about geology, drilling, and completion phases of the project. Make sure you receive and read the drilling and completion reports. Understand the revenue checks. Do not be afraid to ask questions to the group managing your investment. That is their obligation since you are a potential owner in the project or well(s).

Additional Tips for Oil and Gas Investing

• Use the internet.
• Subscribe to Oil and Gas Investor Magazines
• Ask questions before you invest.
• Take time to learn about your investment.

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