Investors, can you make money by investing with oil & gas sales & marketing companies with sales plans involving fancy brochures, pictures, and other advertising materials used to induce or attract you in order to sell you on their oil & gas promoted deals? The answer can be yes if they are honest brokers. This can be a real challenge to find-out though.
Did you know you can make direct investments in oil & gas industry or ‘head’s-up’ deals. Direct investments can be made in private oil & gas programs, and in certain stocks, that are offered on most stock market exchanges for many reporting, or public companies making this possible. Would you believe your investment returns would be higher if you make direct investments with a company offering its direct investments, or by offering their own stock? Given the choice of making direct investments with companies, or with a commissioned brokerage house employing commissioned sale executives, the answer should be very easy. You can avoid sales commissions, and ‘heavily loaded fees’, or highly promoted deals, which can take 25% or more of your money right upfront by the ‘promotional houses’. This is done before you ever begin investing the money with an oil & gas Operator charged with the responsibility of drilling, developing, and maintaining oil & gas leasehold interests, and fields.
The main reason the tax advantages still exist for drilling programs is because of the risk. We already have plenty of risk normally associated with finding, and recovering commercial quantities of oil & gas in the US. Why add additional risk by investing in dubious, or heavily promoted deals which make lots of money up front for those working with the brokerage houses or worse, boiler rooms? These companies are not in the oil business…they are in the raising money business using the ‘thought of making money in oil & gas’, rather than the actual business or industry; which they seldom ever know anything about. Their scam is to make money up-front, rather than invest in legitimate oil & gas programs. In other words, ‘promotional boiler rooms’ make money regardless of whether they, or the so-called companies they hire ever find oil or gas, or pay you enough production revenue to recover your capital at some point.
Here are some important clues to look for when evaluating promoted deals.
1) Fancy websites, with sound, motion, and color. This stuff is expensive to create, and maintain on a website.
2) If you get called by multiple people who hand you off to others, and you can’t keep track of the people who call you, this is a bad sign, and indicates a chief or common tactic of ‘boiler rooms’ and their characteristic way of operating. Many of these so-called brokers who are never licensed only work for a few months at a time before changing boiler or calling rooms to stay ahead of the regulators. Keep the customer ‘pumped-up’ and confused seems to be a common style & method when these so-called brokers are pitching, or who are working in ‘calling rooms’. When you can’t remember the person’s name or who called you, and you don’t know the specific elements, or points relative to what’s being offered in an investment, this is a key clue to look for when talking to someone who purports to be an experienced player in the ‘oil business’ or ‘oil industry’.
3) The use of ‘highly emotional, or excitable’ sale pitches is the quintessential approach used by just about all promoters to appeal to your greed, and emotions. Being long on emotion, and short on facts, and logic seems to be their creed. Don’t fall for it!
4) Look for the deliberate approach, and a calm steady presentation of facts, and look for the details to be fully explained by the person offering an investment.
5) Stay away from the ‘you need to move, and act quickly’ or ‘you’ll lose out’ type of selling approach.
6) Ask about the up-front fees, and the percentages of funds invested, and how the investment funds are invested, and exactly where and how the money is applied. Don’t let them continue until you are satisfied, and its in writing, and you have a copy of the memorandum, and you can find references to all compensation and charges by the company in the written material provided by the company.
7) Finally, ask for their responses to your questions in writing and in email. If they can’t write, or clearly state their deal points, there is likely both an educational and training gap in their learning. You don’t need to be doing business with people having these major gaps in learning, and clear lack of demonstrated capability & experience. Almost all brokerage house account executives have college degrees, and advanced degrees, as well as highly specific training by their member firms. ‘Boiler room callers’ don’t want to be licensed, and couldn’t pass the Series 7 NASD test if their lives depended on it. Nor would they want to disclose their typically checkered pasts involving legal actions, and/or their personal behavior to you or the authorities which is required to get licensed. Stay away from these people…
More to follow…
Private placement offerings have a traditional and legal downside.
Liquidity isn’t normally a hallmark of private placement offerings being made to accredited, sophisticated, and qualified investors for a couple of key reasons, or at least for reasons explained by S.E.C. rules and regulations, or rules of the public path, or road. A ‘federal exemption is provided from registration’ for ‘private placement offerings’; because public investment offerings are characteristically expensive and involve extensive oversight by the regulators and their reporting, and auditing requirements, and mostly because a special exempt category for ‘accredited investors’ has been created to allow investment in private deals without undue public filing requirements, etc. Filing a public offering or going through the process is typically cost prohibitive for new start-ups, or small investment groups & clubs; so the flip-side, or counter balancing argument, or view, is the Feds won’t review, pass judgment on, or perform the customary considerable oversight with public offerings, or institutions such as banks, insurance companies, or other legal entities who historically have had oversight responsibility, and are licensed and deemed accountable by way of their experience, and professional credentials to protect their investors.
So, you don’t get liquidity when you invest in private placement offerings, like you do when investing in the public marketplace, or get the advantage of secondary markets, and market makers, who can sell your public stock, and provide you with the liquidity you get when you invest in the stock markets. The Feds leave you alone if you file Form D’s in each state where you offer private placements, but they do require U-2 filings for manager, and control persons, or sponsors & issuers of exempt securities who cannot collect commissions under threat of very real perjury laws. Therefore, there is adequate oversight by both the Federal and State authorities, and it isn’t unreasonably withheld if you follow rules when forming your private placement offering memorandums, and you provide ‘full disclosure’ of all pertinent facts and history about the deal being offered, and about you as the manager. The only way to do this properly is by hiring a securities attorney who has insurance, and is willing to take the risk associated with preparing the private placement memorandums which are used and required to do business with private investors.
Bottom line, you’re on your own if you are an accredited investor…however this is exactly why & where some good opportunities with excellent upside can be found. If you can find a private placement offering where the manager has experience with selling in auctions, to private buyers, boutiques, pension funds, or other private, and production buyers in the oil & gas industry you can achieve some liquidity with your oil & gas depleting, and declining assets. Remember, Oil & Gas investments are quite different than real estate in one crucial way, real estate is nailed down, or tethered, whereas oil & gas must be sold to take profits, and when the amount of oil production declines, you must either sell your assets, and/or drill more wells to sustain production at levels desired, or possible levels of production in a given leasehold interest or oil field.
Rewards are directly related to taking Risk…or “No guts, no glory!”
More later…Dennis
Investors looking to make investments in private versus public companies need to understand why each type of investment is offered to any investor and what the merits are of any strategy of investment.
First, private investor investments with private companies are often made to take advantage of several benefits typically found with new, or small, and private growth companies, which may, or may not be start-up’s.
Management of small companies characteristically can make decisions quickly, and take advantage of opportunities larger companies cannot focus on, or where the opportunities don’t represent enough of a profit margin for a larger company to warrant spending their time. Finding a lucrative niche’ in a market, or business sector is what small companies are all about. Testing new ideas, and implementing new technology can yield some surprising ‘firsts’ or boost, and even ‘explode a small company’s business success & profits’. For example, it is commonly known in the oil & gas industry, that 85% of all oil & gas found in the US has been found by Independents, or independent oil companies.
Major oil companies can make money over the long haul by owning leasehold assets and oil & gas reserves which go up in value over time with the price in the marketplace, and from their down stream operations, like pipelines, refineries, and retail outlets. Most major oil companies don’t make a profit on their production.
One thing I really like about small private companies is the upside can be unlimited, and the interest of production buyers for example in Oil & Gas is always a possibility as they ‘hunt for those businesses’ with positive cash flow, and assets which can be exploited with more capital. Public companies, and pension funds for example have discretionary authority to invest in higher risk investments to boost their portfolio returns. Production buyers will pay much more money for the lower returns they can expect because they are taking less risk; compared to the upside a private investor can realize with an investment in a private deal with a low basis, or ‘where return on investment’ is based on low cost going in, and not too much initial capitalization is needed to fund the company to a profit point.
Bigger companies or reporting public companies must satisfy many regulations in order to be public companies, and most have tremendous overhead, and everyone knows unions, and employee issues such as retirement, and pension plan contributions, and a vast number of costs which get reflected in their company bottom-line. Public growth companies often don’t expect to make a profit, pay dividends, or see their stock rise in price for some time, and this is directly the result of a negative bottom-line, or little profits or having too much money they can tap. The reason is usually because the expansion using public capital takes time, and the marketing plan, and idea has to be a very good one to compete in the marketplace. Another reason is the ready availability of capital in the public marketplace. Put bluntly, with mutual funds for example; it’s not the fund manager’s money. Why should he care, as long as he follows the rules of the exchanges, and the public company regulations, and of course the S.E.C., and securities laws of the land.
Public market fund managers can make millions of dollars per year by getting paid just 1-2% of their fund’s value. There is no incentive to take much risk when managing a public fund. Just play it safe. When the stock market moves broadly down, it tends to drag even good stock prices down. How is the this good for the investor who wants to be in and out in five years, and make some money during this holding period while writing-off his investment? This is where I talk about the part I don’t like when trying to predict the public marketplace. The one thing you have with public companies who stay in business, is liquidity. You can be in for a ride, or waiting period to make money with private companies, and though you can still get excellent tax write-offs which can make a big difference on taking the chance with a small company investment, the truth is, it takes time to establish cash flow and provide the ‘greater returns’ motivating private investors in the first place. Medium & Large public companies can be hard to predict…is the company ready to expand, and use capital to develop new products for example? Or is the company reinvesting in it’s key or core products or services to grow the company to a point where the stock price increases, and dividends are being paid? Worse, is the company dissipating, and unable, or unwilling to adjust to new competition, or upper level management is so saddled with overhead, union, and pension obligations, they simply think why risk it? What is management doing? Are they investing in their own company?
One final note…there is always a market for oil, and you don’t need to spend money to find oil production buyers…finding capital becomes the biggest challenge when involved in private placement offerings, and while working to achieve the aim of the legitimate folks in our business of developing our oil & gas leasehold interests with our private investors to make a profit. There is room in your portfolio for oil investments no matter what niche’ you like best, small private companies, and/or public companies.
More later…Dennis
Dear Investor, here are some things to look for, and prioritize as you examine an oil & gas offering, and some very important, and specific items to check-off, and look for and avoid as you conduct your ‘due diligence’, and evaluate any oil & gas private offering before you invest.
Ask immediately what the credentials and track record of the caller’s company is, or salesman are and while you are at it, ask what and where the proof is regarding the deal being discussed, what the many risks are, and what amount of money the company has made for others in the past. Get it in writing, and do some checking. It had better be in the memorandum which is the contract as required by law.
Make sure you are dealing with the Operator who is often the sponsor, or issuer, and can offer you a working interest in the program being offered, and it can be properly defined in the private placement offering. This is easy to check in each state. The Operators are on the hook to deal with both Federal and State Authorities, and other agencies; and Operators have both the authority to sell oil, and own the actual leases you are investing in to make money. Operators have a lot of responsibility and will generally give you more accurate information about the performance, and bottom-line in our industry.
Be wary of a turn-over or ‘TO house’ where a front-end caller qualifies you, and a ‘closer’ or someone identifying himself as the owner, and chief executive officer, president, or master salesman attempts to surgically remove your cash, or what I call doing the ‘two step’, or performing a ‘cash-lectomy.’ Ask for resume’s which can be checked-out, and look for consistent time in our industry. Be especially careful about anyone selling you something they can’t explain, or don’t really understand well. Be careful of the high emotion trap…don’t fall for it. If it’s good there is time to carefully consider, and come to a comfortable point prior to investing. Don’t let greed get the best of you. Profit margins can be low in the oil game, but tax write-offs are still very good, and the upside as assets are accumulated by a legitimate company become worth more money over time, as prices and demand go up.
Private and Industry drilling programs are hard to predict relative to funding completion dates, and drilling start, or finish points. No one knows what a prospective reservoir will give-up, or how long it will produce and do so in commercial fashion regardless of technology, or professional expertise. Costs including drilling, completion, and labor not to mention steel prices, are all going up in linear graphic lines and can be depicted on a chart or line graph with oil or market prices. Therefore, it is impossible to say with certainty how much, or when you will begin to make money.
Be wary of the pitchman who tells you ‘God Bless you’, your family, and your dog, etc. etc. I have never seen a company representative who talks about being religious or plays the religion card who is legitimate in my 28 consecutive years in the oil & gas industry. Sorry, it’s my opinion but it is based on experience.
Meet the people asking you’re for money, and make sure there is no ‘metal in their ears, nose, or tattoos unless they can prove they were once an enlisted man in the Navy. Check the private placement memorandums for ‘full & complete disclosure’ of their past history, and for unresolved problems with federal, or state authorities. If a company has been around awhile there can be violations, including ‘cease & desist’ actions but they must be explained in the PPM, and resolved. Lawsuits happen these days. It’s a sign of the times.
Start slow, with small amounts of money and diversify among companies. Consider losing your money for many reasons in oil & gas investing. Especially as the frenzy of prices continue upwards. Also look at oil index funds, public stock, and the majors…investing $10,000 with ExxonMobil 30 years ago would be worth a small fortune today.
Dennis
Dear Investors, we continue to see higher oil prices while the cost to subsidize alternative energy such as bio-fuels, wind power, solar, hydroelectric, and nuclear power continue. I saw a graph today showing the cost of federal tax subsidies on a dollar basis for oil & gas at .25 per dollar versus the equivalent costs to stimulate development in alternative energies in the dollars. When will we learn oil is cheap, has thousands of uses, and the whole world relies on it whether they want to admit this or not?
My 28 years in the business has taught me one non-debatable truth. The cost for energy is going-up for a variety of reasons, and this isn’t going to change in our lifetime in my opinion. I’ve seen the price of oil at $10.00 per barrel in 1983 when I began my career in the industry after working as a broker at Merrill Lynch, and E.F. Hutton, and I saw gas pump prices of 16.9 cents per gallon in 1962 in New Jersey.
China, India, and Japan, and other European countries are dependent on oil & gas and these countries are using more of it each day. China for the first time now exceeds our consumption of oil on a daily basis. We must to continue to look for and find this ‘basic’ fossil fuel using our technology, and the competitive edge our country has because experts in our industry know oil provides more energy, and fulfills more needs than any other single product we use in the world. We must continue to use our technology, and the free enterprise system to find and recover the reserves of oil & gas we need. Technology is going to eventually help us be less dependent on fossil fuels, but it won’t happen overnight, and it will likely occur as a result of working on something unrelated to energy, or actions taken to make our lives easier.
If you would like to discuss the advantages of investing in a fully diversified program, or in direct investments with our experienced ‘Operators’, and investing in tax advantaged oil & gas drilling programs to hedge your investment portfolio that are specifically based on your requirements, and needs… just let me know.
Dennis
