Compared to traditional investments, the right direct investment in oil and gas may provide solid returns with monthly cash flow. In addition, direct investments in oil and gas can provide tax advantages which are not available with stocks and bonds. Furthermore, being diversified with direct investments in oil and gas can provide a hedge against the impact of high or rising energy prices on other asset classes.
Some potential advantages of direct investments in oil and gas may include:
■Potential payback between 2-4 years;
■Tax deductions not available to other investment classes;
■Years of regular cash flow;
■An investment which is less impacted by the ‘up and downs’ of the stock market and interest rates; and
■Diversification of your investments.
However with direct investments in oil and gas, there is the possibility of the loss of a portion, or all, of the investment principal if the well or wells are unsuccessful. Furthermore certain direct investments are relatively illiquid and very difficult to sell to others (see certain other risks at Certain Risks tab above).
Certain direct investments in oil and gas provide a monthly payment for the oil and natural gas sold during the month. Some refer to this as ‘mail box’ money because it comes in with no effort on the part of the investor. In addition, oil and gas wells may provide significantly higher returns during the first few months of production. As a result, the payback of oil and gas investments may be as little as 2-4 years, depending on the particular investment and oil and gas prices.
The US’s dependency on foreign oil is a key topic, particularly with the developments in the Middle East. To encourage the development of US reserves, direct investments in oil and gas have tax advantages not available to other investment classes.
Investments in oil and gas are less dependent on the economy or interest rates compared to traditional investments like stocks and bonds. As a result, these investments may provide a hedge against a downturn in the economy, particularly if the downturn is the result of a shortage of oil and gas.
However making direct investments into oil and gas does have a learning curve. Among other things, it takes understanding of the various types of investments possible and the various risks involved as well as how to manage these risks to the extent possible.
Not all investments in oil and gas are the same. For many, they think of investing in oil and gas as ‘wildcatting’ – which is going out into an unproven area in the hope of being the first to strike oil. However there are investments into ‘proven fields’ where it is generally known that oil and gas exists. Further there are production deals where investors are buying one or more wells which have already been drilled and are producing oil and/or natural gas. So the risks involved can vary widely as well as the returns.
Investing in oil and gas also involves taking a disciplined approach similar to the approach taken by oil companies.
Only qualified investors are allowed to make direct investments in oil and gas.