Investing in Oil and Gas- Services
Most experienced, sophisticated and qualified investors have just three questions when evaluating a business deal, or investment opportunity. Investors want to know what the odds of losing their capital will be. Investors want to know when they will begin making money after sending funds to participate in any investment offering. This is the development time risk. Three, Investors want to know how good the profit structure is, or more specifically, how much money they will make during the life of the investment? I can add a fourth and fifth concern which would be what tax write-offs are there, and finally, what liquidity is there going to be in the investment, and what’s the exit strategy, if any?
Risk is of primary concern to anyone who is expecting to make money, and the deciding of who with, and where to invest hard earned money are the key, and hard questions. Upside, downside, and everything else in between are all factors when an intelligent investor analyzes any investment, and determines how much, or little to choose to invest. There are many types of risk…I would like to list some of them based on my experience, considerable research, and of course, my successes & failures over the years.
There is a people risk…finding the right people is absolutely essential, in fact I believe this to be the single most important requirement before doing any business…bad people screw-up great deals. Finding trained, experienced, motivated people who can work together while you develop the leases, and oil & gas fields you have so carefully selected is not easy. It can make or break-you. Relationships based on years of working together is your best insurance of getting the necessary development work done in timely fashion.
Track records are important, but hard to quantify in oil & gas, simply because like the movies, you are only as good as your last picture show. Well meaning, and extremely competent people, working with great teams, and putting a great deal together can lose, or not succeed with every endeavor, irregardless of their desire to do well, or regardless of their wonderful technical abilities and experience. It’s really important to keep this in mind…however, working with incompetent people, or people who don’t know how to get the job done, or regularly finish what they start isn’t an acceptable outcome. You need to avoid these people…and there are excellent clues to look for when trying to make this determination.
The deal is of paramount importance, but how it’s structured to provide; the upside, minimize downside, permit diversification, and be achievable at the same time, and in a reasonable period of time is a significant challenge…the premise of any oil & gas deal must be supportable with history, logic, geology, engineering, and just plain has to make good sense, for both the area and the time.
Some oil & gas drilling, and developmental areas in the US are intrinsically very risky for example…the Gulf Coast is one such area, where the faint of heart should not venture…costs are extremely high, as are the technical risks. Competition is brutal, and the big boys control the lay of the land…you’ve heard of the expression, ‘my way, or the hi-way’? Previously older areas which have historically produced millions of barrels of oil still exist, and these areas have much less, or little risk, but may not have such exciting upside…higher prices in oil & gas now support the return to these areas even though depleted of their primary or previously recovered reserves of oil & gas…all because secondary drilling and recovery methods with new technology of course, can rival, and exceed the outcomes relative to rates of return, and upside you might get in the Gulf Coast states, or with offshore drilling programs. Actually, since the late 70’s most of the middle east oil field are in secondary recovery, and are being water flooded, which is the principal means of recovering the last reserves in place in an oil field.
Finally, there is the price risk, or volatility risk…oil & gas are high, particularly oil prices, and they are going-up in the foreseeable future, or within the time lines we are investing, and developing new oil & gas projects planned during the next ten years…there will be alternate energy sources discovered and developed, and conservation efforts…but demand will be greater than supply capabilities based on my research.
Email me or call with questions or comments…maybe we can do some business in the future.
Dennis W. Stutes
Cell: 805 701 7761.