Investing in upstream oil and gas projects can be confusing. There are several ways to invest all of which have their pros and cons. Here are 4 basic ways.
- Purchase Working Interest in a Well(s)
- Buy Publicly Traded Stocks
- Buy Publicly Traded Partnership
- Buy Equity in Small Privately Held Company
Purchase Working Interests
This is probably the riskiest way to invest in oil and gas. You are investing in an individual or group of wells by purchasing a direct ownership in the well. Working Interest means that you are basically your own oil company. You own the well, pay your share of the drilling, completion, operations and bear some liability if anything goes wrong. A person should generally be knowledgeable in oil and gas projects in order to properly assess the risks involved in each well that you do.
The potential for a big return on investment or a complete loss is very possible. There is no liquidity for this type of investment. There are excellent tax advantages.
Buy Publicly Traded Stocks
In this type of investment you get the strength of a large company and your ownership in the company is usually minute. You can get in and out of this investment with relative ease. The return on investment is generally less and more long term in nature. You are relying on the company’s historic record in order to make steady rates of return. Many of the large oil companies pay a dividend. There are generally no tax advantages available through stock ownership.
Buy a Publicly Traded Partnership
With a Publicly Traded Partnership you get distributions instead of dividends. The tax advantages are excellent and liquidity is fairly good. The Partnerships often have higher overhead with more layers between you and your return. The public partnerships are usually involved in a set number of wells and eventually will be dissolved. In our experience they rarely have a great rate of return.
Buy Equity in a Small Privately Held Company
With a small company, such as IBHD, LLC, you get to experience the growth in the value of the company, continual new development, good distributions and tax advantages. Choosing the right company is important. Management and their track record are very important. Look for a solid, experienced management team as well as an excellent business plan. The main negative is a lack of liquidity.
In the case of IBHD, our 4 key personnel have 136 years experience in the oil industry with an excellent track record. As part of its business plan it expects to eventually merge with ESI and Intrepid to form a company with over 2 million net barrels of proven recoverable reserves.
The company will concentrate its efforts in developing existing oilfields via horizontal drilling and other new technology to virtually eliminate dry holes and to maximize oil production.
With solid management and excellent oil properties combined with the prospect of rising oil prices this is an ideal time to invest in a small cap company.