Oil and Gas Investment Information
There are many risks and potential benefits associated with oil and gas investing. We believe in educating interested parties about all aspects of the industry so they can make a well-informed decision. There are several things to consider when evaluating a potential oil and gas venture. The information provided below pertains to participation in an oil and gas joint venture. Tax benefits and investor liability vary for other forms of energy investments such as stocks, oil futures, gas futures, and mutual funds.
Selecting the Right Oil & Gas Company
Before considering participation in any particular oil and gas venture, consider the company that is offering it. The company should be able to provide business, banking, legal and financial/accounting references. Ask to speak with one or two current investors. Ask for proof in writing that the company has invested its own money in the prospect you are considering. After all, if they don't believe in it enough to invest in it, why should you? Finally, review their track record.
Return Potential of Oil & Gas Investments
Each project has an individual risk/reward profile. For example, there is less risk in developmental wells than exploratory wells. However, there is a tradeoff for the reduction in risk. Although developmental projects can provide steady production and cash flow, they rarely generate the kinds of returns available in successful exploratory wells. Before evaluating a prospect, it is important to first decide what degree of risk you are comfortable with. There can be no assurance that any venture will be successful. However, if you think participation in an oil or gas venture might be for you, evaluate each prospect on a cash-on-cash basis before considering the tax benefits.
Tax Advantages of Oil & Gas Investments
In order to encourage domestic oil and gas drilling, Congress has made participation in oil and gas ventures one of the top tax advantaged investments. Many individuals find these write-offs to be a very valuable part of their year-end tax strategy. If you'd like to learn more, visit our section dedicated to the tax advantages of oil and gas drilling.
Potential Risks of Oil & Gas Investments
As is true with all investments, there are significant risks associated with investing in oil and gas joint ventures. The most significant risk of participation is that drilling could result in a dry hole, thus resulting in a loss of all capital contributed to the project. A dry hole is an exploratory or developmental well which is found to be incapable of producing either oil or gas in sufficient quantities to justify completion. Although technology has improved significantly in the past few decades, success rates still vary for each project. It is impossible to accurately predict the outcome of any project. Due to the structure of joint ventures, the capital contributed on a dry hole would be lost. This is the main reason many experts advocate managing risk through diversification.
Investor Suitability Standards
Investing in energy projects can be exciting and rewarding. However, because of the significant risks involved, investors must have a certain degree of investment acumen, business knowledge and financial stability. Many companies prefer that an investor be accredited. However, some non-accredited individuals that have significant industry and investment experience may also qualify to participate in a joint venture.
THERE ARE SIGNIFICANT RISKS ASSOCIATED WITH INVESTING IN OIL AND GAS VENTURES. THE ABOVE INFORMATION IS FOR GENERAL PURPOSES ONLY AND IS NOT A SOLICITATION TO BUY OR AN OFFER TO SELL ANY SECURITIES. ANY SUCH SOLICITATION OR OFFER WILL ONLY BE MADE THROUGH A PRIVATE PLACEMENT MEMORANDUM ACCOMPLISHED IN ACCORDANCE WITH SEC REGULATION D, RULE 506. IN ADDITION, THE AFOREMENTIONED GENERAL INFORMATION IS NOT INTENTED TO BE INDIVIDUAL TAX ADVICE. CONSULT YOUR PERSONAL TAX ADVISOR CONCERNING THE CURRENT TAX LAWS AND THEIR APPLICABILITY AND EFFECT ON YOUR PERSONAL TAX SITUATION.