; ?> "NYMEX Daily High Low Future Crude Oil Price")
; ?> "NYMEX Daily High Low Futures Natural Gas Price")
Investing Options
 |
|
|
| |
|
Types of Investments
There are many different investment options for investors looking to invest in oil and gas with many being added in the form of ETFs in the stock market all the time. These options are can be broken down into the following categories: Mutual Funds, Stocks, Partnerships, Working Interests, Royalty Interests, Mineral Rights and Leases. The returns and risks vary, in certain cases significantly, from category to category. Due your due diligence before investing.
Mutual Funds:
This investment option is the least risky of all the options. However none of the tax benefits are available on this option and the potential returns would generally be lower.
ETFs and traded funds
ETFs trade like stocks and are purchased on the exchanges just like buying a stock. There are ETFs which are structured to attempt to follow the price of oil and gas as well as exotics that use leverage to multiply the effect of the price changes in oil or gas. Investigate these extensively before you invest to make sure you understand the structure. A few notable ETFS include: USO is one ETF which is structured to follow the price of oil. UNG is intended to follow the price of natural gas. ERY is a fund which is an exotic which seeks to replicate, net of expenses, 300% of the inverse daily performance of the Russell 1000 Energy Index (see a deeper explanation on one of the stock market boards).
Stocks:
Investors can invest in stocks of major oil companies. Or a more aggressive approach could be to invest in independents or service companies. Again none of the tax advantages would be available.
Hedge Funds:
There are number of hedge funds which are set up to capitalize on various oil and gas investments. These are typically for very large investors.
'Buying Production':
Buying production often means buying working interests in wells which have already been successfully drilled. The investor is taken any of the drilling risks, but has the benefits of the stream of income related to the oil and gas well. Most of the tax benefits enjoyed by Working Interest such as IDCs are not available for buying existing working interests as the investor is not taking any of the risk of drilling.
Working Interest:
Working Interest in an oil and gas well is an ownership interest in the operations of the well. There are significant tax benefits related to investing in Working Interest which are not available to other investment classes. See Income Tax Advantages. Furthermore the payback may be between 2 to 4 years.
Royalty Interest:
Royalties consist of income received by those who own the mineral rights where an oil or gas well has been drilled. Unlike other countries, in the USA mineral rights are privately held and individuals or groups enjoy the benefits of ownership. The royalty income comes "off the top" of the gross revenue generated from one or more wells. Unlike Working Interest Owners, mineral right owners assume no liability of any kind related to the leases or wells. However mineral right owners are not eligible for any of the tax benefits enjoyed by Working Interest Owners.
Mineral Rights:
Mineral rights in and off themselves can be of value regardless if wells have been drilled on the land. Non producing mineral rights can appreciate significantly as operators move into the area and the prospects of obtaining royalty income for the mineral rights improve. Further royalty income can increase as operators drill more wells on a given piece of land.
Leases:
Leases provide the owner to right to drill wells on particular piece of land (Of course they will have to pay the mineral owners a royalty for any oil and gas obtained). Leases will generally stipulate that a certain number of wells be drilled during a given period, as mineral rights have a vested interest in seeing that their mineral rights are extracted due to the potential for royalties. Leases can also appreciate significantly as operators move into a particular area and drill successful wells. As leases have a defined term, investment in leases can be very risky as they lease may expire without any wells being drilled on the property. However the returns can be very high.
The existence of this website should not be construed in any direct or indirect manner as a solicitation for securities.
We cannot guarantee the completeness, timeliness or accuracy of the information contained in this web site. Nothing in this web site contains investment advice. Any decisions based upon the information contained in this web site are the sole responsibility of the user.
This site is for informational purposes only and is to be used only as a starting point for potential oil and gas investment considerations. Consult with tax advisor and legal counsel before you make any investment decisions regarding investments in oil and gas, 1031 exchanges or changes to your 401(k) or investments using your 401(k). In making an investment decision, investors must rely on their own examination of a partnership; which include the merits and risks involved, including the management, and any partnership agreements, or other written materials used to represent the investment for consideration of oil and gas direct investments. Oil and gas investments are subject to significant risk and are not suitable for all investors. Investments are generally subject to significant fees and expenses. An investment could result in partial or complete loss of the principal investment. Oil&Gas investments are speculative in nature, and are investments involving a high degree of risk. Persons considering these investments must be accredited, sophisticated, and qualified to make them.