Oil Drilling Stocks & Oil Futures Investing

Direct participation in the drilling of oil and gas wells can be lucrative, but caution must be used when entering the world of drilling wells. By its very nature, drilling oil and gas wells is a capital intensive venture that contains inherent risks. The issue of matching appropriate capital with a drilling project is a matter of assessing the risks associated. Appropriate capital comes from investors educated in the structure of the proposed deal who understand the legal and technical issues at play and are able to evaluate all the risks properly. Key to any oil drilling investment is understanding that there exists the possibility of total loss of capital. In essence, it is important to evaluate the risks associated in any drilling investment or stocks. Risks include:


  • People risk
  • Mechanical risk
  • Oil and Gas Reserve risk
  • Oil and Gas Price risk
  • The "You" Risk
  • Oil and Gas Investment Deal Structure Risk


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People Risk: People risk encompasses the prospect of evaluating the honesty, integrity, professional ability and history of the parties responsible for the management, completion and operation of the project/well. Is the operator an experienced operator? Has the operator operated in the proposed area? What are the environmental exposures? Is the operator financially sound? Is there proper insurance in place? Is the operator investing in the project? There a myriad of issues that should be addressed when evaluating the People Risk in assessing a drilling investment.


Mechanical Risk: Drilling a hole thousands of feet deep, cementing steel casing, perforating the casing in the correct spot, and outfitting the well to bring hydrocarbons to the surface involves a tremendous amount of technical expertise. Mistakes, challenges or hiccups are likely to occur.


Oil and Gas Reserve Risk: The size and producing characteristics of the reservoir tapped has a lot to do with whether or not a project ultimately makes economic sense. Recoverable reserves can vary widely, the determination dependent upon educated guesses including well control, seismic evaluation, and the area's historical production. The evaluation can be open to interpretation.oil rig workers shaking hands


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Oil and Gas Price Risk: Raw hydrocarbons are commodity products. As with all commodities (like stocks from oil drilling & futures), numerous factors go into determining their value, all of which an investor has no control over. It is important to remember that you will have no meaningful influence on the price at which you sell your product.


The "You" Risk: Sometimes a drilling project will demand decisions from you along the way. For example, do you agree to set casing on the well? Here you will be making a call as to the estimated productivity of the well electing either to continue spending more money to complete the well, or declaring it a dry hole. Other possible emotional strains can come in the form of decisions about going forward. Some projects may require decisions about expensive "fishing" procedures or "squeeze jobs" to cut off unwanted water or long waits for pipeline hookups. An investor should understand the scope of the decisions required.


Marcellus Shale Investments

Oil and Gas Investment Deal Structure Risk: Fundamental to any drilling investment is thoroughly examining the specific terms of the deal. How much capital is going to direct costs? Is it clearly determinable? Who and to what extent are others getting "carried" (i.e. carried along as a participant with any obligation to contribute capital)? Is the difference in the NRI (net revenue interest) and WI (working interest) reasonable? Read and understand the operating agreement which addresses ongoing operational terms. Is the monthly management fee reasonable? How will the investment(sometimes Oil Drilling Stocks) affect your tax situation? Understanding the structure of the deal is fundamental in evaluating warranted and/or appropriate investment. Fill out our oil investing consultation form for more information about this and oil drilling stocks and oil futures investing. Also, feel free to ask us for information regarding Marcellus Shale Investments and oil drilling stocks tips. Page last updated on 11/14/2013.

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