Financial Investments in Oil & Gas


There are many investment options for oil investors looking to enter the oil and gas business. Basically the options can be divided into the following categories:

 

  • Mutual Funds
  • ETFs and Traded Funds
  • Stocks
  • Partnerships
  • Working Interests
  • Royalty Interests
  • Mineral Rights
  • Leases

 

The risks and returns will vary, sometimes significantly, depending on the type of investment. It is important to complete due diligence before investing.

 

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Mutual Funds

Of all the categories listed above, Mutual Funds are most likely the least risky. However, with this type of investment none of the tax benefits are available and the returns are comparatively lower.

 

ETFs and Traded Funds

ETFs are traded like stocks and can be purchased on exchanges. Some ETFs are structured to attempt to follow the price of oil and gas while others are more exotic and may use leverage in order to multiply the effect of price changes in oil and gas. It is important to investigate and understand how the ETF is structured before you invest.

 

Stocks

Oil drilling stocks are a common approach to invest in major oil companies or major services companies. To be more aggressive, although also increasing the risk, an oil investor could invest in smaller or independent companies. Again none of the tax advantages would be available.

 

Partnerships

Partnerships can be structured to pool investor dollars in order to complete specific projects (new drills, reworks, etc.).oil rig workers shaking hands Investors buy units from the partnership and can share in the revenue generated. Depending on the partnership structure, investor can be entitled to certain tax advantages including IDC deductions. When contemplating investing in a partnership it is important to understand how the partnership is structured as well as completing due diligence regarding who will be operating the wells and managing/completing the proposed project.

 

Working Interest

Working Interest in an oil and gas well is an ownership interest in the operations of the well. This not only includes revenue generated but also expenses incurred. While there may be greater risk, there is also the opportunity for higher returns. In addition there are significant tax benefits related to investing in Working Interest which are not available to other investment in oil classes an oil investor.

 

Royalty Interest

Royalty Interest can provide an income stream to those who own the mineral rights where an oil or gas well has been drilled. The royalty income is based on the gross production of the well. Unlike Working Interest owners, mineral right owners or Royalty Interest owners assume no liability of any kind related to the leases or the wells. However, Royalty Interest owners are not eligible for some the tax benefits offered to Working Interest owners.

 

Leases

Leases provide the owner the right to drill wells on a particular piece of land. Leases will generally include several stipulations or clauses that can be very beneficial for the mineral rights owners. Some stipulations include drilling a certain number or wells, drilling wells within a certain timeframe, extension options, delay rentals, etc. Mineral rights owners have a vested interest in seeing that their mineral rights are extracted due to potential royalties. Leases can also increase in value without drilling as operators move into specific areas where new, successful wells have been drilled. Contact us for additional oil and gas business information such as Marcellus Shale Investments.


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Working Interest vs. Royalty Interest
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