(For the FIU regulars that come here, let me take an uncommon side step out of my typical persona to post on a topic I've had a few people ask me about.)
With the current oil prices near, and tapping $100, I've had a few friends contact me because they have been approached about investing in oil and gas projects. Since they know that I am involved in the industry, they've asked me to look at the various packages they have had submitted to them. However, the question that I always get asked is this: "Do you think I should do it?" typically followed by "Would you do it?"
These two questions are the big ones that every investor has to face in asking for advice but understanding the answer in oil and gas investing is a little different. As a result, I will give you my answer to those questions and how I have come to reach them so that you have an idea of how I believe that a successful investor needs to understand that even before you analyse a deal you need an analysis of yourself.
To the answer to whether I would invest in a oil and gas deal is always the same ,"No." Now this isn't because the deal is bad or the company is bad or the prospect is bad. They may very well be all top notch. The reason that I can always answer "No" is that at this point in my life I do not have the money to spend on speculative investments. I can't make this point strongly enough but all, I repeat ALL, oil and gas deals are speculative. Period. I don't care if it's shallow, in field drilling. There is a risk every time of complete and total loss of all money raised for drilling, every time. I can't afford, at this point, to put the amount of money needed to partner in a well, into something that has a reasonable chance of netting me $0 return on investment.
Understand, before I make people panic and say "I'll never invest in O&G" that the stock market and the like are just as volatile. The difference is that instead of basing your investments potential off of the perceived value of a company as based by accounting statements and economist your basing the potential for hydrocarbon recover off the work of geologist and engineers. There really isn't a drop in professionalism on either side but the simple fact is it cost more to play on our side. As a result, it is cheaper for me to diversify on the stock side of the market.
As a result, the key in O&G investing is diversification, both in your over all investments and in your well partnership investments. It's the same as the logic that points out that if you walk in and bet all of your money on one hand of poker you will boom or bust quickly. However, if you only play with money that you can afford to lose and you play several hands you have a better chance for success.
So my advice to oil and gas investors, who already know the have the money that they need and can afford to be speculative, is to spread your exposure over the best quality programs that you can find. Don't do one big project, do smaller positions in several projects of various scopes with multiple companies. This allows you to better gauge the programs that you are involved with. Also, be patient. Things in O&G move in spurts of activity. It's a lot of hurry up and wait. This is an additional reason to spread your programs because sometimes a rig timeline gets skewed and drilling gets put off but if you money is working in different places you have a better chance of seeing continued activity and not suffering the emotional roller coaster of waiting on operations.
As far as selection of a company to invest with, there are loads to pick from. My company even does private placements, but there are strict restrictions on advertising and I can tell you firsthand that some of the wells we drill don't suit every investor. So let me give you what I would consider the important things to look at in considering a deal or vetting a company.
A lot of people want to tout their record and a lot of people will tell you to ask for lists of the company's production or return to the investors. I have to say that I put less confidence in this. I've seen big companies hit a bad streak and hit only 1 out of 10 wells. Sound horrible, right? What if those wells all cost the same and that well they hit nets 20 times it's cost? I've also know of companies who can hit 10 wells in a roll and all produce just enough money that keep them on line but no one makes money. It's too easy to skew the data off of well results besides each project is different for the simple fact it's a different well being drilled.
The two biggest things I'd stress checking is the company's standing and the projects strength. If a company is selling interests and it's not through a brokerage that is FINRA then skip it. If they won't submit themselves to the over site of the securities laws in their sales then you might as well move on. The second one is harder to judge but the amount of information you get is a clue. If the company doesn't provide you with logs, maps and production to look over you need to be skeptical. If they do, spend a little money and check the area on sites like Drilling info to see if the production and activity in the area the are representing is indicative of what's really going on. If the investment is sizable enough, hire someone with a background in evaluation to do this for you. (You know, I like my job but if you'll pay significantly I consider quitting to evaluate for you.)
While this all seems like a lot of work and worry over an investment, it is. The good thing is that my best argument for why it is worth it goes like this: I know of a well In Lavaca Co, Texas that cost $2.4 million to drill in 2000. It came on at 242 barrels of oil per day and 4.4 million cubic feet of gas per day. As of this month it has produced 235,077 barrels of oil and 5.471 billion cubic feet of gas. Even if the oil and gas prices stayed locked at year 2000 levels that's a total of $5,876,925 in oil and $17,780,750 in natural gas. Of course, oil prices rose from $25 to $94 , today, and from $3.25 per mcf to $8.12, but I think I made my point. There is quite a bit of money to be made if you can afford to invest in it wisely.
So, in summary, it's not for everyone. You have to be realistic in what level of exposure and risk you are comfortable with. This is really the strongest factor in answering the question of "should I do this deal?" And once you know that, proper planning on your side can help you minimize loss through an investing strategy and diversification.Labels: oil, psa, work |