Nine Excellent Tips Before Investing in Oil
Investing in oil can be a way to enter into a new investment category to help turbo-charge your portfolio. Investing in crude oil is an area of focus that brings with it certain risks. The main risks are failure to obtain production and risk associated with fluctuating prices.
Your objective should be to reduce the risk exposure in crude oil investments while increasing your exposure to a wide spectrum of projects within the investment category to increase the likelihood of much higher returns than you can obtain in a low interest rate environment.
The EnergyFunders blog is a great source of knowledge for new and experienced investors alike. Feel free to get started with our e-book to get a basic introduction to oil and gas investments. Or, you can keep reading. There are some key points right off the bat that can help you keep risk at a manageable level and maximize upside potential.
Pick projects that make sense in any price scenario
To win at crude oil investing, you can’t just pick drilling projects that require sky high prices in order to turn a profit. That’s a major mistake that has many investors feeling the pain. Investors targeting the crude oil category know that by negotiating correctly on the terms of the deal, money can be made at virtually any price point. By negotiating deals that are projected to be winners even at the low end of the price spectrum, return on investment can be strong during price downturn while leaving the potential for record returns when the price of crude goes on a tear, as it seems to do quite often on a historical basis. You want to position yourself smartly to buy into crude oil projects when the price is low so you can be the one to capture record returns when crude oil prices spike.
Spread the risk across many wells, many formations and many operators
Here’s some real talk:
Every crude oil project has a risk of failure. Things can and do go wrong, just like they can in any other investment category including passive investment in the stock market. When targeting crude oil investments, you can mitigate risk by diversifying across many wells. You can turbo-charge your risk mitigation strategy by investing in crude oil projects being managed by different operators in different parts of the country with different oil formations being targeted.
It’s a simple concept, but one that bears repeating over and over:
The more diversification built into your oil investments, the greater you can protect yourself against risk. This is the same reason why the largest crude oil exploration and development companies in the world have projects all over the world from the Eagle Ford shale to the coast of Africa. They are diversifying. You can do the same thing by targeting crude oil production in different projects across the United States.
Get into the well
When you invest in a company being publicly traded on the NYSE, you have to pay CEO salaries, pay bonuses, pay for expensive real estate for a swanky corporate HQ and the expenses keep piling up.However, every oil company in the world that focuses on production has one source of revenue: sales of the crude that they produce out of the ground.
From. The. Well.
Investing directly into the well is a way for you to juice your ROI and cut out the expenses that dilute your when you invest in a company that focuses on producing crude oil.
Spread the risk across different types of projects
Large companies do this, and you should too. There are a number of project types you can invest in when targeting crude oil. Shallow wells typically have lower costs and more known formation. Deep wells can generate substantially more productive but cost more to drill down and extract the crude that will be converted into barrels of oil to place into the stream of commerce. Existing wells can also be re-worked. This is one way to cut out the cost of drilling to inexpensively extract crude oil. The list goes on and on. To get the most out of your crude oil investing program, you need to be invested in a number of different project types.
Don’t abandon ship when crude isn’t priced high
Oil doesn’t need to be at $100 per barrel of crude to make strong returns. In fact, when the price of oil is low it is easy to make deals that make sense in a low price environment. When the price of crude is low, you should lay the foundation to take advantage when oil prices skyrocket. You can’t predict when turmoil in the Middle East or market functions will cause prices to increase. What you can do is lay a strong foundation based on strong business fundamentals.
Dig deep during your Due Diligence period
Realizing a return on investment from crude oil production requires a skill set vastly different than putting together a good investing pamphlet. Don’t let a pamphlet satisfy your due diligence. No matter how slick it seems. Dig deeper. Your project should be vetted by technical experts in oil and gas extraction. The deal should also be structured by experts.
Crude oil investing isn’t like a clothing store
Paying fifty dollars for a t-shirt at Abercrombie and Fitch may seem pretty silly. But, when you’re looking for a place to park your crude oil investment dollars, there are a lot of Abercrombie and Fitches out there looking to make their profit on you overpaying. You want to have business partners who have equity in the project and aren’t just looking to make a sale and then go on vacation to the Bahamas. Insist on business partners who are right there in the deal with you.
Deal structure transparency is critical
You can’t cut out the middleman unless the deal structure is completely transparent. You have a right to insist on transparency. It isn’t rude to demand to know where every dollar is being spent. Don’t let someone tell you otherwise.
Get with a team that’s experienced in crude oil investing
At EnergyFunders, the deals are transparent and they’ve been reviewed and structured by a cross-disciplinary team. A carried interest in the crude oil that is produced from each project is our sole revenue. So, we want you to be successful. No hidden agendas. We don’t get paid unless you do.