So, what are the types of Oil and Gas Investment Opportunities? The short answer is that the types of projects available are extremely varied.
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A distressed asset is typically an asset where the original operator purchased the asset at a price that was too high to be sustained in a lower price environment.
Or an asset can become distressed when an operator encountered financial difficulties that may have been unrelated to the distressed asset.
In either scenario, a distressed asset is one that presents a unique oil and gas investment opportunity.
Typically, an asset is distressed because the bank note attached is bigger than the revenue coming in. Just like in residential asset foreclosure, the bank will sometimes negotiate with a new buyer to buy the asset under its full value in order to get the asset off of its books.
The opportunity is thus to purchase an asset – under market value – that may include numerous wells that just need a limited capital infusion to increase production to levels that make can make the formerly distressed asset a tremendous investment opportunity.
What it means to have an in-fill drilling program is that new wells are targeted to be drilled in an area with a very well known geology.
Often, major oil and gas companies will drill an area extensively and gain a very strong understanding of the geology. This geological knowledge can be obtained by smaller operators in the area.
A strong investment opportunity often presents itself when major companies leave an area that they drilled extensively for more lucrative opportunities such as offshore wells or an asset that has seen little production and thus has a greater upside potential necessary to feed a multi-billion dollar valuation on Wall Street.
When major companies leave behind well-known fields, it leaves the opportunity for in-fill drilling programs by smaller companies. These smaller companies can benefit from known geology to drill in high-value locations left behind by a much larger company pursuing a much higher profit margin elsewhere.
To be clear, what is left behind can be extremely lucrative on a smaller, scale even if the in-fill drilling operations can’t sustain a multi-billion dollar publicly traded company.
In-fill drilling programs can also be conducted lucrative in areas that were originally explored by smaller companies who couldn’t afford to lease up the entire area that has potential production based on the first discovery of oil.
Re-working and re-entering.
After reading the section on in-fill drilling, you may be sensing a pattern in the oil and gas industry.
Large companies explore an area and obtain most of the up-front value.
Smaller companies acquire the “leftovers” which they can translate into strong return on investments.
It isn’t always the story of a small company taking over where a big company left off, though. There are many smaller firms that make it their bread and butter to re-work old oil and gas wells left behind by other smaller sized companies.
When re-working a well, production can often be increased simply by fixing mechanical problems inside a well.
Production can also be increased by re-entering and fracturing the rock in an existing perforated zone.
This strategy can lead to strong returns because it is an opportunity to target production without paying the expense of drilling a well to total depth. Drilling is often the single largest expenditure in a well. When you eliminate that cost, you create an opportunity for high profit at low cost and low risk.
Shale wells are produced by drilling horizontally through shale rock which traps hydrocarbons.
These wells often present a prolific opportunity if acquisition costs can be kept low. One difficulty with shale is that regions like the Barnett, Eagle Ford, and Bakken have been targeted for investment by the largest oil and gas companies in the world, driving lease acquisition costs into the stratosphere.