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In the U.S., subject to Rule 501 of Regulation D of the Securities Act, an accredited investor must meet specific criteria regarding his or her assets, income, net worth, legal status and professional experience. Accredited investors can be individuals with high net worth or insurance companies, banks, brokers or trusts. An accredited investor is also known as a registered investor.
An authority for expenditure (AFE) is a type of budgeting form that includes the cost estimate for the well and incorporates the intangible and tangible drilling costs. It’s typically the final step in the well-planning process for a well that is ready for drilling.
A barrel is a unit of measure used in the United States to report oil production. One barrel equals 42 U.S. gallons (35 imperial gallons) at 60 degrees Fahrenheit. Outside of the US, oil production is reported in cubic meters.
Crowdfunding is the practice of raising small amounts of capital from a large number of individuals to finance a new business venture.
Depletion allowance is a tax deduction allowed by the IRS to compensate for the “using up” of a natural resource such as oil, gas, timber or minerals. It is a way to recover costs for capital investments.
Directional drilling refers to drilling toward a specific target. With directional drilling, operators may drill at an angle or slant, which allows them to reach a target without beginning the surface wellhead directly above it. Many targets downhole are directly below surface locations that are protected, environmentally sensitive, or uninhabitable
Horizontal drilling is a type of directional drilling, where the well starts off at the surface and is directionally drilled to be at a 90-degree angle. Instead of producing through a formation and producing from a small portion of the rock, you turn sideways and greatly extend the wellbore’s contact with the reservoir rock.
Equity crowdfunding is the offering of private company securities to a large group of investors in exchange for equity in the private company. This type of offering is typically conducted online but is still subject to securities regulations.
Horizontal drilling is a type of directional drilling, where the well starts off at the surface and is directionally drilled to be at a 90-degree angle. Instead of producing through a formation and producing from a small portion of the rock, you turn sideways and greatly extend the wellbore’s contact with the reservoir rock. It’s sometimes referred to as unconventional drilling. Horizontal wells have become more popular in the past decades, but they can have higher drilling costs for a variety of reasons.
Intangible drilling costs are the expenses incurred while developing well sites for items that are not a part of the functioning well and have no resale value. Examples of intangible drilling costs are labor, survey work, ground clearing, repair and supplies.
A joint operating agreement (JOA) establishes the terms governing an operating partnership between entities, whether a business or government body. In joint operations, each party contributes resources to a specific project but retain their own identities.
In the oil and gas industry, a joint operating agreement is a common type of contract. It details things such as the designated operator, scope of work, equipment, types of drilling techniques, decommissioning and length of agreement.
Lease operating expenses are recurring costs associated with an active well and its associated equipment. These costs can include rent, insurance, and payroll. If multiple parties are involved, each party’s lease operating cost is represented by their working interest in the well. Reducing lease operating costs is a significant function of a management team.
A master limited partnership (MLP) is a business owned by two or more owners that is actively traded as an entity on a securities market. An MLP combines the tax benefits of a partnership with the liquidity of securities, which can be quickly bought or sold, allowing the partners to take advantage of the cash flow.
The net present value (NPV) is also called present value or discounted cash flows. It’s the calculation you can use to find today’s value of a future stream of payments. Net present value is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. Money in the present is worth more than the same amount in the future because of inflation and earnings from alternative investments that could be made during the intervening time.
A non-accredited investor is someone who does not meet the requirements of Rule 501 of Regulation D of the Securities Act. A non-accredited investor currently has a net worth of less than $1 million and earned less than $200,000 annually for the previous two years.
An oil and gas lease is a legal agreement where the lessor (mineral rights owner) allows a lessee (oil and gas company) access to the minerals and property. Usually in return the lessee pays the lessor royalty payments.
Oil and gas stocks are shares of oil and gas companies traded on the stock exchange. Investors can also invest in energy by purchasing oil and gas futures, notes or exchange-traded funds or buying into wells.
Oil futures involve an investor buying a contract that means he will sell a stake in oil commodities back by a certain date. If the price of oil rises then the contract will be a profit for the holder. If the price drops, then the holder will still have to make good on the contract at a personal loss.
Oil futures can play different sides of the oil industry. There are futures for heating oil, crude oil supply, airline fuel, and more.
Exchange-traded funds are a group of stocks that a fund manager controls. Oil and gas exchange-traded funds are typically only comprised of stocks from companies within the oil and gas industry. Like stocks, exchange-traded funds are traded on stock exchanges. Oil and gas exchange-traded funds and other ETFs have become popular because of their low cost and similarity to stocks.
Oil and gas royalty payments are the portion of oil and gas revenues that an oil company pays to the landowner. It’s usually a percentage of the revenue based on the terms of the oil and gas lease.
An oil mutual fund is also a portfolio, but unlike oil ETFs, a fund manager manages it. The fund manager decides what to sell and buy to ensure the fund makes a profit. Most oil mutual funds tend to be a blend of energy stocks.
Oil-producing wells are wells that produce enough oil for the revenue from the oil to outweigh the tangible and intangible drilling costs.
The payback period (sometimes called “payback” or “breakeven period”) is the length of time required to recover the initial costs of an investment. The payback period ignores the time value of money (TVM), unlike other methods of capital budgeting such as net present value (NPV), internal rate of return (IRR) and discounted cash flow.
Proved Developed Producing (PDP) wells are those that are currently producing at economic rates and selling to a market.
Proved Undeveloped (PUD) well locations are those that have not been drilled (or still require a significant investment to access petroleum recovery), are reasonably certain to be economically productive, and are laterally continuous with Proved Developed wells.
The rate of return (ROR) or internal rate of return is a metric used to estimate the profitability of a project. The internal rate of return is the interest rate (or discount rate) at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. The term “internal” refers to the fact that the internal rate excludes external factors, such as inflation, the cost of capital or various financial risks.
Regulation A+ is an update to Regulation A adopted by the SEC in 2015. Regulation A+ establishes two tiers within Regulation A:
Regulation A provides exemptions from the requirements of the Securities Act for companies using equity crowdfunding. Regulation A allows companies to offer and sell their securities online. This makes raising capital possible for small to medium-sized businesses that would not usually be able to afford the costs of registering with the SEC. It also allows non-accredited investors to participate in the offering.
Regulation CF is the set of rules adopted in 2015 by the SEC that allows private, early-stage companies to raise money through crowdfunding and online crowdfunding portals.
Regulation crowdfunding is crowdfunding where all transactions must take place through an SEC-registered broker-dealer or funding portal. Companies using regulation crowdfunding are permitted to gain a maximum of $1,070,000 over a 12-month period and must disclose all information with the SEC and the broker-dealer or funding portal.
Regulation D (Reg D) is a Securities Act regulation that provides exemptions for qualifying companies to offer and sell their securities without first registering the offering with the SEC.
Regulation S clarifies the SEC’s views on the territorial reach of Section 5 of the Securities Act. Section 5 requires that all securities offered through interstate commerce must be registered with the SEC. Regulation S exempts offshore offerings from Section 5 requirements, meaning registration of an offshore offering is not mandatory.
The return on investment (ROI) measures the gain or loss generated on an investment related to the amount of money invested. You calculate it by dividing your total returned net revenue by the total net invested capital.
The return on investment is another term for multiple on invested capital (MOIC) or return multiple.
Rule 501 of Regulation D defines the term “accredited investor” according to the view of the SEC and Regulation D of the Securities Act. According to Rule 501, an accredited investor must meet specific criteria regarding their assets, income, net worth, legal status and professional experience. Accredited investors can be individuals with high net worth or insurance companies, banks, brokers or trusts. Accredited investors are also known as registered investors.
Tangible drilling costs are the measurable cost of drilling equipment and physical items with resale value. Examples include pumps, tanks or wellheads. Tangible drilling costs are tax deductible for oil and gas investors.
This is a type of oil and gas investment in which the investor is responsible for drilling and other costs. In return, working interest owners receive a percentage of the oil and gas revenue, related to the amount of interest they hold.
A carried working interest is the amount one party (typically a dealmaker) earns after the operator pays drilling costs and completes sales on the well. It is a simple equation: working interest ownership = revenue from oil production – operating expenses – burdens (landowner royalty + overriding royalty).
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