This is the very first question you need to ask, and then answer. No matter how much you like our company, or how financially attractive our current prospect is, it just doesn’t matter if oil and gas partnerships aren’t for you. So, here’s a candid explanation of what they are, what types of investors may benefit from them, and what to look for in the offering company. And before we start, please note the following:
- Oil and gas partnerships have been around for years and have a checkered past.
Historically, disreputable promoters, periodic boom and bust in oil prices, and a
general misunderstanding of what they are have all contributed to investor skepticism. - Today’s partnerships have come a long way in overcoming these negatives. Yes,
risks still exist (as in every business opportunity) but they are more than offset by potential returns.
Only you can decide if this type of investment is right for you, and you’ll have a much better idea after reading on…
“What is an Oil and Gas Partnership?”
In simple terms it is a business entity owned and operated directly by its investor partners. There is one investor or group who is designated as the General Partner, and it manages the limited partnership on behalf of all partners. They oversee the actual drilling and production activity. If all goes “according to plan” (commercial well), the investors increase their net worth and monthly income. In the “worst case scenario” (dry hole), they can write off most of the investment for tax purposes.
Investors own what is referred to as a “working interest” in the well, which is usually a percentage of actual ownership. They share in the revenue, pay operating and maybe future work-over costs in proportion to their ownership. Theoretically they have a liability for costs incurred by unforeseen events, but because the limited partnership and their contracted service providers have insurance, this is rarely an issue. (The procedures for drilling the types of wells we are talking about are well understood and follow standard operating procedures).
Investing in an oil and gas limited partnership is much different than investing in “Wall Street” investments. There is no resale market that trades in limited partnerships, so if an investor wants to sell his working interest, it will take time and approval of the General Partner.
“What Types of Investors Might Be Interested?”
Although not for everyone, thousands of individuals each year invest in limited partnerships. They must be an “Accredited Investor”, which generally means a net worth exceeding $1 million (not including private residence) or an annual income greater than $200 thousand ($300 thousand if joint). So, they are often mature and financially successful.
By this time in life they are usually more interested in wealth preservation and monthly income/cash flow than they are in capital gains. Most of them are familiar with Wall Street types of investments, and they realize that they can earn more via oil and gas limited partnerships than they can with stocks.
Accredited investors, because of their higher tax bracket are able to take advantage of significant tax write-offs and shelters. A 70 – 85% write-off of the initial investment is typical. This is a powerful reason for “buying in”.
They also know that because potential returns are greater, the risks may be higher than with stocks. So they are willing to allocate a portion of their assets to oil and gas limited partnerships. How much? It is their decision. If they have a lower tolerance for risk, they put in a smaller portion, and conversely for a higher risk tolerance.
And finally, they understand the benefits of building over time a portfolio of oil and gas partnerships. Just like with a mutual fund, building a portfolio means diversification, which reduces your risk while giving a higher return. So it seems like many accredited investors should be interested in limited partnerships.
It is unfortunate that the oil and gas industry has not done a better job educating investors. That is precisely what our website is doing for you right now, so please read on…
“How Do Limited Partnerships Fit In Today’s Oil And Gas Industry?”
Here we are talking about the limited partnerships offered by the independent U.S. oil and gas companies. They are well suited to take advantage of opportunities overlooked by the “major oil companies”. Here are some reasons:
New Technologies
Technological developments in exploration, drilling and production technologies (such as 3-D geological imaging, horizontal drilling and fracking) have greatly improved the economics for smaller companies to produce in proved reserves overlooked by the “major oil companies”.
Consumption Trends
Developed and developing countries will continue to use more oil and gas for decades to come. Conservation and alternate energy will not stop it.
National Politics
Issues such as pipeline construction, fracking and railroad tanker transportation are sometimes in the news. Washington, however realizes the importance of maintaining a strong, resilient national oil and gas production infrastructure epitomized by our independent oil and gas companies.
International Politics
OPEC influence and Middle East instability are mitigated by our independent oil and gas companies. Limited Partnerships can be profitable whether oil prices go up or down.
“How Do You Find A Great Oil And Gas Limited Partnership Company?”
If you want to find a great company you must get answers to these questions:
Experience & History
Does the company have a track record of success in both “boom” and “bust” oil price cycles? Has it been in business long enough to have industry expertise and contacts?
Expertise In Exploration & Production
Does the company know how to find and drill successful wells in overlooked oil and gas reserves via new analytic, seismic and fracking technologies? Can it operate wells via improved well work-over and reservoir engineering technologies?
Viable Business Model
Does the company have a business model that can make money in either high or low-price oil scenarios? Does it have single or multi-well projects dealing with drilling into proven undeveloped reserves? Can they keep costs down while operating the wells?
Top Management
Are they “movers and shakers” who can make things happen no matter what obstacles arise? Are they connected with the best geologists, petroleum engineers and operators who can contribute to successful wells? Do they keep an eye on short-term and long-term factors affecting supply, demand and price? Are they highly ethical? Are their interests aligned with their investors because they have put their own money into their projects?
Of course, any company that contacts you will tell you they have “all the right stuff”. Perhaps they do, but you must confirm this with your own “due diligence.” And this wraps up our answer to your first question:
“Why Should I Want To Invest in an Oil and Gas Limited Partnership?”
We hope our explanation has been helpful, and if your answer is “Yes, I am interested!” you are ready to get answers for the second question:
