How to Invest in Oil & Gas
When you consider how to invest oil and gas, there is no question that it can be a worthwhile investment for well-qualified oil and gas investor. Whether you prefer to invest in oil and gas with an owner-operator or treat the oil industry as a commodity, there are numerous avenues to seek profit. Mutual funds or ETFs allow for the opportunity to buy a number of oil and gas-focused shares. For those new to the oil and gas industry, it can been entry to the wealth that awaits without the direct risk in commodity spot prices. An investor using this method can learn the tools of the trade without relying entirely on the success of a single company.
Large cap stock or ADRs (American Deposit Receipts) are other methods that open doors to the benefits of oil and gas investments. An investor has the opportunity to purchase stock in large or small oil companies, reaping the benefits of companies that engage in oil exploration as well. It is possible to either buy stocks directly or buy shares through a broker.
Futures Contracts are an option as well, but a risky one for certain. These derivatives can be purchases as oil and gasoline futures contracts, but an investor is then at the mercy of the market as futures contracts frequently expire without worth.
Lastly, there is a more direct line of involvement that a wealthy investor can take advantage of. A small or micro-cap stock or a limited partnership allows for a more direct equity position within smaller companies. Such investments are not publicly traded, as they are more specialized, and they are not nearly as accessible as other options. The use of a broker is often required, unless a sophisticated investor has a significant amount that can be invested. In that case, one can engage directly with the company’s management to arrange a beneficial arrangement.
Of course, as with any investment there is a level of risk. However, learning how to invest in oil and gas, particularly in South Texas, still remain stable, complete with high demand and various forms of investing with different levels of risk. It should be noted that not every level is complete with the same tax benefits as previously mentioned.
Mutual funds offer low level of risk but none of the aforementioned benefits are available. Partnerships are common, limiting liability and sold as securities through the Securities and Exchange Commission. Tax incentives are available for partnerships but only on a pass-through basis that must be detailed each year. Royalties are reserved for those who own land where oil and gas wells are drilled, gaining from the gross revenue generated from wells and assuming none of the risk associated. Unfortunately, landowners are not eligible for tax benefits known to working or partnership interests.
Working interests in fact involve the highest levels of risk, considered more as a form of self-employment than a security. Regardless of the income, production is ultimately broken down into gross and net revenue. As far as tax advantages are concerned, there is no better avenue than oil and gas investments, and a sophisticated investor would be wise to partake in this fruitful trade.
ADVANTAGES AND DISADVANTAGES OF INVESTING IN OIL: INSIDER INSIGHT
As with any investment, there are risks and benefits that should be taken into consideration, but when it comes to how to invest in oil and gas, the advantages of considering oil and gas investments in South Texas can be well worth the risk taken.
Diversification is one such advantage, in that investing in gas and oil can help you diversify your portfolio and minimize risks. Oil and gas investments are a useful diversifier within the economy. There is a balance between oil and gas prices and other stocks, so that one when drops the other rises. It can bring stability to investments, as oil and gas investments help protect your investment portfolio against poor economic turns.
Profit Potential is another advantage. Particularly in smaller companies and limited partnerships, the payoff of an oil and gas investment can be incredible. The extensive profit from a single oil well can greatly surpass the original oil well investment, and it is possible that an oil or gas well can pay dividends for several years.
Tax Advantages. Learning how to invest in oil and gas must also lead you to the tax benefits of investing in oil and gas. There are also several tax advantages available for the serious, well-qualified gas and oil investor that make an oil and gas investment even more profitable.
Companies are allowed to deduct for depletion, which may not be noticeable in a publicly traded stock but can definitely make a difference within a limited partnership. Depletion accounts for the gradual exhaustion of mineral supplies in a section of land, which could make or break an investment.
On the other hand, there are disadvantages to consider before investing.
The oil and gas market is volatile, meaning that it is unpredictable and subject to extreme price variations. Losing money is not unheard of, particularly within exploratory projects, which is why diversification is such an important aspect of oil and gas investments.
Liquidity is another downfall in that it may be difficult to find a buyer for shares of small companies. Such an investment is typically managed through the company or limited partner directly in which an investor must redeem their interest. However, if one is satisfied with their investment being locked in for a period of time, this may not cause distress.
Commissions are also associated with limited partnerships. Those who have invested are required to pay a commission to a broker or intermediary, which are usually larger than what a standard stockbroker would demand. Lastly, oil and gas investments are a complex matter that should only be undertaken by sophisticated investors with knowledge of this field. Special tax rules require important considerations that may apply to investors, and money invested is not always returned immediately. However, a wealthy investor who is educated in the risks and rules of oil and gas investments could benefit greatly.
We hope this article has provided you with additional insight and information on how to invest with oil and gas so you can make informed decisions about your investment portfolio.
